Post the class discussion on whether wine business is a good fit for IPO / capital markets, I reflected on my own investment career and researched about private equity ownership in wineries.
By common rules, wineries are not the perfect candidates for the private equity investments, mostly due to a mismatch between long winery's business cycle and traditional private equity investment horizon (~5 years). However, a simple search online showed that private equity moves in the wine business is actually very active. Some recent deals include:
- Aug 2016: TSG Consumer Partners bought Napa’s Duckhorn Wine Company from GI Partners
- May 2016: GI Partners bought a majority stake of Napa’s Far Niente Wine Estates
- Jan 2015: J.W. Childs Associates bought control stake in Kosta Browne
"...The US wine market is the largest dollar wine market in the world at $32.5 billion in retail revenues. And although it has grown consistently, particularly at the high end, US per capita wine consumption is significantly underdeveloped relative to the rest of the world.*Since 1994, US wine consumption has grown steadily–not one year below the prior year, and growth rates have accelerated since 2010; some say the wine industry is “recession-proof”. California, Napa, and Sonoma–as well as lesser-known areas such as the Central Coast–continue to develop, as do the markets of Oregon and Washington State. In 2014, the highest rated US wines/wine regions, receiving consistently 97,96,95 point scores from the Wine Enthusiast, were Washington/Columbia Valley for Cabernet, Merlot, Syrah and whites as well as the Pinot Noirs and whites from the Willamette Valley in Oregon. These regions and their wines are being recognized at the level that California wines have been historically viewed.Increasing demand for wine, especially super and ultra-premium domestic wine brands, continues to foster a need for capital, as does a forecasted change in ownership over the next 10 years of over 50% of American wineries..."
(Source: http://bacchuswinefund.com/about/)
In my opinion, private equity investors invest in wineries for potentially following reasons:
- Overall favaorable industry trend (increasing demand, more penetration, movement towards higher end / higher margin products, globalization etc.)
- Favorable timing: family transitions within traditionally pure family owned wineries plus the capital intensive feature of wine businesses created investment opportunities (either primary or secondary) for investors. Introducing a corporate investor could mean less control over the winery, therefore a private, independant investor such as PE funds could be more favored by family winery owners
- The wine sector is still a highly fragmented market, therefore creating potential consolidation opportunities and exit path through M&A
- Real estate upside such as residential / commercial opportunities around wineries
- Passion for wine
I would imagine that an funds with an evergreen structure (funds with an indefinite life) would be best suited to hold private equity assets. While none of the three funds listed appear to have evergreen structures, they are all notably old for the private equity industry: TSG was founded in 1987, GI was founded in 2001 and J.W. Childs was founded in 1995. Due to the length of the relationships they have with LPs, they likely have a stable LP base which will allow them to invest in longer term assets.
ReplyDeleteLily, thank you for the interesting insights. I agree with the reasons that you stated, and wonder if they could be similarly applied to the Continental European market, which arguably fulfills all the reasons too.
ReplyDeleteI also wonder how non-market factors like status and the ego boost one might gain by owning a vineyard factor into these investment decisions...
ReplyDeleteKosta Browne has a history with PE ownership. In 2009, Vincraft and TPG bought in. In 2015 (the deal you mention above), Vincraft sold its stake to JW Childs.
ReplyDeleteI was curious about Vincraft's business model, but was surprised that I couldn't find much. Here's a brief description of the investment firm from a 2011 press release announcing Vincraft's acquisition of Gary Farrell: "The Vincraft Group was formed in 2008 by Bill Price, Walt Klenz and Pete Scott, wine industry veterans with over 70 combined years of experience as investors in and operators of highly regarded wineries. Their industry expertise ranges from large, broadly distributed producers such as Beringer and Kendall-Jackson to highly-allocated, luxury-tier wineries including Kosta Browne and Kistler. Vincraft is creating a portfolio of distinctive, limited-production wineries that are well-established and already enjoy a reputation for consistently well-crafted wines. In fall 2009, Vincraft made its first investment with Kosta Browne Winery. Today, the group announces the addition of Gary Farrell Winery to the portfolio. For more information, please visit www.vincraftgroup.com." Strangely, their website doesn't seem to be operational. I wonder if they've since disbanded.
TPG also plays a bit in the wine space. Other than its stake in Kosta Browne (which I think it still holds), TPG bought Beringer in 1995 for $350 million and sold it five years later for $1.5 billion.
I like Win's point on non-market factors like ego boost. The case on Robert Mondavi actually mentions something similar: returns on equity on wineries is on average <5% and when R Mondavi went public, a lot of investors were expected to be in it NOT for the financial returns but just because they wanted to own a winery.
ReplyDeleteThanks Lily! Another thought I have is that medium-sized or larger wine (alcohol) conglomerates operate much more like a traditional food & beverage brand, or rather portfolio of brands such as PepsiCo or Kraft. They operate multiple wine brands, made from different regions / grape varietal (diversifying production risk), and selling to different consumers via different channels (diversifying demand risk). Especially as these brands focus more on the mid-end, where production seems to be scalable and few brands have a strong brand pull (meaning having a portfolio of them, across a wide selection of channels), it seems like this portfolio approach will allow wine conglomerates to have more stable revenues, cashflows and margins - making it more PE friendly.
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