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Snooth User: EMark

Invest in a Winery?????

Posted by EMark, Jul 4, 2014.

Has anybody ever considered investing in a winery?

Today, I received a note from my financial advisor indicating that he wanted to chat with me about some possible opportunities.  One was for a REIT, but the other is in a winery.   Is anybody familiar with the Cunat Family Vineyards?  They bottle their wine under the "Materra" label.

According to the the Cunat/Materra web site (linked above) they are located in the Oak Knoll District in Napa Valley.  It looks like they produce the usual suspects:  Cab, Merlot, Chardonnay, SB, and, slightly off the very beaten Napa Valley path, Viognier.  Their winemaker is Bruce Regalia and their consulting winemaker is Michael Trujillo.  I can't say that I am familiar with either of these two names, but, then again, the list of winemakers with whom I have no familiarity is quite lengthy--even if you limit it to winemakers in California.

Attached to the e-mail that I received was a "Private Placement Memorandum" regarding Cunat Premium Vineyards, LLC.  I have never heard of a Private Placement Memorandum, but, based on my initial viewing, it looks for all the world like a prospectus.  Somebody once told me that the purpose of a prospectus was to provide all the reasons for not making an investment.  Under that definition, this document seems to qualify.

So, half of me is saying, "How cool would that be to have equity in a winery?"

The other half of me is saying,  "This is insane.  I could just burn my money and save time."


Reply by outthere, Jul 4, 2014.

How do you make a million $ in the wine business? Start with $10million. Most people use wineries as a write-off as the majority are not profitable. Kinda like the restaurant business.

Reply by EMark, Jul 4, 2014.

How do you make a million $ in the wine business? Start with $10million.

Yup.  The same reason I would never invest in an auto racing team.

Reply by GregT, Jul 4, 2014.

Michael Trujillo was the winemaker at Sequoia Grove forever. I don't know if he still is. Surely respectable, but not some rock-star who's going to garner press just because he's involved.

As far as investing in a winery in Napa making Cab and Merlot today, that's buying in at the top of the market. As mentioned, people who are starting wineries in Napa these days are not doing it to make a living. They usually have money from elsewhere.

A private placement memorandum is exactly what you thought - a prospectus. It's used to raise capital for a company that is not traded on one of the exchanges and is therefore not public, hence the "private" placement. They're usually used by small companies that don't want to or can't afford to incur the expenses of registering their securities sale with the SEC. However, and this is not my area, I think they're limited in terms of the number of investors that can participate, the net worth of the investors, etc. There are some exemptions but I don't remember what they are. I'm assuming your accountant will know all that stuff and will fill you in.

I'm also curious as to why he's coming up with this type of an investment strategy. Does he himself have some financial interest in the winery? Not that there's anything wrong or  shady, it just seems like a fairly unusual investment recommendation.

Reply by dmcker, Jul 5, 2014.

As Greg mentioned, private placements are just that: private investments where shares are not traded publicly on open, regulated markets (I've put together several in other business areas). Ownership is placed with individuals or institutions privately. Lots of private firms out there that are of course excellently run and excellent value, so that's no problem in and of itself. A memorandum of agreement or memorandum of understanding is a common tool in the business world that performs fairly well-defined tasks. Whereas a 'prospectus' is a generic term that can cover a wide range of styles, purposes and sins, and sounds more like a 'sales' tool. Whoever put the investment package together for that winery wanted to be more precise and sound more businesslike and friendly to 'investors'.

My immediate reaction was the same as Greg's, too, in that I wondered why your 'financial advisor' was coming to you with a generic Napa winery offering as one of two things he/she was offering you. Wineries are notorious underperformers, subject to all sorts of risks. Their appeal tends to lie more in vanity areas. I was offered a chance to invest in Chalone Vineyards back at the beginning of the '80s in a private placement like you describe, although I was approached directly by winery management. That was a different winery and a different era. At the time I wondered guiltily if I should invest in an area where I was mostly a hobbyist, but then I realized that I knew a lot about the industry already and that gave me a good perspective (an approach I later refined and applied to the internet industry offerings of the '90s). So I bit the bullet and participated. 10 years later it was worth well more than a 10-multiple but that was a genius winemaker and a genius business manager at the beginning of the CA wine bubble. Cannot expect anything like that from what you describe.

So back to the investment advisor. If someone brought something like that to me, my first instinct would be to investigate him (as to 'why'), further. I'd query him right away. So many, many other investment vehicles out there with lower risk and better return. Or is he aware that you are well into wine and was trying to find something for you in that context?

If I were located where you are and wanted to invest in a winery-related business or vehicle, I'd start by doing a lot of research (including all of the people involved in any candidate venture) then decide what I wanted out of it. Bragging rights? Prioritized access to wine? Helping out someone doing something new and creative? A steady, positive ROI? Something else? Then look around, even closer to home. Hell, I'd even contact Abe Schoener at Scholium and ask him if he needed funding for his SoCal operations and who to talk to about how to structure it. That would be far more interesting, and certainly provide access to better wine, to boot.



Reply by JonDerry, Jul 5, 2014.

Easy pass Mark. Would be much more fun to invest in a grass roots project from one of your cronies here on Snooth. I hear Fox wants to eventually plant/grow vineyards up North.

I met a couple the other night who were wide eyed about a Lodi Zin project they started recently. 2012 will be their first vintage, and in talking with the wife it was clear that they were in a little deeper than they intended. After paying for '12 and '13 grapes, bidding on '14, oak barrels, paying a winemaker, for bottles/corks, and storage they have probably put out 30-40k. They mentioned 70 case production in neutral barrels but Im not sure if they're doing 70 cases per vintage or total. Anyway, I'd rather get in to something like this with an active role in the process than what you describe.


Reply by Richard Foxall, Jul 5, 2014.

Years since I took securities law, and my real knowledge of securities really pre-dates that when I did some business development for an HR firm that was pitching the Hong Kong stock exchange.  Private placements are allowed for companies with under 500 shareholders--they are not subject to the same disclosures as publicly traded companies.  In the past, offerings were generally limited to investors with a minimum of $250k net worth.  Private placements can actually be a very good thing for bigger investors.  Essentially, when a VC funds a start up, it's a private placement--there's stock, the company is registered with the state's government (usually Secretary of State), and there's a description of the number of shares, and how many you purchase, etc.  Once in a while one comes along that a broker will offer to individual investors.  My parents were involved in one for a software company, for instance.  In general, not something you want to do one time only, as you need to spread your risk.  And a winery?  I concur that this is buying at the top of the market.  It's possible they want to bring some aspect of the business in house and want to raise capital for that, or they want to buy another vineyard, or hire some staff to push sales forward, but that's exactly where wineries wash up on the shoals (like Phelan, for one--you could buy them for 33% of what the owners invested, I bet).

Of course, forget all that when I come knocking at your door asking you to invest with me.  I've got a plan that can't lose money...

Reply by dvogler, Jul 5, 2014.

Really?  Wow.  I TRUST you!  :)

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