The combination of Mondavi case and conversation around Far Niente’s ownership prompted me to research further into the different forms of “wine investment” and how appealing each one is. With Mondavi, we discussed his hope that by conducting an IPO, he could persuade the public to buy into the brand’s strategy and promise. In effect, GI Partners’ decision to purchase a majority stake in Far Niente echoes a similar aspiration. However, the results were starkly different. In the case of Mondavi, we saw shares plummet from the initial price of $13.50 to a depressed but steady level around $8 to $9. The conclusion of this saga was Mondavi’s sale to mass-producer Constellation. On the other hand, although the inner workings of GI Partners’ portfolio are less visible to the public eye, their pattern of winery investment (purchasing a controlling stake in Duckhorn in 2008 and continuing on to establish a majority stake in Far Niente seven eight years later) indicates the potential they see in winery ownership.
The contrast indicates that there may be some incentive for institutional investors in the aspect of control – in other words, they have faith in the future of a winery as long as they are able to exert influence over its management. Otherwise, investing in the product itself – not the management, or strategic direction – is safer and more appealing to an individual. In fact, the UK Investor Magazine argues that investing in actually purchasing fine wine is not only more palatable (and enjoyable) than buying stocks, but actually financially safer. Warren Buffet at one point argued that wine should comprise at least 1% of any investor’s portfolio. The UK Investor and OenoFuture (fine wine purchase consultants) pointed out that: “since 2005 fine wine has seen growth of 198%, making it a very attractive safe haven for investors keen to diversify their portfolio.” Although the optimism here may oversimplify the complexities of the investment opportunity, the point about the benefits of investing the product itself – versus the company – is food for thought for any producers who consider the IPO route in the future.
This is a very interesting piece and I think it highlights one of the key aspects about investing in wine (or any asset) as an institutional investor - it's all about control. As a former investor, we almost never made an investment (regardless of industry) in which we did not have substantial influence over the operations and strategy of the business. At the end of the day, as much as we may like a product or a group of managers at a company, our fiduciary responsibility to our clients was to return as much capital as possible even when it meant changing a product focus or firing a management team.
ReplyDeleteWith wine, I think there can be such a high level of importance and focus placed by wineries on the quality of the product that causes them to treat the production process like an art rather than a financial business. And that's why I agree that in most cases wineries make a poor investment because of this fundamental conflict of the strategic goal of the winery - is it to create the best wine or generate the highest profits while still producing a viable wine that consumers demand? Wine also takes substantial capital investment and many PE firms approach investments with the goal of reducing costs as much as possible which in all but rare cases would tend to lead to lower quality wines and a more commercial approach to the business. Echoing your conclusions, I think these are a few more thoughts on why wine as a product is likely a better instrument for investors and why wineries themselves should likely try to avoid control-focused PE buyer when looking for capital.
Thanks, Morgan! I found this very interesting. I might take a different approach from Jordan, coming from a growth equity background where my firm primarily acquired minority positions in founder-led businesses. The crux of minority investing is in incentive alignment - the model tends to work best when the founding team has a significant portion of their net worth tied up in the business, wants to continue growing the company for the foreseeable future, but also recognizes the value of taking some chips off the table and having a strategic partner for key business decisions. Wineries, as we've seen throughout the course, tend to be family run operations for decades.
ReplyDeleteIn the case of Far Niente, it was abandoned for many years before Gil Nickel acquired it in 1979. Gil died in 2003 and his only son, Jeremy, was not involved in the operations of the winery (although he remained a major shareholder). Thus, from an investment perspective, there was not a clear operator with skin in the game to partner with on a minority basis. Rather, I think it was prudent for GI to acquire a controlling stake and reset the organization by installing a new CEO in Seven Spadarotto in 2018 (https://napavalleyregister.com/community/star/news/local/spadarotto-named-ceo-at-far-niente/article_8a5e61b5-14fe-56ce-a2d5-70f67291f1e9.html).
Further, in the case of the Mondavi IPO, I actually think it was negative market signalling that contributed to the trade-down. In the offering, the Mondavi family sold a million class A shares at $13.50, which represented about 90 percent of the class A holdings of Mr. Mondavi, 80, and his children (https://www.nytimes.com/1993/08/10/business/market-place-a-pestilence-in-the-vineyard-is-a-plague-on-mondavi-stock.html). This led the market to believe that the family was simply "cashing in" rather than raising the capital to continue to invest in further growth.