INVESTING: A More Liquid Return

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on November 19, 2018 - November 25, 2018.

Some of our investors were saying that they were not sure about whisky as an investment but would like to get the bottles because they came from a closed distillery and are hard to get. > Gan Abdul Ghani Ismail/The Edge

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When Chris Gan and his partner Victor Foo set up a closed-end rare whisky fund in Singapore in October last year, they structured it purely as an investment opportunity, which meant that the bottles had to be auctioned off to get the best returns.

None of the investors who forked out a minimum of US$250,000 to invest in the fund would be able to get their hands on a bottle unless they bought it elsewhere. This made it easier to manage the risk because things could get messy if some people wanted bottles and others, returns.

The fund invested in rare whiskies from “silent distilleries”, meaning those that are no longer in operation. It only invested in casks that had been evaluated by the master blender at Diageo, who picked out 1,000 casks and put the best of these into the “cask of distinction” programme.

But something strange, or rather not-so-strange, happened. Some investors wanted the bottles rather than the money.

“Some of our investors were saying that they were not sure about whisky as an investment but would like to get the bottles because they came from a closed distillery and are hard to get. They thought that if they kept the bottles, they could probably sell them for more in five years, or drink it, or even store it and pass it on to the next generation,” says Gan, promoter of the fund who is vice-president of the Singapore Precious Metals Exchange.

Gan and Foo spoke to Diageo about it and went back to the drawing board to structure a new fund that would give people bottles, rather than money, for their investment. Not ones to let the grass grow under their feet, the duo have already come up with a second fund.

For the first fund, they invested in, among others, a cask of 37-year-old Port Ellen, which has been bottled and is now ready to be released into the market, a few bottles at a time at auctions. One bottle was recently auctioned online at Whisky Auctioneer and it fetched £8,800 (RM47,606), which was nearly 50% above the reserve price of £6,000.

Port Ellen was established as a malt mill in 1825 and developed as a distillery under John Ramsay from 1833 to 1892. It was acquired by the Distillers Company Ltd in 1925 and closed in 1930.

The distillery was rebuilt in 1966 and production continued throughout the 1970s. It was closed in 1983 and the dwindling stock is currently owned by Diageo. Port Ellen whisky has now become a collector’s item.

“Some of the 1981 batch of Port Ellen was sold to others for blending and whatever was left was used by Diageo in the early days of special releases. As the supply dwindled, the company realised that there was only so much left in there and probably only one or two casks that were really, really good. So, they picked one of those,” says Gan.

“Even if you restart the distillery, you will not be able to get a 37-year-old Port Ellen. You will never get the same kind of conditions. So, that was how we got into it.”

He points out that the rare whisky market is very interesting and prices are still reasonable for some Scottish whiskies. “More importantly, we realised that we needed to buy it from a reputable source, which is Diageo. Others may have such casks, which they previously bought for blending or whatever, but we cannot really confirm the provenance and we do not know how these casks have been stored — whether they are from the same distillery and whether they are any good,” he says.

Diageo still has a lot of casks filled with precious liquids lying around. The problem is, it only wants to sell the casks. Customers, on the other hand, only want to buy the liquid after it has been bottled, says Gan. One cask could hold enough whisky to fill 150 to 160 bottles, which is excessive even for the most avid appetite.

And this is where he and Foo spotted the opportunity. “We wanted to structure something so Diageo could sell the cask and our clients could get the bottles,” says Gan.

For the second fund, he and Foo are looking at a minimum investment of a little more than £100,000. For this amount, investors will get a pre-determined number of bottles from a cask. “We are looking at a 40-year-old from Brora, which will cost us £1.5 million and probably give us about 180 bottles,” says Gan.

The Brora distillery was built in 1819 by the Marquess of Stafford. It was known as

Clynelish until 1968, when the name was changed to Brora. The distillery was closed in 1983 but in 2014, Diageo released the 40-year-old 1972 Brora for £14,500 per bottle, making it the most expensive single malt ever at the time.

“To find someone who wants to buy a cask for himself is a tall task. People don’t really want to take all that,” Gan points out.

This is where the fund comes in. The cask will be bottled by Justerini & Brooks (also owned by Diageo), one of the oldest wine brokers in the world, which is now moving into whisky.

“We are going to work with J&B. So, when we bottle this thing, the bottles go from

Diageo straight into our clients’ accounts with the brokers themselves so everybody gets their pre-determined share of the bottles. From there, they can decide what they want to do with them,” says Gan.

For instance, they can decide to store it with J&B. “It has fantastic storage. It has been storing wine in its cellars for 150 years. Now, it is offering this service to us so you can actually have storage there,” he says.

“If you decide to take the bottles, it can make arrangements to send them to you. Or you can ask J&B to sell the bottles to its clients because it has a very extensive client list. And naturally, you will be charged a brokerage fee.”

Or, the clients can choose to sell the bottles themselves. “We are talking about potential, right? If you look at the whisky index, it is just going up and up. So, for our first fund, we would conservatively make more than 20% a year, if not more,” says Gan.

Who are they targeting for the second fund? “I think it will attract all kinds of people — those who want to keep and store it, those who want to drink it, the collectors and the connoisseurs. When it is out and people are actually selling the bottles on the secondary market, the price will be much higher than what they paid for them,” he says.

The connection with Diageo helps assure investors that this is the real deal. “So, the cask comes from a reputable distillery that is owned by one of the largest spirits companies in the world. This is very important. I mean anybody can claim that this thing is 40 years old, but how do you know for sure?” says Gan.

“So, provenance is very important — that you have the cask, that you have the whole history of the cask itself and that it is in good condition. The Brora cask has been picked by experts as one of the casks of distinction. It is a whisky of distinction. And I have actually tried it. It is sublime.”

With all the interest shown, he believes there will be a third fund. “Speaking to investors, not just in Singapore but also in Hong Kong, we can see that there is a strong demand. The structure we have come up with gets around the problem of having to buy the whole cask,” he says.

Gan says the structure can be used for any number of similar funds, but they will only be targeted at rare liquids. “We will focus on casks from silent distilleries. It is like drinking a drop of history and some people will pay big bucks just to sample that.”