GI and Duckhorn grew the business in three main ways: 1) increasing the portfolio of one of Duckhorn’s top brands, Decoy; 2) investing $60m in the business to build out capacity by adding 350 vine acres and upgrading the wine-making facilities; and 3) creating a new brand, Canvasback.
What was essential to these initiatives was upholding the reputation and brand of Duckhorn and Decoy. In conjunction with these initiatives, GI retained many of Duckhorn’s key senior management and continuously sought to hire top talent. Duckhorn was able to capitalize on its strong brand to drive further volume growth in both new and existing varietals and brands. Not surprisingly, Duckhorn is continuously recognized as one of the best wineries in the U.S.
It will be interesting to see whether the TSG investment will be as successful. TSG was able to retain the key Duckhorn employees. A new owner with a fresh, longer investment horizon may be willing to make more investments in the long-term growth of the business. On the flip side, GI Partners may have taken advantage of the “more obvious” business opportunities. Nevertheless, industry trends remain in Duckhorn's favor as the continued growth in premium wine has likely been a key driver of Duckhorn's growth, both historically and prospectively.
Furthermore, it will be interesting to see whether GI can pull the same growth levers under Far Niente to drive another success investment in the wine industry.
Source:
https://www.gipartners.com/news/gi-partners-completes-sale-of-duckhorn-wine-company-to-tsg-consumer-partners
Super interesting share, Nate – thanks for posting. Acquisitions seems to be an increasingly popular movement in Napa Valley.
ReplyDeleteI'm interested to see whether the trend of PE firms specifically acquiring prominent wine properties continues... In some ways, I liken this to the private markets in tech. Many founders, across wineries and startups, want liquidity – especially if a winery doesn't have a firm succession plan in place but does have a strong brand. Instead of pursuing secondary sales, which is popular amongst tech firms, PE firms are giving wine entrepreneurs liquidity in an otherwise fiercely competitive environment.
Anecdotally, one of my favorite wineries 3-4 years ago, Orin Swift, has since been acquired by the E&J Gallo Group (wine conglomerate) and I've noticed a *swift* decline in quality. Can't help but wonder if customers are tuned into the ownership structure, and if that is important to them, consciously or subconsciously, in terms of an authenticity advantage.
Thanks for touching on this, Nate! I can see how wineries would be a great investment for a fund because on one hand there's just so much low-hanging fruit (pun intended) in terms of modernizing the industry and bringing it into the 21st century from a business perspective. At the same time, exponential growth seems unlikely given land constraints and the supply/demand dynamics in the broader market, so I don't see any given winery as a good buy for more than than one or two consecutive sales to funds. Will be interested to see how this landscape evolves in the future.
ReplyDeleteThanks, Nate! I was wondering more about this as well during the Far Niente session. At the surface, I would have thought wine would make for a poor private equity investment category given the limited cash flow visibility resulting from variability in external forces (weather, etc.) and quality of each vintage, as well as the limitations to growth that Janine described above. While GI claims to have tripled earnings, it appears this deal was a 2.4x over 10 years, or ~9% IRR. It is likely the firm increased their effective return with dividends over that hold period, but nonetheless, the result is likely below what they underwrote to as a growth equity firm.
ReplyDeleteIn terms of the TSG acquisition, I took a look at recent news and it seems they have viewed Duckhorn as more of platform investment through which to execute accretive M&A. For example, in July 2018, they acquired Kosta Browne. https://www.agriinvestor.com/tsgs-duckhorn-wines-acquires-california-pinot-noir-producer/