The hazards of a spirited investment
Before you choose a whisky cask for your portfolio check out the flavour of the market
“Hot investments”, no matter what they might be, have a perennial draw. They are also, oh so often, a siren song that ends up parting the gullible from their money.
Another way of putting it is that a “good thing” is only a “‘good thing” if you’ve done your due diligence and have reason to believe that you actually do know what it is that you are doing.
Investing in whisky casks is a splendid case in point. Let us start with a simple, incontrovertible, truth, upon which a great many lies can be layered. Whisky improves slowly in the cask, not in the bottle. That is a solid fact.
The logical corollary of this is that if you buy a cask of whisky and hold it for a couple of decades or more, despite losing a significant share of the liquid through evaporation, after a significant passage of time, that cask will most likely be worth more than you paid for it, maybe a lot more. That makes it an investable asset class.
It is also a Capital Gains Tax-exempt asset class because HMRC classifies it as a “wasting asset”. Whisky in the cask evaporates at around 2 per cent by volume with each passing year, the aptly named “angel’s share”.
So, companies trawling for investors for their casks, always emphasise the point that all profits are free from CGT.
Does all this make it an investment that can generate the 12 per cent to 15 per cent per annum returns that many of the brochures from the host of start-up companies charging into this market looking for investors are claiming?
There are more than one or two caveats surrounding that proposition.
Whisky in the cask improves and becomes more valuable, yes. But valuable to whom? This last point is not quite so cut and dried as it might seem, because it rather assumes you can find a buyer.
This raises an interesting point. How does a company that is less than, say, three years old, claim to be able to guarantee an exit strategy to a private buyer of its whisky casks, given that the ideal holding period is probably north of 20 years?
If the company says it will buy the cask back on demand, at a profit to the investor, by definition, it is selling low and buying high, which is usually regarded as the road to ruin for any business. It also means that you are rather bound by whatever valuation the merchant decides to put on your cask.
If the whisky broker selling you the cask says that the distiller will buy the cask back on demand, what proof is there of this? So, the exit from this ”rock solid investment” can be problematic.
You may be able to put the cask up for auction, and some jaw-dropping prices have been achieved in this way for a lucky few.
However, every sale that makes those kinds of headlines fuels the whisky cask investment frenzy and opens the door to more disappointment and, dare one say it, to more fraud being perpetrated on unwary investors.
Of course, there is always the option of finding your own way to market by decanting the cask into bottles and selling them. Which raises another clutch of questions.
Will the distillery the cask was acquired from allow you to use its name or brand? Some do, some don’t. Will you be able to call the end product Scotch whisky? You won’t if the alcohol level of the bottled product is below 40 per cent, which it may or may not be.
All of this suggests that investing in whisky casks may be somewhat more complicated than some vendors would have you believe.
Potential investors can discover why this is so simply by going to YouTube and looking at the multiple warnings given about the current craze for investing in whisky casks offered, entirely independently, by three highly experienced whisky consultants.
The three are Sam Brooks, founding director of Vintage Acquisitions, Jake Sharpe, founding director of the Whisky Baron, and Mark Littler who runs his own whisky consultancy firm.
All have a long history in advising clients interested in investing in whisky and all are very clear about the pitfalls that await the unwary.
“By all means invest in whisky casks, but only once you have a clear idea of what is involved, and only when you are sure you are dealing with a reputable broker,” Brooks says.
Geoff Kirk, channel director, secondary market at Macallan, points out that potential investors should not extrapolate market reports about the returns to be gained from buying top-range bottled whisky to casks.
The Macallan does not sell casks direct to individuals and says there are no plans to establish a cask programme saying: “We are exploring alternative ways of meeting the high-level demand for bespoke products.”
Over the course of the last ten years, the Knight Frank Luxury Investment Report has indicated that there is a growth of a staggering 586 per cent in the rare single malt category, says Kirk.
“Generally, industry reporting is based on single malt bottled product results, not cask investment. Therefore, using such value growth indicators in relation to investing in casks of maturing whisky can be extremely misleading.”
When a full cask is purchased, the consumer takes on a great deal more risk and responsibility. Specifically, the value of the cask will not benefit from the halo effect that comes with a bottle direct from a brand, as they do not have the full brand weight behind the perceived value of the whisky.
Single casks marketed contain new make spirit from the declared distillery, but the cask itself may have been sourced by an independent company or a private individual, who may not have demonstrable experience in this field. This can result in a whisky that is far removed from the typical style of that distillery.
In the case of The Macallan, says Kirk: “Given the quality of our casks, up to 80 per cent of the character and 100 per cent of our natural colour comes from our casks.
“If a different type of wood and seasoning is specified for an independently owned cask, or a low-quality refill cask is used, the whisky produced can vary radically from the classic style of the distillery’s own brand releases.”
For consumers, the cask in question provides neither the value associated with the brand, nor the character of the original single malt. This could result in a compromise to the expected value.
He adds: “With a cask purchase there is also the background of changing legal and compliance regulations with customs and excise to consider. We have witnessed individuals being marketed casks on a regular basis that does not portray the full picture behind the investment.”