5 September 2013

Laid bare: Naked Fine Wine Bond

 

Few things get the wine community talking like the announcement of another investment scheme. So when Naked Wines announced it was seeking to raise £3m through a fine wine retail bond, it caused plenty of chatter – and raised quite a few questions too.

But the Naked Fine Wine Bond is as far from the traditional wine investment market as you can get – probably to everyone’s relief. Instead, it forms the basis of the company’s move into upmarket wines, the sort that require investment in oak barrels, a great deal of care and attention, as well as time to mature before release.

From mass market to upmarket

While Naked Wines has has grown exponentially since its launch in 2008, it has never been considered a source of fine wine. Its focus has been on the mass market with a range of wines designed for early drinking, sort of like Tesco but without the interminable queue at the checkout.

The fact Naked has sought further funding for its plans through a retail bond, which pays interest at 7% per annum or 10% each year in wine credits, is a bold step. But it isn’t a new idea, either. It follows in the footsteps of similar retail bonds from John Lewis, Hotel Chocolat and, perhaps most famous of all, King of Shaves.

It’s surprising this sort of funding model hasn’t already taken hold in the wine industry, where significant capital expenditure is required to plant a vineyard and build a winery. It’s widely acknowledged that banks are notorious for refusing loans to winemakers, so just imagine what might be possible: entire vineyards and wineries could be funded through crowdfunding. Pledge anything from £1 or up and you could get your own stake in a winery, even if you only paid for a single bunch of grapes.

This idea that enthusiasts can bankroll winemakers has been central to the Naked Wines ethos forever. Through its ‘angel’ customers, who pay £20 to the company each month, it helps to fund winemakers whose businesses might not have got off the ground any other way. Naked Wines, they tell us, was doing crowdfunding long before Kickstarter came along.

Truth be told, I was expecting to push Naked Wines founder Rowan Gormley into a corner when I asked him if the bond was launched because he couldn’t get a bank loan. When he said he could have had a loan at a lower interest rate than what the bond was offering, I was stumped. Why pay more interest on a bond when the bank is cheaper? “That’s our marketing budget,” Mr Gormley said. Aha.

Currently about 60% of bond subscriptions are coming from existing customers and it is expected they will be keen to buy these wines through the proceeds of their bonds. This is just another way to guarantee future wine sales.

Perhaps most interesting of all was Mr Gormley’s response when I asked him why, in the FAQ section of the bond’s invitation document, it says that within six months of issuing the bond the company will likely start selling a limited quantity of fine wines that have been ‘incubating’ in anticipation of a move into this market. Surely if this £3m is meant to fund the entire process, it wouldn’t have started already?

As it turns out, Mr Gormley said, when Naked Wines was launched, the expectation was for the angel customers to order from their accumulated funds twice a year on average. But these customers are in fact ordering four times a year. So because the angel system was designed to give the company a steady stream of cash to fund its more ambitious plans, this means there is less capital to play with. “This £3m is to give us the money to do what we have wanted to do all along,” Mr Gormley said, adding that until now the company has used whatever it has left over to fund a small quantity of what it describes as ‘fine’ wines.

The nitty gritty

As for the bond itself, you might be wondering what this is all about and what, exactly, is a retail bond? In the wide world of bonds there is a distinction between the wholesale and retail markets. Wholesale bonds are for institutional investors (fund managers, investment banks, etc) and tend to require an investment of £50,000 or more. A retail bond is for the average investor on the street (think retail sales) and can be accessed for much smaller sums, say £100 and up.

To participate in the Naked Fine Wine Bond issue, you invest anywhere between £500 and £10,000 for three years in exchange for either a 7% annual return or 10% per annum in wine credits. When the three years are up, your money is repaid.

Crucially, this is not actually a bond,  but an unsecured loan that cannot be sold on the secondary market, nor redeemed before the term ends. If it were a proper corporate bond, investors would have the freedom to sell it on the secondary market. Furthermore, Mr Gormley said that one reason the bond is limited £10,000 is because exceeding that value throws up several money laundering and regulatory issues. Once you get the financial regulator involved in these things (this bond is not approved by the Financial Conduct Authority, nor does it need to be),it becomes a great deal more expensive to create.

With that in mind, it is necessary to consider whether the 7% annual interest being offered on the Naked Fine Wine Bond matches the amount of risk that is being taken. And there is indeed quite a bit of risk. Anyone who invests must be willing to tie up their money for three years, no questions asked. But there is also no question that the risks have been mitigated as much as possible and the company appears stable enough to still exist when the bond matures. The money is being held by a separate entity, so if it hasn’t been spent on making wine, it is in a segregated bank account. If the worst happens to the Naked Wines Group, the money will be there either in cash or in the form of wine for bondholders to reclaim.

This retail bond might not be for the seasoned lover of fine wine, but there is no doubting that Naked Wines has a strong following. And even though its wines might not suit everyone’s states or interests, it has attracted plenty of good reviews for its produce. Love them or loathe them, 120,000 customers are sort of difficult to dismiss.

 

 

 



Copyright 2017. All rights reserved.

Posted 5th September 2013 by Geordie Clarke in category "Wine Blog