The liquid active ingredient: Myriad joys of wine
Today’s world has two types of wine lovers, those who buy to drink and those who flip to make a profit. Both involve passion, just their “high” is different.
As a sommelier, I understand how wines can seduce our senses, but I have to be honest, I’ve never invested in wine to resell for a profit. I used to joke often that wines are my only “liquid asset”. So it was fun to sit down for a chat with Suman Bannerjee, Chief Investment Officer of Hedonova, an investment fund with a fairly diversified portfolio. What makes them unique is that they allow investments in the alternative (read: less orthodox) sectors like NFTs, crypto and even wines.
Bannerjee gave me a quick rundown of how it works. “There are basically three ways to invest in wine: first, buy the winery and sell the grapes for a profit. Second, buy premium bottles and wait for prices to rise. Third, buy wine in barrels, keep them for two to three years before selling them to bottlers,” he said. His company is committed to the latter options.
Then came a shock of a revelation. “Does knowledge of a wine region and its vintages help to invest?” I asked. “Surprisingly, a thorough knowledge of wine as a beverage, its origin and heritage, is pretty much useless since wine taste trends have remained stagnant since the 1930s.”
It pretty much shattered everything I believed about investing in wine. “It takes a deep understanding of the wine industry and geopolitics to make money. Geopolitics is important because wine prices are dictated by laws and export tariffs, so it is important to be able to predict in which direction tariffs may move,” he said. Logically, if tastes have remained a constant, it is better to study what can affect supply and demand.
Another often asked question is why wineries don’t hold back their wine and get more profit from it. Well, winemaking is a capital-intensive business. From the time the grapes are harvested, vinified, aged, bottled and finally sold, there can easily be a three to four year (or more) wait. No winery will have the working capital to get through such a long period of endless bills and mortgages. This is where these investment arms come in, identify the wines and buy barrels in advance in order to financially help the winegrowers while they wait to prepare their product for delivery.
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The upside here, for people like Hedonova, is being early-stage investors, they pay a much lower price (but take the highest risk). Once the wine is ready, they resell it to other companies, most often to other investment companies who may not have had the means to buy and hold earlier.
So how does this translate into money for us? Well, we invest with them – Bannerjee said one can start as low as $5,000 (you can also go up to $250,000) and they take care of the rest. (In order to invest more, it would have to be channeled through feeder funds under Hedonova). It’s always easier than buying wines from established regions and prized vintages because (A) those wines may not appreciate much more and (B) when we go to the market, provenance matters (it’s i.e. where did we get them from and how well were they stored) and with no answers to satisfy even the most discerning wine critics, chances are we won’t find many takers for our lot, or else we would find buyers but not for the profit we imagined. Instead, it’s easier to just pay the 5% brokerage fee and people like Hedonova will take care of everything right down to finding the buyer for us.
Wines, as an investment, can yield an 18% return per year (on average, according to Bannerjee), which sounds great. “Wine is safer than watches but riskier than art; the masters paintings are limited in quantity, they will never be painted again. The art is timeless while the wine has a limited shelf life and there is more production. But art buyers tend to be very wealthy families who have cash on hand regardless of economic downturns. As a result, art prices fell only 8% in 2008, while wine fell 18%. Wine is usually bought by upper-class people who tend to cut spending during downturns,” he explained.
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I also asked which regions are the most sought after. “Burgundy in France represents 50% of the wine market in terms of volumes. Two styles that are picking up are Chilean white wines and California Napa Valley wines,” he replied.
To conclude, Bannerjee had some good advice. “The wine you like to drink is not the wine you invest in. You want big brand wines, they are less risky and are traded more often on exchanges on Liv-ex, so easier to sell. And finally, you want a wine from a country that has relaxed export laws and low tariffs with the United States and China, because they are the biggest wine drinkers. Until May 2021, the United States had imposed high tariffs on French wine. Once they were changed, the returns were multiplied by 3,” he said.
Ultimately, whether you want to invest through a company like Hedonova or just buy bottles to open with friends, we can all agree that wine can bring joy in so many ways. If you’re investing, you know who to talk to, and if you have a precious bottle to uncork, you know where to find me.
The writer is a sommelier