Whisky
Published: 27/11/2023

Investing in whisky casks

April Newsletter (27)

Whisky as a consumer good is well known to many and therefore very popular: The global Whisky Market was estimated at USD 61.7 Billion in 2019 and is expected to reach USD 95.9 Billion by 2026.

Whisky investments are classified into 2 groups: bottles and casks.

Whisky casks

The market for whisky casks has a higher barrier to entry due to the minimum ticket size, exclusivity and a relatively closed community. Cash is crucial for businesses, including distilleries. After producing a cask of whisky, it must age for at least 3 years before becoming Scotch, leading to incurred costs for ingredients, equipment, payroll, and overhead. To cover these expenses, distilleries often sell their casks to investors instead of holding onto them to make more money, as keeping the doors open is a higher priority. Distilleries need time and capital in order to enable the casks to mature appropriately which makes it a perfect opportunity for patient investors.

As per Braeburn Whisky, the whisky cask market saw an average projected growth of 14.95% in 2022, which indicates a 1.69% rise compared to 2021. Whisky casks have significantly outperformed all the conventional investment options. The value of whisky casks is closely tied to the eventual prices of bottles sold to consumers, making consumer tastes and needs the primary influencers. The premiumization of whisky and the rising preference for single malt over blended whisky will continue to drive up demand and prices for whisky casks.

Europe has the highest volume of cask investment at 74.78%, followed by Asia at 18.35%. 

 

Screenshot 2023 11 27 at 16.44.46

Why invest in whisky casks? 

There are whisky investors all around the world who have been adding whisky casks to their portfolios for a long time. Investing in high quality alcohol is a very attractive proposition due to historical returns of close to 13% per annum. In the past, whiskey investors were mostly wealthy private investors who were not deterred by the high barriers to entry. This is because not everyone has the necessary capital, contacts or time to acquire such an investment on their own.

Whisky must be matured in a cask for at least three years before it can officially be called "whisky". Three years is not always the final figure, there are many whiskeys that are aged for 10, 12 or even 20 years before being bottled.

Since whisky does not continue to mature after bottling, it is crucial to let it mature in the cask until the desired age is reached.

For distilleries, this means that a lot of capital is tied up in whisky casks that sit around unused for years before the contents are bottled and sold. The tied-up capital could otherwise be used by the distillery for investments in research and development activities, facilities or marketing.

Due to high demand, whisky is being bottled younger and younger. This means that we are already in possession of a scarce commodity. The scarcer the commodity, the higher the earnings potential.

In September 2023, we exited our first cask investment: Ben Nevis Whisky Cask

3D Landing (22)

Rationale for exiting the investment opportunity:

This exited investment opportunity shines with a remarkable realised profit 23% after accounting for fees, resulting in an impressive annualised return of 17%.

During the same period, the S&P 500 recorded a value increase of 4.6%, while traditional stock indices such as the SMI and Gold experienced depreciations of -1.9% and -0.6%, respectively.

This exited investment opportunity is showcasing the impressive potential of alternative investments in surpassing gold and traditional stock indexes.

⚠️ What are the risks factors to consider?

Damaged cask: The handling and storage of the whisky casks are crucial in maintaining their fundamental value. However in case of unforeseen events such as human errors, a fire or natural disasters, the casks can be damaged or destroyed.

Oversupply of whisky: Whisky is governed by the laws of supply and demand. It is possible that the supply will increase in future due to the fact that there are numerous new distilleries. However, many of them won’t be able to reach the quality standards required to produce a high-end product. Additionally, the demand for Whisky has been increasing significantly both domestically and abroad, thanks to several emerging economies and growing interest among collectors in premium spirits.

Market conditions: Following a set of due diligence and market research, investment grade assets are identifiable. Nevertheless, the paying the right price for the asset is a challenge and therefore poses a risk of acquiring the asset at a price premium.  

Legislation: Legislation is a significant risk that every investor must understand. There are some extreme examples in history such as American Prohibition in the 1920s where alcohol has been banned completely. Other more recent examples include various tariffs and quotas in international trade that can affect the exports and therefore the global demand.

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Aurelio Image CEO

Aurelio

CEO & Co-Founder