Fine-wine fund has outperformed the market

Date: Monday, February 9, 2009
Author: Jeff Benjamin, Investment News.com

As alternative investment strategies go, fine wine might be a little too alternative for some. But that doesn’t dilute the reality of positive performance, particularly in this kind of market cycle.

This is why Michael Wigley has decided to enter the asset management business through a private-equity fund that invests in some of the world’s most exclusive and expensive wines.

The Fine Wine Appreciation Fund-1, which was launched Sept. 19 with $3.3 million, was up 9.1% from inception through the end of December, compared with a 28% decline by the Standard & Poor’s 500 stock index.

The fund’s return through the end of the year is even more impressive when you consider that it was accomplished with only about one-third of its assets invested in wine and the rest sitting in cash.

In other words, the wine portion of the fund alone actually gained about 30% during that initial 14-week period.

Mr. Wigley, who manages the fund as chairman and chief executive of Bacchus Partners LP in Minneapolis, said the cash weighting is now below 50%.

He expects the fund to be fully invested by April or May, when he plans to launch a second private-equity fund that employs the same strategy.

“While everyone else got bloodied in the fourth quarter, we did OK,” Mr. Wigley said.

Tapping into wine as an asset class has existed as a hobby, mostly among the ultrarich, for ages. But thanks to a burgeoning over-the-counter market and new international wine indexes, wine is emerging as a legitimate asset class.

The value of the portfolio is calculated on the London International Vintners Exchange Ltd., which was established in 2004.

The actual portfolio is held in a wine storage facility in Wayzata, Minn.

“The strategy is a little bit of a hedge because it is a commodity,” said Brad Lehrman, a partner at Minneapolis law firm Lommen Abdo PC.

Mr. Lehrman, who was hired to help set up the legal structure of the investment vehicle, explained that potential investors need to consider not only the esoteric nature of expensive wine but also the unique issues related to private-equity investing.

“To manage a fund like this, you need an understanding of wine and also a familiarity of private-equity funds,” he said. “And for investors, there’s always a risk with private equity because it is, pardon the pun, not a liquid strategy.”

Even with the expansion of markets and new exchanges, wine as an investment is still a long way from being considered a fully liquid asset class the same way that one might measure a blue-chip stock.

But a lack of liquidity within the portfolio is a large part of the reason that the private-equity structure works so well in this instance.

The double-edged sword, however, introduces the restricted levels of liquidity as a normal part of private-equity investing.

This fund, following a traditional private-equity formula, comes with an automatic seven-year lockup, which could be extended to 12 years, according to the prospectus.

The schedule for the payout of investment gains, which could be adjusted at the discretion of the general partners, is set for after the fund is completely liquidated in seven or more years.

For the first fund, Mr. Wigley has set a 2% management fee, a 20% performance fee and an 8% high-water mark that requires an 8% gain before the general partners can take any of the gains.

“Fine wine is an asset class that a lot of people haven’t considered,” he said. “I think people will find it’s a pretty great place to put 10% of your portfolio.”

Mr. Wigley speaks from more than a little experience.

Although he also is chief executive of the Minneapolis-based turnaround firm Great Plains Cos. Inc., he said that wine collecting has been his hobby for 25 years and that he has a personal collection of more than 18,000 bottles.

Asked about the challenges of raising assets for such an esoteric strategy in an environment of complex Ponzi schemes and other Wall Street shenanigans, Mr. Wigley said that he invites investors to visit the Wayzata storage facility.

“We put out the offer to investors that anytime they want to come down and see, touch and feel the wine, just let me know, and I’ll give you a guided tour,” he said. “One of the nice things about having a hard asset is that it’s physical, and it’s there.”