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Whisky Investment Guide
Whisky Investment Guide
Whisky Investment Introduction
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Lifting the curtain on whisky cask investments
Whisky investments have proved to be a high performing asset class, with prices reaching new highs in recent years. For new investors looking to enter the whisky market, it can be a daunting proposition due to the relationship-based nature of acquiring sought after whiskies. VCL Vintners are uniquely positioned to guide clients new and experienced alike through the opportunities to invest in whisky, be that through individual & collectable bottles or entire casks.
Featured over the following pages is a comprehensive guide – it will cover the world of whisky cask investments, educating and informing prospective investors on the process, history and market performance of liquid gold.
An introduction to whisky as an investment
According toThe Wealth Report from Knight Frank, rare whisky was the best performing collectable of the past decade, experiencing a meteoric rise in value of 58.6% per year over the past 10 years.
The Scotch whisky market is enormous. To the UK economy it is worth approximately £5 billion and accounts for around 25% of UK food and drinks exports with more than 90% of Scotch production sold abroad. Broadly speaking, the luxury whisky investment market is booming- genuinely rare and unrepeatable whiskies are what the market desires and as a result the potential for long-term growth is enormous as demand is increasingly high and supply finite.
VCL Vintners maintain regular contact with Scottish distillers, bottling agents and experienced brokers of Single Malt Whisky and relishes the opportunity to search out that once-in-a-lifetime cask or bottle. If it exists we will hunt it down!
The opportunities in whisky extend beyond that of Scotch alone. Japanese whisky represents an opportunity for astute investors, with Karuizawa whisky standing at the top of the global whisky market, with the brand rising most in value compared to any other whisky in the world since 2013.
Scotch Whisky is an integral part of scotland and the uk's global export strategy
In 2019, Scotch Whisky accounted for:
75%
of Scottish food and drink exports
of Scottish food and drink exports
21%
of all UK food and drink exports
of all UK food and drink exports
1.4%
of all UK exports
of all UK exports
Source: Scotch Whisky Association
WATCH
Sourcing casks and the importance of relationships
Whereas before you had to live in Scotland, or know someone who worked within a distillery to be able to access the casks, now there is a ready-made market for you to benefit from investing into single cask ownership to generate returns
Whisky Market Performance
Whisky assets are increasingly a topical conversation piece for broadsheets and investments gurus alike. Prices have, in recent years, exploded and there are seemingly no signs of this pace receding. In fact, the number of consumers of whisky worldwide has recently breached the 500,000,000 mark and, with continued growth looking likely, it would appear that another blistering decade of performance is on the horizon. Accessing this market, which is often new to investors, can be difficult owing to the extensive networks required when acquiring the best casks. VCL have an exceptional track record in portfolio selection, asset management and client care.
Whisky Supply vs Demand: a perfect imbalance
As an industry, Scotch single malt production is older than income tax. For decades, the market for Scotch was a domestic one- with the UK having a lesser population and fewer still that could afford to drink it. As such, there was plenty to go around. This is no longer the case.
Scotch single malt today is a global spirit and part of the very fabric of society worldwide. Statistics show that whisky now outsells Tequila in Mexico and Cognac in France. Whilst the industry has increased production levels by as much as 60% over the past decade, just 800million (approx.) litres of whisky are produced annually in Scotland, and just 40m litres (approx.) retained as single malt. This level might be considered small when viewed against the backdrop of 500m generic whisky/whiskey consumers worldwide. The consequence is a hugely oversubscribed market for Scotch single malt with a perfectly inverse supply/demand imbalance.
2019’s Scotch whisky export value demonstrated clearly that demand is continuing to increase- export levels had increased by 4.4% (£208m) on 2018’s levels, setting a new record. Indeed, the theme continued as bottle exports reached 1.31bn, up 2.4% compared with 2018. Today, Scotch Whisky accounts for over 20% of all UK food and drink exports and is sold in around 180 markets worldwide.
Whilst the USA is still the largest export destination by value for Scotch Whisky at £1,069m, it is India that is now coming to prominence. Although Custom Duty on whisky imported into India is 150%, it is now the second largest export destination for Scotch Whisky by volume with 131m bottles, up 16.1% on 2018. The ISWAI (International Spirits and Wine Association of India) expects the government to reduce the customs duty to a reasonable level, in turning opening India to yet greater volumes of Scotch Whisky.
With demand for Scotch single malt higher than ever and supply levels approaching their zenith, it’s clear to us that prices are heading in the right direction.
WATCH
The size of the Scotch whisky market
If you look at the export value of whisky to the UK economy, it's worth just under £5bn. Exported to 180 markets around the world, and 42 bottles exported every second. If you look at the whisky market as a whole, Scotch is the pinnacle.
Global Whisky Exports Continue to Rise
Perhaps the most important factor affecting the Scotch single malt market has been the Covid19 pandemic. Owing to it being a supply chain-based industry, whisky production for new fill came to a halt during 2020. However, with 20% of consumers drinking more and explosive retail sales, the stock levels have been further diminished and the supply/demand dynamic is now even more heavily geared towards profits within cask investment. This demand has been supported by the influx of new investors to the market, migrating away from risky stocks and low interest bank-based products towards the safety of tangible treasured assets.
Consequently, billions of pounds are being ploughed into distillery expansion to allow for greater production and tourism (2m people visited distilleries during 2018)- at the heart of this, Diageo’s £150m investment programme including the Johnnie Walker global visitor experience. These conglomerate parent organisations expect consumption levels to continue to increase and are prepared to invest heavily to accommodate these bourgeoning levels. This sentiment was echoed by Mike Kempton-Smith, an associate director in asset-based loans at Barclays Corporate Banking in Scotland, stating “With exports continuing to grow in 2019 by 4.4 per cent, ever closer to the milestone £5bn figure, global demand continues to develop, with growth in 106 markets last year”.
It is a universally held opinion that the whisky industry is destined for significant growth over the coming decade and we believe that cask investment will increasingly become a more commonplace feature within commodity based portfolios.
Whisky Tops the Knight Frank Luxury Investment Index
According to The Wealth Report 2019, rare whisky was the best performing luxury investment asset during 2018, achieving a meteoric rise in value of 40% after featuring for the first time in the Knight Frank Luxury Investment Index. Perhaps more impressive is that this growth was not an isolated yearly spike. Over the past decade it has outpaced everything from coins (190%) to classic cars (193%) with a blistering performance of 586%.
Its continuing dominance was reaffirmed in late 2018 when a new record was set for the most expensive bottle of whisky ever sold- a bottle of 1926 Macallan fetched $1.45million at auction.
Over the past five years it is the stand out investment vehicle, having outperformed gold, property and British stocks.
Clearly HNWI’s are prepared to pay top prices for rare and ultra-exclusive whiskies, with many collectors evolving from singular bottle investment to entire casks that can cost seven figure sums to acquire. With the sizeable profits available, there has been a noticeable increase in people educating themselves on the market. Most whisky investors wish to build their collections of casks and bottles and, in doing so, diversify away from risky stock markets and low interest bank based assets.
Explore the data: Knight Frank Luxury Index
What are the costs of investing in whisky?
Cask whisky investment is low cost, hassle free and very secure. Bound by a rigid set of HMRC rules, casks of single malt whisky have to remain within the boundaries of Scotland and in an HMRC bonded facility. There are literally hundreds of bonded warehouses in Scotland, providing vital income to many rural areas of Scotland. Many of our casks will be stored at the bonded facilities owned by the distillery that produced the cask, but not always. Often distilleries will spread their casks across a wide range of distilleries and warehouses ensuring that they mitigate any risk of fire damage, for example.
Warehousing Costs
The cost of warehousing a cask can vary dependent on the prestige and location of the facility. However, the typical cost will be around £40 per cask, per year. This is the only cost attached to the cask and is payable from Year 2 onwards of your investment duration- we cover all costs Year 1.
Insurance costs
Comprehensive insurance cover for all casks is held by VCL indefinitely. Our policy cover is for up to £10million on any one incident and all casks, including those belonging to our clients, are covered against fire, theft, natural disaster and accidental damage. The cost of this insurance is covered in its entirety by VCL indefinitely.
Performance related fee
Most investment houses that manage assets belonging to clients will charge a fixed yearly fee, regardless of the outcome of the investment. Here at VCL we take a different approach- we manage your asset on an open-ended basis and charge no yearly fee. Instead, VCL are contractually obliged to take 10% of any profits made on the cask at the end of the investment period, whenever that may be. The greater the profit we make for the client, the bigger our commission at the back end and so we are incentivised to generate as much profit as possible for our clients.
Duty, Vat and Taxation
We always advise on getting your own independent tax advice, but the following might be useful:
- VCL Vintners hold a WOWGR license. The term WOWGR stands for Warehousekeepers and Owners of Warehoused Goods Regulations. A certificate obtained under these regulations allows a business to move goods with the payment of duty suspended from one bonded warehouse to another. It is a very difficult licence to obtain, accessed after rigorous interviews and strict conditions.
- All cask whisky is held under bond in Scotland and as a result is exempt from VAT. At the point at which you decide to bottle and the cask is to be removed from bond, excise duty and VAT will be due. Ordinarily the cask will be brokered on whilst still in bond and therefore not subject to these taxes.
- For UK tax payers, UK Capital Gains Tax is not regarded as being applicable because cask whisky is a “wasting chattel” as a result of the “angel’s share” (evaporation).
Illustrative Example of Costs
Indicative figures to show how the above costs are calculated:
1
Cask Purchased
Mr Smith invests £10,000 in a single cask of Scotch single malt in 2020
Cask Sold
He sells the cask through VCL for £15,000 in 2025
2
3
Storage Costs
He has paid £40 storage on the cask from 2021-2025, equalling £160
Commission
VCL’s commission would be 10% of the £5,000 profit generated, equalling £500
4
5
Return on Investment
Mr Smith would therefore receive £15,000, minus £160 (cask storage), minus £500 (VCL commission), equalling £14,340
Taxation
The £4,340 profit is potentially exempt from CGT owing to its ‘wasting asset’ status*
6
*Our advice is always to consult with your own independent tax advisor
Whisky Investment Process
Typical whisky investment process
At VCL Vintners, we understand that whisky casks are an investment class new to many. To make the process as accessible as possible, we follow a simple strategy when on-boarding buyers. This transparency gives our clients the confidence and clarity needed when investing into a new market.
Step 1
The Journey Begins
All whisky casks provided to our clients are owned by VCL Vintners- we do not operate on an ‘Option to Sell’ basis. Where you see a stock listed for sale, it is owned by us. We have assessed its profitability and have purchased it, regardless of whether it finds its way to client or remains within our stock portfolio.
Step 2
Cask Selection
Once you have spoken to your cask broker and you have made a decision as to your comfort levels for investment, the broker will provide a stock recommendation by the way of a ‘Certificate of Acquisition’, detailing the specifics of the casks. A signed copy is needed alongside Anti Money Laundering Documentation (Photo ID and Utility Bill).
Step 3
Transfer of Funds
Your funds are to be transferred in a timely fashion by way of bank transfer or cheque.
Step 4
Transfer of Ownership
Once we have received signed paperwork and funds have been transferred in full, you are issued with a receipt, your Unique Cask Number and details of the HMRC regulated bonded facility in Scotland currently warehousing your cask.
Step 5
Cooling-Off Period
Shortly after this a member of our management team will contact you as part of our compliance process to ensure that you are happy and that you have received a high standard of professional service. As this call ordinarily occurs within a seven day period of your investment, the Distance Selling Act ensures that you have the right to a refund should you feel unhappy with the purchase.
Step 6
Ongoing Support
The broker will then maintain regular contact with you, updating you on any developments with your cask and the whisky market in general.
WATCH
What should you look at when selecting a cask for investment?
The thing that makes us stand out is that we're looking at this as an investment. The decision we make is solely based upon the returns, because our clients aren't people who want to collect whisky. They're people who want to profit from whisky. For us, it's about making a recommendation in order to make a return on investment.
Investment Exit Strategies
How easy is it to exit the investment?
As a global market with 200 countries participating in its trade, the Scotch whisky investment market offers high liquidity through a multitude of exit strategies, both domestic and international. With trade levels for whisky growing year-on-year, demand for premium casks has increased significantly resulting in quick and efficient exits when required. Currently, the average execution time for clients cashing in their positions stands at 4.2 days, although this can vary dependent on portfolio size. Commonly, VCL will be able to make a cash bid on the day and clients can have the whole process wrapped up within 48 hours.
For portfolios being brokered on via the international market, VCL have access to a diverse worldwide network of collectors, auction platforms and distilleries and take great care to ensure that all stock positions offered to clients are easily saleable. Such is the demand for high end whisky cask portfolios that clients can expect to receive acceptable offers on their portfolios prior to the conclusion of their intended investment duration.
The primary exit strategies provided by VCL Vintners to our clients include:
THIRD PARTY AUCTION SALES
Ultra exclusive stocks sourced by VCL have enormous global appeal in the treasured asset market and, as such, would readily be included in auction sales held by the likes of Bonhams and Christies.
INTERNAL AUCTION
VCL will soon launch its own online auction serving as an intra-client trading platform introducing exposure to 1,500 potential buyers at any time.
BROKERAGES AND INVESTMENT COMPANIES
VCL provide other companies with whisky cask stock, this becoming an increasingly important aspect of the business model.
CASH BID
VCL are a debt free and cash rich company and can provide an on-the-spot cash bid for casks.
INDEPENDENT BOTTLING
VCL can manage your asset, independently bottle your stock, and trade the bottled stock on both domestically and internationally. This option, ordinarily reserved for ultra-premium assets, can often yield exceptionally high returns.
Frequently Asked Questions
Your Questions Answered
As a new asset class to many, whisky cask investment will of course come with questions. Below are a few questions that we are frequently asked by people considering investments into single malt casks. If you require any additional information, please feel free to contact us and speak with one of our experienced consultants.
01
HOW DOES THE STORAGE WORK?
Scotch casks have to be kept in Scotland under bond by law. Whilst in these HMRC regulated warehouses your cask will be kept in the best conditions for the whisky maturation process. The cask will also be monitored regularly by the warehouse staff and can be re-gauged at any time for a small fee.
02
Can I view my cask?
You will be able to visit the distillery housing the cask via the distillery’s tourist centre. Most HMRC bonded warehouses will allow you to actually see your cask although a 200 year old cold, dark and damp warehouse in the Highlands is not everybody’s idea of fun!
03
How do I arrange insurance?
You don’t have to. From the moment you purchase through us until the moment you either sell out or move the cask to another facility or account we will cover the entire cost of the insurance of your cask.
04
WHAT ARE THE TYPICAL INVESTMENT SIZES?
Investment sizes range from £8,000 at the lower end all the way to £3,000,000. Typical trade sizes are around £30,000 – £50,000.
05
HOW LONG AM I EXPECTED TO HOLD THE CASK FOR?
We usually recommend a minimum of a five year hold, ranging up towards ten years.
06
CAN I SELL OUT AT ANY TIME?
We will always listen to your instructions with regards to your cask. We understand that your circumstances may change and that you may need to sell out earlier than five years. Please instruct us if this happens and we will discuss the best strategies at that time.
07
DO YOU WORK WITH ANYBODY I MIGHT HAVE HEARD OF?
Alongside sourcing casks for some of the UK’s wealthiest people, we work alongside Charles MacLean, the world’s most prominent whisky author and critic with eleven whisky books in publication, including the industry’s standard work on whisky brands. We have also featured in both The Observer and The Telegraph.
08
HOW DO I EXIT WHEN I WANT TO SELL OUT?
When you instruct us to sell you out we will typically go through one of six routes:
- Sell to another client via our intra-client brokering service
- We trade the cask on the open market to a cask broker or collector
- We purchase the cask back ourselves
- We sell the cask through our own online auction service
- We sell the cask through a third party auction house (Bonhams etc)
- We bottle the stock for you and release it to the retail market achieving maximum profit (an avenue normally reserved for rare and old casks)
09
CAN I SELL OUT THROUGH ANOTHER COMPANY/BROKER?
The simple answer is yes. There is a huge demand for cask Scotch and the secondary market is a liquid one. However, we sincerely hope that, should the cask we recommended to you substantially increase in value, you will instruct us to realise those profits on your behalf. This allows us to benefit from the 10% commission on the profits as specified in our terms and conditions.
10
CAN I MEET OTHER CLIENTS AND THE MANAGEMENT TEAM?
Of course. We hold around six meetings per year, normally at London’s Rosewood Hotel, where clients old and new get to mix, meet with our management team, and to experience a whisky tasting class normally held by “the world’s foremost expert on whisky”, Charles MacLean.
11
HOW CAN I BE SURE THAT YOU ARE THE RIGHT COMPANY TO WORK WITH?
When investing your hard earned cash, choosing the right company has to be of paramount importance. Aside from liking the person you are dealing with, you need to know that they are an approved and accredited organisation. The following can be said of us:
- We are members of the Wine and Spirit Trade Association
- We are members of the Liv-Ex
- All of our brokers have been educated at the Wine Spirit and Education Trust
- We are certified by the Independent Commissioner’s Office
12
WHAT FACTORS DETERMINE THE VALUE OF A CASK?
Year of production, type of barrel, distillery, age, OLA (Original Litres of Alcohol), RLA (Remaining Litres of Alcohol) and ABV (Alcohol by Volume).
Covid & The Whisky Market
All asset-classes have been impacted by the coronavirus pandemic. However, unlike some asset-classes, the impact on the whisky market is not a negative one from the perspective of cask investments. Constrained supply, through distilleries temporarily halting production, will have a lasting impact for years – ensuring that the supply and demand imbalance for whisky will have an even greater impact in the price appreciation of casks for years to come.
The coronavirus pandemic has hit the Scotch malt whisky market as it has everywhere else however, on a more positive note, 33% of Scotch malt whisky exports markets held steady or increased regardless of Coivd-19 during 2020.
The export destinations that increased by value last year:
Export Destination | 2019 | 2020 | % Increase |
|---|---|---|---|
Latvia | £142m | £176m | +23.6% |
China | £89m | £107m | +20.4% |
Western Europe (non EU) | £82m | £93m | +11.5% |
The export destinations for Scotch Whisky (defined by volume, 70cl bottles) that increased in 2020 were:
Export Destination | 2019 | 2020 | % Increase |
|---|---|---|---|
Poland | 33m bottles | 37m bottles | +14.6% |
Latvia | 35m bottles | 39m bottles | +11.9% |
Brazil | 43m bottles | 45m bottles | +5.7% |
France | 173m bottles | 176m bottles | +1.5% |
Irrespective of the export market, the most important thing to remember is that for cask investors it has no bearing on them.
Trade agreements
Recent free trade agreements signed by the UK government will provide a major boost to the Scotch whisky market ensuring trade continuity having left the EU. So far 60 of these agreements are in place and the Free Trade agreement that was signed with Japan mirrored the existing arrangements that were in place when the UK was part of Europe meaning there will be no impact from a tariff perspective. Japan imported 45 million bottles of Scotch in 2020 and was worth £114m in exports.
In addition, Britain is aiming to join the Trans-Pacific Partnership. The partnership involves 11 countries such as Japan, Australia, Canada and Vietnam. Currently, Asia and Oceania makes up 25% of total export market for Scotch worldwide.
Vietnam free trade agreement:
This will lead to the gradual elimination of the 45 per cent import tariff in Vietnam. This development is also an important step forward to the UK’s accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which will deliver new opportunities for Scotch whisky, as well as other products, in key markets in Vietnam.
Mexico:
The Mexico-UK spirits agreement was made in December giving post-Brexit protection to Scotch whisky and Mexican spirits in both countries. Last year, Mexico was in the top ten export markets for Scotch whisky by value-£120.9 million and was the sixth largest market for Scotch whisky by volume globally.
WATCH
The impact of Covid on cask investments
