Frogs, Tides, and Wine: the Adventure Capitalism Boom

How is the changing investment landscape affecting the wine industry? Some thoughts on adventure capitalism and wine (and frogs and tides at the very end).

>>><<<

The cover story on the November 27 issue of the Economist newspaper was “Adventure capitalism: startup finance goes global.” It wasn’t, as this illustration might suggest, a story about Bezos and Branson and how their billions were powering rocket adventure tourism in near space. That’s interesting, but it’s another story.

VC become Ad-Venture Capital

The article traces how venture capital (VC) has gone from a niche investment space to something that seems to be much broader and more pervasive. VC is usually thought of as early-stage private investment in privately-held tech and science firms. The old world of VC was mainly focused on the US and just a few sectors — think Silicon Valley start-ups. The idea was to invest early on in what in the best-case scenario might turn out to be a unicorn firm — one that would achieve a billion-dollar valuation while still in private hands and then go public in a big way. Ka-Ching!

High risk is one reason the Economist calls this Adventure (rather than Venture) capitalism.  VC is inherently risky. The investments are by their nature illiquid and you need to hit the target with some very successful investments to offset the inevitable disappointments. I suppose it is a little bit like the old joke about the wine business — the best way to make a small fortune is to start with a big one. But of course some investors do very well indeed.

The Economist argues that VC is changing — being disrupted just as it has disrupted in the past. The VC world has broadened beyond the narrow set of sectors of the past and beyond the US. It has also changed as huge amounts of money have poured into VC firms. The fact that there are more investors taking risks doesn’t make the system less risky.

The Problem of Return-Free Risk

There are a number of factors powering the rise of adventure capitalism, but perhaps the most important is the scarcity of positive real returns in some traditional sectors and the consequent logic of assuming higher risk to achieve higher return. Necessity as much as entrepreneurship drives the trend.

It used to be said that US Treasury bonds were “risk-free return,” for example, and so good foundational investments for a variety of individuals and institutions. Now, an investment advisor I know says, Treasuries are “return-free risk.” The interest return is negative in real terms (below the prevailing rate of inflation) and prices are volatile. This fact forces investors to explore all the nooks and crannies of the financial world to meet their needs.

The VC boom isn’t the only example of their trend. You might not have heard of SPACs (special purpose acquisition companies) before this year, but they are now a big enough market niche to be going through their own boom-bust cycles. Some call them “blank check funds,” which suggests something about the times when high net-worth investors decide it is a good idea to hand a financial advisor (sometimes paired with a sports star or celebrity of some sort) a blank check to buy a private company.

There are also NFTs (non-fungible tokens) that sometimes trade for high amounts. I suppose there could be a SPAC that invests in funds that acquire NFTs — what could be better? And I understand there are active markets in virtual assets on metaverse platforms.

This Changes Everything?

If you want to consider how far investors will go to get a return, consider that huge amounts that some recording artists have received for their back catalogues of songs. A steady flow of fees from music streaming services apparently looks really good when the alternative is something like return-free risk.

The list of investors who are plunging into the world of adventure capitalism investing is amazing, including billionaires and speculators, of course, but also what we might usually think of as very conservative institutions such as university endowment funds and public sector pension funds. (I recently reviewed the endowment report of a major mid-west university that had 22% of its assets invested in private equity and venture capital.)

These institutional investors, who once focused on blue-chip investments, now find themselves pulled into higher risk illiquid investments by the gravity created by their need to achieve certain rate of return targets. Most institutions that I monitor aim to increase their private equity and VC profile in the future.

One important question is this: what happens to all of these investments when the economic environment changes, as it looks like it is doing now, with higher inflation pushing interest returns up and the big quantitative easing flows tapering off at least here in the United States?

Wine Investment Booms

So how is this a wine story? The Economist is right that investments in risky and illiquid assets is no longer limited to traditional venture capital firms and Silicon Valley sectors. It is hard to follow the wine business in 2021 without noting all of the investment activity. Acquisitions (Sycamore’s purchase of Ste Michelle Wine Estates, for example), SPACs, and big moves by some institutional investors, too. Lots of money searching for returns in winery and vineyard investments.

Everyone seems to want to get on the NFT bandwagon, for example. Even Penfolds, the iconic Australian brand owned by Treasury Wine Estates is piling in. According to one report,

Australia’s most celebrated wine-maker is going digital with the announcement that Penfolds is teaming up with non-fungible token (NFT) marketplace BlockBar for an innovative new project. The partnership will see a limited edition NFT tied to the impossibly rare Penfolds Magill Cellar 3 barrel made from vintage 2021. According to the iconic Australian brand, only 300 will be made available, for the cool sum of USD$130,000 (AUD$180,00).

And Penfolds isn’t the only producer to exploit interest in NFTs. Barossa winemaker Dave Powell is offering the entire 2021 vintage of his wine through sale of NFTs. Is the wine’s value greater when linked to a NFT? Many apparently think so in the same way that some firms are trying to raise their profile by linking to blockchain (Square, the payments company, is now Block).

Better than Birkin?

Fine wine has done very well as an “alternative” investment in this environment and I have received several emails promoting funds to invest in fine wine assets. According to a recent article in Forbes, fine wines topped the list of alternative investments over the last decade, a list that includes blue chip art and furniture, classic autos, and colored diamonds. Wine’s rise to the top of the pile was noteworthy because it has now outperformed the previous leader … handbags! Gosh those Hermès Birkin bags did really well — I assume you have a bunch of them in your retirement portfolio, yes? Nah — me neither.

I think it is clear that wine is part of the adventure capitalism story — how could it escape such a broad, powerful trend? So the questions I asked above apply to wine, too. What happens when the economic environment changes, as it seems to be doing now? Which of these investment strategies will endure and which will fade away?

Frogs and Tides

Many, including the Economist, seem to be enthusiastic about the adventure capitalism trend and all that goes with it, but it makes me nervous. It seems to me that this is a process that normalizes risk without actually reducing it. Having taught university classes on financial crises and written a couple of books on this topic, I take risk very seriously (and I don’t think I am alone).

The current investment environment in wine and more generally reminds me of the parable of the frog in the pot on the stove. The water heats up slowly, so you kind of get used to it. Once you realize that things have started to boil up it is too late.

I will therefore be watching closely as the monetary life-support system tapers off and interest rates rise. As Warren Buffet is supposed to have said, you never know who is swimming naked until the tide goes out!

4 responses

  1. Mike a great piece on summarising the investment landscape. With regard to the economic environment – the important word might be “environment” a key variable ( amongst others ) that might see a lot of value draining away from what have been seen traditionally as safe wine producing havens.
    More specifically, in the world of wine, it is interesting to see the price differential paid for a. tonne of a specific grape variety across the world. The sales price of resulting wine, partially reflects that differential – but the larger part is the SAM(M)- or ” smoke and mirrors (margin)” The elasticity of price to quality can only be stretched so far and and the great leveller is ultimately quality. As well as the frog in the pan – it may be the tortoise and the hare.

  2. What happens when you finally drink your investment? Maybe being left holding the handbag is a better investment? thanks Mike always interesting

  3. Great piece, as usual, Mike.
    It goes beyond VC, however. It is rarely mentioned that the much-vaunted English Wine Boom owes hugely to the money thrown at it by wealthy individuals, often with hedge fund backgrounds, who are not looking for any kind of meaningful return on their investment in the short-medium term… This, in turn creates an atmosphere in which ‘real’ investors throw money down the same hole…

    https://www.thedrinksbusiness.com/2021/03/new-english-wine-company-sets-goal-to-become-top-five-producer/

Leave a Reply to Rodney Schatz Cancel reply

%d bloggers like this: