Whisky Learning

Whisky investments: when history repeats

Jason Thomson and Christopher Coates have a word to the wise regarding whisky investment: lessons can be learned from the past
By Jason Thomson
Investment in whisky is nothing new, but history has shown that there is good reason to exercise caution if one is looking to take up a financial interest – though the nature and extent of the risk involved varies depending on the type of investment.

The most traditional and secure way to invest is by doing so directly in whisky or spirits companies via the stock market. Several of the larger distillers are seen as prime stock options and are often recommend as a way to diversify a growing portfolio – Diageo, Pernod Ricard, AB InBev and Brown-Forman are all publicly traded, for instance.

Rare and limited bottles have certainly turned the heads of whisky speculators in recent years, but getting the right bottles can be tricky due to the ever-growing demand. A great deal of specialist knowledge is required in order to choose the ‘right’ bottles and, in any case, competition is often fierce when they do come up for sale.

This difficulty has led some investors to try getting in on the ‘ground floor’, as it were, by looking to purchase, or partly invest in, casks of maturing whisky. A diverse range of methods to do this have popped up over the past several years: cask-share schemes, specialist whisky investment funds and even crypto currency tied to maturing whisky stock – all promising good returns. But, as with any investment, there are always risks.

While some have certainly celebrated investment success as a result of ploughing their money into whisky cask ownership, there have been a number of schemes over the years which have hit the headlines for quite the opposite reason. Cask whisky investment is not regulated in the UK by the Financial Conduct Authority and even the rules around private cask ownership sit in what some industry veterans describe as a ‘grey area.’ This means there are few protections if things go wrong.
Thieving a little whisky at Glenfiddich

In the mid-1990s, investors were duped by Stephen Jupe of Marshall Wineries into buying £4 million worth of casks from the non-existent Grandtully Distillery, a crime for which the founder was sentenced to five years in prison. Not only did investors later find that their whisky was not sourced from Grandtully, but, when looking to move their casks on, it came to light that they had grossly overpaid for the spirit. The good news was that the casks did exist – Jupe had purchased them from another distillery, the team at which were unaware of the con – but the bad news was he’d sold the spirit at a huge mark-up, often as much as 146 per cent above the market value. While Jupe claimed his investors were wealthy and canny business people, according to Decanter magazine, many of those conned were in fact pensioners investing their life savings.

In another case, this time in 2013, Australia was rocked by one of the country’s largest fraud investigations to date. Nant Whisky offered what seemed like the deal of a lifetime. Small investors could buy barrels of whisky for AUD $25,000 (GBP £13,630) and after only four years the distillery would then offer a guaranteed buy-back scheme at $36,000 (£19,627). Of course, it was far too good to be true: Nant was selling the same barrels more than once and couldn’t honour the buy-back. Once the dust had settled, investors had lost an estimated $20 million.

Other high-profile cases include the operations of Cavendish/Hamilton Spirit Management, which raised £6.2 million from investors and ended with the founders sentenced to jail time, and Napier Spirit Company, which raised £3.2 million by inflating cask values and was eventually closed following a court order. Even though cases like these have now reared up with some degree of frequency, regulation has still not been brought to bear on the whisky investment world and, even today, this is very apparent in how they advertise.

Anyone who has typed a whisky or investment-related query into a search engine in the past year is very likely to have been targeted with an advertisement, promoted search result, or sponsored social media post for one of the many new whisky cask investment companies that have recently joined the market. Their claims may vary from company to company, but there are a few important statistics that the majority are sharing.

One of the most intriguing claims enticing uninitiated casual investors relates to the remarkable returns that whisky has allegedly made over the past decade. The exact number used varies – some claim 564 per cent, others say 586 per cent – but the common theme is that the figure is always staggeringly high. Several of the cask investment companies also proudly share where the figure comes from: the Knight Frank Rare Whisky Index. However, although appearing repeatedly on websites and social media, these huge numbers aren’t in fact applicable to the kind of investment these companies offer.

“Our index is tracking 100 bottles of rare and valuable whisky – it has absolutely nothing to do with cask whisky,” states Andrew Shirley, editor of the Knight Frank Wealth Report (which includes the Rare Whisky Index).

Specifically, 562 per cent is the total increase in value between December 2008–2018 of 100 of the oldest, rarest and most expensive bottles of whisky in existence, a figure that comes from research carried out for Knight Frank by consultants and brokers Rare Whisky 101. Shirley explains that Knight Frank has been working with its legal team to see if their data is “being used in the wrong kind of way to promote these cask investment funds.”

Shirley goes on to explain that he is in no way casting dispersions on any particular whisky investment fund or company and that their teams may well be able to pick out casks which will guarantee profits, but maintains that “you can’t use these headline figures to promote investments in cask whisky.” However, many cask investment companies do continue to use these figures, even though they are not, and never were, relevant to cask whisky.
Cask whisky investment is not regulated in the UK by the Financial Conduct Authority

What’s more, according to Andy Simpson of Rare Whisky 101, the Knight Frank Rare Whisky Index increased by just 5.02 per cent in 2019, which flies in the face of claims made by some investment firms that whisky was the top-performing luxury asset of that year. “We’ve seen claims that there was an extraordinary increase of 40 per cent on rare whisky bottle values. That’s just not true! In 2018 the Knight Frank Index increased by 39.56 per cent, but in 2019 it increased by just over 5 per cent,” says Simpson. “Frustrating, yes, but hopefully this outlines what not to believe.

“Rare Whisky 101 and Knight Frank have a longstanding relationship, and we’re both in agreement. Time permitting, there will be further joint press releases in due course about the (mis)use of the Index in relation to the sale of casks as an investment… the press release hasn’t been issued yet, but we’d like to see all these new ‘whisky cask investment’ companies use 2020’s numbers to sell their casks!”

Martin Armstrong, director at Whisky Broker, has had his own recent experiences with a number of whisky investment firms. Founded in 2010, Whisky Broker offers a range of services including buying, selling and bottling casks, but it’s when storing casks for third parties that Armstrong has encountered issues – and, more often than not, the trouble is caused by whisky investment companies.

One of the most common issues is the age-old problem of overvaluation. “Somebody wanted us to value a cask at £34,000, or something like that,” Armstrong recalls, describing a recent incident relating to a cask bought by a private individual through a whisky investment firm. “The cask was worth about £11,000. We had sold a sister cask of it for about £11,000 a month before, but they had paid £34,000.”

He goes on to explain that breaking the bad news to private individuals, usually when discussing warehousing insurance, is becoming a regular fact of life. Often, he says, these people aren’t clued-up, professional whisky investors who understand the risks, but pensioners that’ve sunk their life savings into something they’d hoped could be a fast-growing nest egg – usually after being on the receiving end of high-pressure sales tactics.

Such discrepancies aren’t unusual and Armstrong points out that, beyond the serious issue of the buyer paying a grossly inflated price, matters are complicated further when it comes to insuring the cask: “The insurance company obviously says that we have to value the cask accurately. If you undervalue it they’ll not pay out. If you overvalue it, they will only pay out what they think it’s worth.” This means that unwitting investors who have overpaid won’t get their full investment back in the (albeit unlikely) event of fire or theft. He also feels that the investment companies aren’t painting a realistic picture when it comes to whisky cask ownership and the risks inherent in it.

“These people don’t realise that one in every 10 casks will leak and one in every 50 casks will leak to empty,” he adds, which is why whisky companies have acceptable ‘planned losses’ built into their business models. “Those are the critical bits of information: there is no insurance against that.” When dealing with hundreds, thousands, or tens of thousands of casks, these kind of losses can be acceptable – it’s quite a different story if a private individual only owns one or two casks and they represent a significant proportion of that person’s life savings.

Another significant issue, which could become a huge problem for investors in the future, is the tracking of cask ownership. Armstrong explains that, as a cask in bond has had no excise duty yet paid, HM Revenue & Customs (HMRC) require the warehouse keeper to know the identity of each cask’s owner. “We’re supposed to do checks on every owner to make sure there aren’t tax-evasion or duty-evasion issues, but we’re supposed to do those checks before the person becomes the owner.” Armstrong says that many investment companies are almost making this task impossible by not alerting the warehouse when ownership changes.

On account of the amount of due diligence now required in order to bring a new client on board, many warehouse keepers are now not accepting new customers – whether those accounts be for investment companies, brokers, bottlers, or private individuals. This means few new owners are presently being added on to warehouse keepers’ systems. Worryingly, this doesn’t seem to have stopped cask investment sales.

“The investment companies are hiding the sale – they’re not telling anybody that they’ve made the sale,” says Armstrong, explaining that the same cask can be sold several times without the warehouse knowing or ever seeing a Delivery Order, a crucial document that’s ordinarily signed by the seller, the buyer and the warehouse keeper which officially transfers ‘ownership’ and control of a cask.

“Cask ownership is all about a triangular relationship,” explains Andy Simpson. “The transferor of title (the seller), the receiver of title (the buyer) and the warehouse where the cask is stored. The actual ‘owner’ of the cask is whoever the bonded warehouse has in their records as the person or company paying the warehouse rent. Warehouse rent needs to be paid directly to the warehouse, not the company who sold you the cask.

“If you haven’t had confirmation from the warehouse manager of the warehouse your cask is stored in, then the cask ‘belongs’ to someone else. If you then wanted to sell that cask, you would be unable to do so as you would not be able to instruct the warehouse owner to pass title to someone else via a Delivery Order – you would have to go back to the company you ‘bought’ the cask from and they (or the actual owner if they do not own the cask either) would have to issue a Delivery Order.”

According to Simpson, this means that an investor who does not receive a Delivery Order is putting their trust completely in the company managing the investment. In instances where the seller is a reputable and established distillery, which owns and administers its own warehousing, the risk is low. Similarly, some private ‘cask-purchase’ arrangements with big-name distillers don’t involve the purchase of a cask per se, but entering into a contract whereby the buyer is guaranteed the future out-turn of the cask, which must be bottled by the distiller. However, in most cases of purchasing from third parties, Simpson explains that if the seller goes bankrupt and the buyer didn’t sign a Delivery Order, the cask may not be safe from the liquidators – especially if the warehouse does not agree to acknowledge the investor as an owner, which they are under no obligation to do without a Delivery Order.

At least one such incident involving a purported ‘investment company’ folding and owners without Delivery Orders having to fight tooth and nail to (re)claim ownership of their casks has occurred since 2016, with details confirmed to Whisky Magazine by two separate sources with direct knowledge of the case. This is just one reason why, Simpson argues, Delivery Orders should form part of any cask purchase.

“Imagine if a company decided they could sell their single cask to ten different buyers?” Simpson speculates. “If all those buyers decided to make a purchase based solely on a ‘certificate of title’ provided by the company (without a co-signed Delivery Order being sent to the warehouse), then in theory one single cask could be sold to many different buyers, none of whom would be any the wiser and none of whom would ‘own’ the cask – at least in the eyes of the warehouse and HMRC.”

According to Armstrong, if a warehouse keeper suspects any discrepancy when it comes to cask ownership, they are expected to report the issue to HMRC within 72 hours. However, the fallout from this can be severe. He tells of one case where someone pretended to act as a private individual but was caught out as being what’s called a ‘revenue trader.’
Spirit safe

According to HMRC, a revenue trader is anyone who buys, imports or handles excise goods and that does so in the course of ‘carrying out a trade or business.’ Various goods, including wine and tobacco, are liable to excise duty and, broadly speaking, a revenue trader is someone who buys and sells casks with the intention to generate profit.

Various trusted sources in the industry have reported to Whisky Magazine that there has historically been a small amount of leniency granted by HMRC as regards cask ownership, whereby individuals who purchase low volumes (opinions differ on what that means) of cask whisky can reasonably justify that this has been done without the intention to ‘carry out trade or business.’ A common example given, for instance, is that if one had five children and bought a cask for each, kept them for 20 years and then sold them all at once, it is unlikely that HMRC would view this as revenue trading. However, if a large volume of casks were purchased or if casks were regularly bought and sold, it is likely that HMRC would view this as revenue trading and penalties for unauthorised activity would follow.

In this case, Armstrong explained to the individual that they would need a WOWGR (Warehousekeepers and Owners of Warehoused Goods Regulations) certificate, which is an essential accreditation for all cask revenue traders and businesses purchasing cask whisky. This individual did not have a WOWGR and, as a result, the casks were seized by HMRC. Armstrong suspects that most of these casks may have been secretly sold on, but, with a duty point being created due to the seizure, he estimates it may cost the owners as much as £250,000 to regain control of their casks. Armstrong argues that the current system isn’t working and has written to both HMRC and the Scotch Whisky Association (SWA) to suggest that a centralised register for whisky cask owners should be created to both simplify and shore up the process of ownership checks.

Even so, Armstrong and other industry insiders do feel that for those keen to invest there are good (but not sky-high) rates of return available, but only if the right casks are purchased at the right time, at the right price, in the right volume, from reputable businesses operating transparently and in accordance with the letter of the law.

Recent history has shown that offers which seem too good to be true often are and that little has changed to stop the misadventures of the past from happening again. It’s too soon to say whether this new wave of whisky investment companies is a sure sign of history repeating, but, as is always the case with whisky, time will tell.