E241: How Spirits Became a $1 Trillion Alternative Asset Class

Speaker 1 So you're the CIO of Invest. We'll get into that in a bit, but you started your career as an OCIO at RVK.
Tell me about your experience working at RVK.

Speaker 2 Yeah, that was a great experience. I worked with some really intelligent people who taught me a lot about investing, really set the foundation for kind of how I thought about things as an investor.

Speaker 2 And

Speaker 2 one of the things that I thought RVK did a really good job of, especially the folks that I worked with, was thinking about things a little bit differently than the broader sort of institutional investment community, especially from the consultant side, where there was a lot of pressure to invest in big names.

Speaker 2 Pension plans want to align with what other pension plans have done simply because it didn't really put their neck out on the line.

Speaker 2 If you follow people's incentives, you'll see kind of what they do, right? And the consulting community oftentimes isn't incentivized to really search for the

Speaker 2 best and brightest. It's oftentimes reversed into the mean of the lowest common denominator of what others are going to do.
And RBK was very different in that regard.

Speaker 2 Our team really wanted to differentiate ourselves by finding unique strategies that together created the diversification that maybe a go anywhere, do anything allocator fund could do, but with more precision.

Speaker 2 And typically what we saw with experts and a specific focus is that you're sourcing better deals, you're adding more value throughout the deal, and you're exiting better.

Speaker 2 And that was a really important lesson that I thought was unique to the firm and the team that I was working with.

Speaker 1 And you hear a lot of people saying that consultants or even larger allocators are not incentivized to find these best and brightest. They're incentivized to go after the large brands.

Speaker 1 Can you double-click, like really granularly, why is that incentive there? And maybe

Speaker 1 walk through that incentive structure from an individual at the consultant or an individual at a large asset allocator.

Speaker 2 For the consultant, you're proposing

Speaker 2 investment opportunities to typically an investment staff who then has to propose those to a board.

Speaker 2 And if you as a as a consultant, which are paid on a flat fee based arrangement, if you propose something new, unique, and different, if it performs well,

Speaker 2 you get no compensation for that.

Speaker 2 And if it performs poorly, you're oftentimes could be considered the scapegoat there to the investment staff, who the investment staff, if they kind of get in line and believe the story that's being sold from the consultant, then they are responsible ultimately to the board as well.

Speaker 2 And so if they are recommending something to the board that is kind of out there a bit and it doesn't work out, that's really putting their neck on the line. And they're oftentimes not compensated.

Speaker 2 And there are structures that some groups have implemented to it to kind of avoid this a bit, but they're oftentimes not compensated for overperformance.

Speaker 2 But if you do have something that's a bit of a slip up,

Speaker 2 then you're going to be judged against that. And all of these institutional groups are judging their performance relative to their peer set, relative to benchmarks.

Speaker 2 And so as long as you're meeting or exceeding the benchmark, really that you just don't want to be below the benchmark, right?

Speaker 2 And that's going to put you at risk for your role and for the individual who's making those recommendations.

Speaker 2 There's not a lot of incentive for either the consultant or the investment staff to take those risks.

Speaker 2 And you see that bear out in terms of the portfolios, that you see a lot of money going to these big allocators that over time are just hard for them to really perform, outperform.

Speaker 1 If I was dead set or raising from consultants, and let's say I was on a fund three or four, I wasn't KKR fund 17,

Speaker 1 what would I be looking for as a a counterparty from a consultant, maybe individual or firm that would signal to me that they are looking for the best and brightest and that they are willing to take a risk on an emerging manager, maybe even a manager that just became an established manager, but is still early on in their life cycle.

Speaker 1 What would be those one or two characteristics?

Speaker 2 One of them is that you could look at the track record of what they've already recommended, right? That would certainly be something that

Speaker 2 was a kind of telltale sign to the market for us that, hey, we were doing some more unique things. But I think that manager needs to think about how can I be a good partner here?

Speaker 2 How do I differentiate myself?

Speaker 2 And if you see a consultant that is open and interested in those things as a way of creating a customized relationship, whether that be fee reductions for first-time closings or co-investment rights, like that investor that's trying, that consultant that's trying to find value add pieces above and beyond the contract of the strategy, they're thinking a little bit more about how to add value to their underlying investor.

Speaker 2 Because not only

Speaker 2 are you trying to be a good partner for this manager, but you're also trying to be a good partner for your underlying constituents, the staff and the board, by lowering the fee load and finding these additional opportunities to do co-investment.

Speaker 2 So those are just some simple ones. It's just thinking a little bit differently about

Speaker 2 allocations versus I know that pension plan ABC is in,

Speaker 2 we're already in this fund in a prior vintage. That seems pretty good.
Nothing has really changed. Let's move forward with it with another allocation, which happens quite a bit.

Speaker 1 What percentage of the funds did you and your team source directly out in the market?

Speaker 1 And how many were referred to you by LPs that were basically sourcing them and sending them over to you for diligence?

Speaker 2 Oh, good question. I mean, I would say 90 plus percent were self-sourced by us.
Um, we really turn over the stones to find the new and interesting, differentiated teams.

Speaker 2 So much, in fact, that we would even think about going as far as finding a great group of people who are at a larger firm.

Speaker 2 And we talked about this at times, do we see to spin out ourselves to uh create a you know we are the seed capital for this new firm which would really incentivize that uh manager obviously to perform and their first-time fund with us as the as the main lp source and so we never went that far but that was we even uh that was something that was bad about so you went from working out at ocio to investing in bourbon quite the career arc so tell me about that and how did that come about so my partner and the founder of invest bev uh a guy named Brian Rosen, he and I have known each other for a long time.

Speaker 2 And we were out with our wives, we're good friends, out one night. And he started talking about

Speaker 2 his industry, which was alcohol. His family had been in the industry for nearly 100 years.

Speaker 2 It's a really fun story. They were actually the first liquor license in Chicago coming out of Prohibition.
So his family had been in the space for a really long time.

Speaker 2 And under his stewardship, after running the business for a long time, he had exited

Speaker 2 the business to private equity. with his own personal and friends and family capital.
He started investing in the author space again.

Speaker 2 And he came to me at that dinner and said, look, you know, Giuseppe,

Speaker 2 I'm seeing dealful. I'm very ingrained in this space.
I think there's some great opportunities to invest. I think, you know, my own capital can only go so far, I'm thinking about raising a fund.

Speaker 2 And I said, well, Brian, you know, I know this world a little bit. I'm happy to help any way I can.
And kind of,

Speaker 2 in a funny way, he said, well, why do you think I'm telling you about this? You know, I want to do this together. And

Speaker 2 so that's really how it started. And so.
The next step was, okay, alcohol is a category. We all know it as a consumer.
Let's talk about what you're actually doing.

Speaker 2 What's the strategy within the category. And you really, you really leaned into this concept of whiskey aging.

Speaker 2 And I kept kind of leaning in further and further on this because as I as I heard about it, this aligns to some of the real assets kind of investing that I did in at RBK, right?

Speaker 2 You're talking about real estate infrastructure and all those things, timber as well.

Speaker 2 These barrels are this tangible real asset that really had a lot of the same attributes that some of those other real assets had, but they had a really distinct advantage relative to those other things where the good itself was actually getting better over time, right?

Speaker 2 We all can go to a liquor store and see, you know, 15-year-old McAllen is more expensive than 12-year-old and so on, right?

Speaker 2 Those types of things are kind of universally known, that the maturation of whiskey, you get a better product as time goes on.

Speaker 2 So that really got me thinking that there's some attributes about this category that were really compelling.

Speaker 1 I spent a good half an hour going back and forth with ChatGPT. I even Googled, which is not something I do very often these days.
I couldn't find the returns on bourbon.

Speaker 2 What are the historical returns on bourbon? The market, by some would say by design, is a bit opaque.

Speaker 2 But if you transact as much as we do, we have both our investment equity side and a credit side, which provides a lot of insights.

Speaker 2 You get a deep understanding of where pricing of barrels should be, finger on the pulse. And

Speaker 2 in our years of doing this, nearly over 10 years now,

Speaker 2 we've had transactions and you've seen high times in the 40s% percent IRRs.

Speaker 2 You've seen some really, really outlandishly good returns when you think about is a tangible asset if you compare it to the timbers of the world, which are typically like a single digit type of a return.

Speaker 2 It's just, it's just no comparison. Now, I'd be remiss if I didn't mention that there are also times like in recent years where COVID has had a impact on the art industry and

Speaker 2 so forth. And so returns have come down.
The price of barrels have that appreciation curve has come down slightly.

Speaker 2 And so returns in some of our vintages are going to be in the 20s, potentially even in the high teens. And so, you know, that's really the range that you can think about from a realistic outcome.

Speaker 2 What is the correlation to the market?

Speaker 1 And how do you look at it? Is it also somehow correlated to equities? Does it have a beta? And how do you go about kind of ascertaining these numbers?

Speaker 2 We actually

Speaker 2 worked with the Kellos School of Management here in Chicago and just had them do a kind of a third-party. correlation analysis.

Speaker 2 It kind of, it certainly mirrored what we might anecdotally say is that people drink in good times and bad, right? It's a non-correlated category. And the data bore that out.

Speaker 2 There was almost no correlation whatsoever with the S ⁇ P 500. There was no correlation with 30-year treasury, the unemployment, housing starts across the board.

Speaker 2 In addition to that, alcohol sales had

Speaker 2 a dramatically less volatility, right? Standard deviation was half in many instances and even less in others relative to these other categories. And so.

Speaker 2 When you think about a category with an appreciating asset, a tangible asset, limited volatility, and limited correlation relative to the other things in your portfolio.

Speaker 2 That really became compelling to me and I thought would be compelling to the investment community because that's one of the reasons why you invest in alternatives, right?

Speaker 2 At the end of the day, is you want something that behaves differently and complementary. It doesn't all zig when everything is zigging.
You want it to, at the very least, not zig and potentially zag.

Speaker 2 But the alcohol industry just being so steady

Speaker 2 is a really compelling piece of this to me and to our investors. There's this whole

Speaker 1 asset allocation of diversifiers. Typically, it's hedge funds that are uncorrelated to the market.

Speaker 1 And typically, these have lower returns, but add diversification to the portfolio because they are uncorrelated. Is this the bucket that it would fit into

Speaker 1 an endowment or a pension fund? Or where exactly, from first principles, where exactly should investors fit something like bourbon or alcohol in their portfolio?

Speaker 2 The one thing we talk about a lot with investors when we work

Speaker 2 at the institutional level is those that have really rigid buckets that they need to fill across across their allocation struggle with where do I put this right

Speaker 2 and I would argue that it does fit in a real asset bucket that's certainly one opportunity or one way you can go if you have that

Speaker 2 some folks have just an opportunistic bucket I don't know if the risk profile of what we're doing is as high as what was typically in an opportunistic bucket but we almost have to meet the investor where they are and say what does your investment profile and portfolio look like and how can we think about what we're doing and where it might fit and honestly it doesn't fit for for for a lot of folks, but those that are more

Speaker 2 nimble in their asset allocation and can be a little more open-minded because you don't start the day with an allocation to whiskey in your portfolio.

Speaker 2 We have to, as a firm, convince you that this is a category that is interesting and that it does fit, as opposed to finding where it was already preordained to fit.

Speaker 1 You know, there's only a handful, probably half a dozen funds that invest in this entire space. So a big part of your job is educating the market.
How do you educate the LPs in a process?

Speaker 1 And how do you get that second and third meeting? Like, what's the art to that?

Speaker 2 You start with

Speaker 2 what is the category that we're talking about? If it was real estate, right, they already have an allocation to real estate, but you might have to be more specific

Speaker 2 in a particular category. So you need to get into the details of multifamily, right? You need to sell the category in and of itself.
What are the underlying

Speaker 2 dynamics and characteristics of the category that make it make it compelling? And that's where we start with alcohol.

Speaker 2 We talk about the size of of the of the category you know trillion dollar category you talk about the correlation to other categories we start with that to say okay this is big enough to really think about this is compelling enough to to dive a little bit deeper and then the next step is kind of what is the strategy right with which you're capitalizing on the opportunity because first you got to sell them on the opportunity of the category then you got to sell how do you how do you capitalize on it and so that's that's when we get into the uh whiskey barrel specific characteristics et cetera and then from there once once they get a good grasp of this whiskey aging component, then you have to talk about why us?

Speaker 2 Why are we the ones to do it? So it's a three-part journey in my mind.

Speaker 2 And to be honest, the first of those is honestly typically the most difficult.

Speaker 2 Once you get to, now you've bought into this, I mean, you've been open to the concept, the strategy on the bourbon barrels is really compelling. And then you talk about us as a firm.

Speaker 2 To your point, there's very few people who do this aside from us, but our whole team, aside from me, comes from the beverage industry, right?

Speaker 2 Aside from my partner, who I mentioned, we have folks from Bacardi, Molson Coors, et cetera.

Speaker 2 And and that really differentiates us from a relationship basis to buy and sell uh barrels differently and and and to the point i made earlier about sourcing better adding value and then exiting better if you have deep industry relationships in our category uh which we do that really sets us apart from no offense from anybody who lives in new york you know flying in from new york and just doing this as part of a larger hedge fund strategy or whatever the case may be uh it's it's very different and um and that's how we think about it a lot of people for whatever reason don't think of asset managers as as traditional businesses.

Speaker 1 I like to think of them as businesses. And the way I kind of think about it is you have to pick your heart.
So it's very hard to be in a hyper-competitive market.

Speaker 1 And it's also very hard to educate a market to go through all that. But there are these huge rewards for people at SART marketing.

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Speaker 1 So it's these, some of these businesses, it's the education, the first mover advantage, although it's very difficult, that's what leads to these like unique asset classes.

Speaker 1 Same could be said in venture. Andrews and Norwis had to popularize this idea of founder friendly.
We're going to give feedback to founders. We're not going to treat founders poorly.

Speaker 1 And it took a while to kind of scale up for them. I think their first fund, if I'm not mistaken, was roughly $200 to $300 million.

Speaker 1 So I think you pick your heart and there's different dynamics, but there is no free lunch.

Speaker 1 Same to your execution sourcing. Like that is your alpha.
The reason that's sustainable alpha over several vintages is because you can't just come in. It's not just financial trade.

Speaker 1 Everybody wants that financial trade, but they don't want to capture beta. They want to capture alpha.

Speaker 1 So I think you have to think about alpha not only as today, but how do you sustain that alpha over several vintages?

Speaker 2 It's an incredible way of thinking about it, right? Pick your heart there. And I certainly

Speaker 2 experienced that over time. There's certain people that immediately get it.

Speaker 2 And there's certain that just a lot of convincing and some you'll never convince, right, to do something different until they see, you know, decades of experience.

Speaker 2 And then I'll say it'll be too late, but you'll certainly be behind the curve of getting exposure to categories that really could generate returns that you're not getting in other places with managers that you want to be aligned with, right?

Speaker 2 Adrisin Orgowitz, for instance, right? If you passed on that

Speaker 2 years ago and you said, okay, now I'm bought in, I'd love to have an allocation there. Well, good luck, right? It's one of those things that they're only working with existing investors typically.

Speaker 2 And so, you know, you don't want to say folks are going to miss the boat, but there's, you will certainly from a return perspective, and you may just not be able to get access to that manager.

Speaker 2 You see that with others in venture, Sequoia, and so forth. It just becomes becomes difficult and very sought after one, once everyone's bought in.

Speaker 2 Going back to that point we talked about earlier, right? Once there's comfort in the masses

Speaker 2 from others investing, you start getting a snowball of commitments.

Speaker 1 Do you find that the early adopters, the Clay Christensen innovator's dilemma, the early adopters, and going back to the laggers and the conservative investors, do you find that that's on the organizational level when it comes to LPs or on an individual level, or is it some combination of both?

Speaker 1 And if both, then how would you allocate kind of 100 points across the individual versus organization?

Speaker 2 Ultimately, find at the end of the day that the individuals who think that way gravitate to the organizations that think that way, right?

Speaker 2 Because if you were that, have that entrepreneurial mindset and want to do things that are new and different, you're going to get...

Speaker 2 stifled over time at an organization that doesn't doesn't think that way. And you're going to either go start your own thing or you're going to find an organization that does accept that mentality.

Speaker 2 So it's certainly driven by the individual um at the end of the day but i think

Speaker 2 the the individual drives the organization and uh they have to ultimately be be aligned for for anything to get done tell me about the economics of alcohol production how does what does that look like

Speaker 2 we'll use spirits here right because it's different across different categories in alcohol when you think about beer and wine and so forth but uh and i'm going to use rough numbers here just in terms of um these costs and they vary but if you think about a whiskey right a barrel the wood itself is going to cost roughly 250 bucks and then you think about about the grain and the labor and all those things, another

Speaker 2 $200.

Speaker 2 So then you have a roughly $450 cost basis as a distillery.

Speaker 2 If we as a firm buy that barrel for $750 and we've bought barrels for more expensive or less expensive than that, less expensive today, which is great, but that's roughly a 40% margin, right?

Speaker 2 So now we're talking about a margin of 40%.

Speaker 2 We hold it for four years, let's just say on average, and we sell it to a brand for $2,000. And again, we've sold four barrels for more than that, and at times even less than that.

Speaker 2 But if you think about those numbers, if you bought it for $750 and

Speaker 2 sell it for $2,000 in a few years, it's a 27% return, which is kind of in line with what our fund is projecting.

Speaker 2 So now you have a $2,000 barrel of whiskey, and you're going to get anywhere from 250 to 300 bottles out of that barrel. And so now you're talking about $7 a bottle.

Speaker 2 So then you take $7 a bottle and you add that into,

Speaker 2 you add in the bottle itself, the label and all those things you call it $10 for cost of goods to the brand.

Speaker 2 That brand is going to sell it to the distributor for, let's call it, $25.

Speaker 2 So they're getting their margin. Then that distributor is going to have to sell it to the retailer and they're getting their margin.

Speaker 2 And then that retailer has to sell it to you as the consumer and they're getting their margin. And so all in, that

Speaker 2 liquid that costs $7 a bottle is probably ending up on the shelf for $50

Speaker 2 all in when you layer in all of those pieces of the ecosystem in the alcohol industry.

Speaker 2 so it's a lot of a lot of middlemen a lot of middlemen and the whole three-tiered system and we can we could have a whole conversation around that it came out of prohibition but there's pros and cons for that but for those who can navigate it well it creates advantages to for scale and for those that can't it creates hindrances and really blocks the ability to grow a brand and so the fact that we have a team that knows that space very very well and you know decades of experience there um is is incredibly helpful for us as a group you started your first fund in 2015 you're on your fifth fund what have been some of the lessons that you've learned over the last decade on how to start and scale a fund manager?

Speaker 2 People are important in every business and having the right people on our team has,

Speaker 2 or in the early days, just not having as many people or the, you know, it was just really my partner in the early days. I think that can limit your ability to execute and to scale.
And so if you...

Speaker 2 If we had a crystal ball and kind of knew where the world would go and knew how investors would,

Speaker 2 how this would resonate resonate with investors, I think we would have invested even more upfront.

Speaker 2 We would have built a bigger team, we would have built bigger, more resources, and we would have raised more money earlier

Speaker 2 would probably be

Speaker 2 one of the lessons

Speaker 2 that I see because

Speaker 2 one thing that we really found ourselves thinking about is

Speaker 2 our first institutional fund was our fund two.

Speaker 2 The first fund was really friends and family capital that

Speaker 2 predated that. When we came into market in the middle of COVID in 2020,

Speaker 2 we didn't know how the market would react to an alcohol-specific fund, et cetera. And so we came up with a pretty small fund and we ended up being oversubscribed, which was great, right, for the fund.

Speaker 2 But then you find yourself in that dilemma of now I have to go sell my second fund. And I think about

Speaker 2 my consulting hat, putting that back on, you don't want to see a fund make too big a jump between fund one and fund two, fund two and fund three.

Speaker 2 So now we've sort of anchored to the smaller fund size that we've been building on over the years.

Speaker 2 And now we're to our fund five, which still relatively small comparatively to some of the names we've talked about. But now we're big enough to really be on the radar of some of the larger.

Speaker 1 Let's assume that a fund one is 100 million. What's an acceptable fund two, fund three, and what's tolerable, for lack of a better word, by institutional investors?

Speaker 1 And what do they like to see in terms of fund size over time? And

Speaker 1 how much is that impacted by the strategy itself?

Speaker 2 We've been doubling that. That's palatable to folks, even though it's a bit of a, not a bit of a, not a stretch, but maybe a slight, a slight stretch.
You don't want to see this

Speaker 2 dramatic increase, but a doubling has been what we've done from fund two each time. So we're at about a 250 million target here for our fund five.

Speaker 2 So still on the really small end of the spectrum, but now you think about from the institutional perspective, there's a couple of things that

Speaker 2 have historically been limiting factors for the very large institutions to be to look at us and really have we've gotten past now, which is great, is that if you're writing a very large check, Now we're to the point where in the most recent fund, we have an anchor that's a $100 million check, which is great.

Speaker 2 And we have a couple of others that are $15, $20 million checks. And so that snowball is starting to really roll, which is great.

Speaker 1 So going back and putting on your RVK hat, I've heard of this kind of doubling as an acceptable kind of speed limit, but you do see some people that triple or even quadruple.

Speaker 1 What are some leading indicators of a fund that's allowed by their institutional investors to grow faster?

Speaker 2 What's necessary?

Speaker 2 If you can prove...

Speaker 2 like you're not having scope creep in terms of what you're doing and doing it differently and to say that maybe there were deals before that you had to syndicate, and now you can take more of that deal.

Speaker 2 I think that that's really compelling as the story to say, we're just going to take more of any individual deal, which gives us more pricing power as being the sole capital or more of the capital.

Speaker 2 If you add to the team and you have more capabilities, right? I think that's also something that can be pretty compelling

Speaker 2 from an investment community perspective. And then, if you then if you just have great returns, right?

Speaker 2 If you have great returns doing what you're doing, and you say, Look, we've had to turn down a lot of deals, and this is what this is what we've done historically, we've turned down tons of deals,

Speaker 2 but we're going to keep doing exactly what we're doing. We're just going to do more of it.
That's believable. Versus, I was buying, investing in oranges before, and now I'm investing in Cadillac.

Speaker 2 It's a hard time for me as the investor to look at you with a straight face and I say, I believe you can execute on this totally kind of diverse strategy from what you've been doing.

Speaker 1 Even better than that would be having co-invest. So let's say you had a hundred million dollar fund, $200 million co-invest.
How do you know that you could have a $300 million fund?

Speaker 1 Well, if I had done the co-invest in the fund, then I'd have 300 million.

Speaker 1 It sounds kind of oversimplified, but that is a way to almost empirically prove the investable universe.

Speaker 1 A lot of GPs, as they grow, private equity funds want to, at some point, start a private credit franchise. When does the institutional investor market allow that? When do they want it?

Speaker 1 And what's your right to start a credit fund? How do you know that you might be approaching that?

Speaker 2 I think credit is very different, right, than traditional, maybe it's in private equity or venture or something like that. I mean, private equity specifically, right?

Speaker 2 It's just very different than private credit. So in my mind, you you need to have ported over a whole team from someplace to lead that strategy.

Speaker 2 I don't think you could say this group can necessarily do something different.

Speaker 2 Now, in the example of InvestBev, the thing that is a little bit unique is that what we do on the barrel side is essentially inventory financing, right?

Speaker 2 Because a brand who doesn't want to buy the barrel today is waiting until it's aged and buying it from us.

Speaker 2 And the reason they don't want to do that is because they don't want this inventory being on their balance sheet for four or five years. So they're waiting to buy it from us when it's older.

Speaker 2 We're essentially doing inventory financing. So for us,

Speaker 2 we are working with the same parties. We're solving the same problem.
And we're just doing it in a slightly different way if we bring our private credit solution to the market,

Speaker 2 which we have, and we've put a decent amount of money to work on that side of what we do, because a brand could either wait until the barrel, the liquid inside the barrel is fully aged and just buy it at that point.

Speaker 2 or they might want to take some chips off the table, have some risk appetite to have the barrel slightly earlier in the aging process.

Speaker 2 And if they do that, instead of doing it with 100% equity, they can do that with 40% equity and 60% debt.

Speaker 2 And why we are very well positioned to do that is because if we were to take those barrels back, we have a whole side of the business that does that on a day-to-day basis.

Speaker 2 So we know what to do with the inventory. So we know how to underwrite that collateral.
We know how to

Speaker 2 sell that collateral if we actually had to liquidate. And again, solving the same problem.

Speaker 2 So our story, we think, is a little much more kind of the jump feels less of a jump and more of a step, right? For us.

Speaker 2 But I think in the broader community, you really have to have a compelling story as to why you have a right to win on the credit side. We absolutely believe we do, but

Speaker 2 it is a hard story to sell.

Speaker 1 I want to double-click on something that you said that was very interesting, which if you had known the demand for the asset and for your fund, you would have invested more money up front.

Speaker 1 What are those some low-hanging fruits that you could have invested money in that would have helped you accelerate your franchise?

Speaker 2 We would have put more on the operations side on our team. Just buying and selling actual assets is there is some operational intensity there that

Speaker 2 if you have those resources internally, you just remove a lot of the friction of those processes. Just kind of explaining it in kind of mundane detail, right?

Speaker 2 But like if you are buying a barrel from me, I have to get a sample set to you. You have to agree that you like the sample.

Speaker 2 Then we have to send you sale agreements, invoices, all these different things. Then we work with the storage facility and a transfer over from my account to your account.

Speaker 2 There's a lot of steps in the process that can just really slow things down. And if you don't have dedicated resources focused on that,

Speaker 2 that just kind of gets you stuck in the muck a little bit. And we saw a lot of great buying opportunities.
So if we had more capital

Speaker 2 and the team to kind of execute operationally in the early years, we could have bought barrels at prices that were that were attractive in the 2020 timeframe.

Speaker 2 And that would have set us up or even earlier, that would have set us up to have larger funds that had more barrels at better cost bases in those funds.

Speaker 1 What are some hires, investments and technologies or things that you wish you would have done fund one or fund two that now are painfully obvious and just accelerated your franchise?

Speaker 2 So behind the scenes, a lot of what we do from a valuation perspective and where we see the intrinsic value of a barrel today and where that barrel is going to be valued in the future is based on other factors.

Speaker 2 that are going on around just the barrel itself, the inventory that exists at that time, demand at that time, all these different things.

Speaker 2 And had we brought the rigor in the in the very, very early days to

Speaker 2 identify how all those factors interact, to get more precise on pricing, I think we could have been even more aggressive than we ultimately were. So I think that would have been great.

Speaker 2 And I think if we, then you build this model that that tells it, gives you, gives you insights, but all models, right, across AI to to to bourbon, it's all about the input, right?

Speaker 2 What goes into the model. And so if we had spent more time working with some of our peers in the industry gathering data too, that would have fed the model.

Speaker 2 And to be even more precise in the early, earlier days, that would have been, that would have been really interesting.

Speaker 2 We have gobs of data now, right?

Speaker 2 Over 10 years of operating, but I think there could have been some interesting collaboration efforts with, you know, there are tons of other players out there, but other players.

Speaker 2 And that both of those things would have been something that if you had to do it over again, I would have spent more time focusing on in those days.

Speaker 1 What's the single best piece of advice or feedback that an LP has ever given you?

Speaker 2 No one, no, no investor is ever upset about

Speaker 2 returning their capital.

Speaker 2 That was one of our investors because I had a conversation with a family office that I've known for a really long time, all the way back to my RBK days.

Speaker 2 And I said, look, we bought some of these barrels

Speaker 2 a year ago and we're getting offers to sell them and we get a nice IRR.

Speaker 2 But

Speaker 2 I'm thinking about this from a multiple perspective and

Speaker 2 want to deliver on that side of it.

Speaker 2 And the response was, just up yet, I understand what you're saying. I think investors really do want multiples, right? They want real dollars.

Speaker 2 But if you see a good trade and you can return money to investors,

Speaker 2 no one is going to look at you cross-eyed for that. No one is going to be upset about getting money back.
Now, I will say in the institutional world, that it does become a problem sometimes, right?

Speaker 2 Because you make an allocation, you go through a whole

Speaker 2 process to get approvals, et cetera. And then all of a sudden, the money comes back quicker than you anticipated in a pacing study or what have you.

Speaker 2 Then you have to go through and make a new allocation. So it does need to be a little bit balanced.
I think there's like an asterisk on that point.

Speaker 1 I would even put it to the extreme. I invested in a company seven, eight years ago.
It's not doing well, to be nice. And I found a way, a secondary, to get my investors back their money.

Speaker 1 And I was very apologetic. And I had multiple, especially

Speaker 1 the most institutional and most experienced LPs were like really patting me on the back. They're like, look, you don't get any economics here.
I really appreciate all the work that you did here.

Speaker 1 So even when you return 1X over seven, eight years, especially in venture. And certainly that's not what you underwrite the investment to, even that itself could be a positive to your LPs.

Speaker 2 Yeah, 100%.

Speaker 2 And I was just at a conference earlier this week, and this has been a theme in many of the conferences over the last, and just in the broader kind of investment community, about the tie-up of capital across investors in private equity and venture and so forth, and that being

Speaker 2 a linchpin

Speaker 2 in the ecosystem here of we need that capital to free up, to make new investments, to kind of keep the keep the kind of machine running and it's tied up.

Speaker 2 So, you know, just getting that capital back can really be a good thing, even if you're not maximizing returns to your point.

Speaker 2 There's something to be said for money back in your pocket.

Speaker 1 I went to karaoke last night with 20 LPs and without outing the LP, one of the LPs made a rap about DPIs. So I think that's a good sign of where the LT market is today.

Speaker 2 That's a hidden target right there.

Speaker 1 It was a great, I'll keep them anonymous, but it was a great, is a great, is a great rap. How are you using AI today?

Speaker 2 One thing we're using it for is just broadening our reach in terms of research on who our potential customers are on the barrel side, who our potential counterparties are.

Speaker 2 You can do,

Speaker 2 you know, each barrel has what's called a mash drill, which is just essentially the recipe of proportions of grains, corn, wheat, rye, malted barley. And you can, we've used, you know, AI to say

Speaker 2 which brands are using this type of

Speaker 2 liquid, right? Of this type of bourbon.

Speaker 2 So you, we know many of these brands, we have relationships with lots of them, but just there's, there's thousands of brands in the whiskey space alone in the United States.

Speaker 2 I think it's like 4,500 500 brands and we don't have that reach right you use those tools to to find that information and broaden broaden that um kind of outreach um looking at it from a trend perspective to think about kind of how can we be thinking about what's coming next um from a from the in the alcohol industry right if if we would have been able to been thinking about this 10 years ago or maybe a little longer somehow predicting hard seltzers, right?

Speaker 2 Now we have hard Ts, all these different things.

Speaker 2 We continue to spend time talking about and toying with AI to try to help us unearth some of those trends.

Speaker 1 Yeah, we're still trying to figure out how to best incorporate AI.

Speaker 1 One thought experiment that we look at it is kind of a third person in the room.

Speaker 1 You literally could turn on chat GPT while you're having a conversation, have ChatGPT chime in at the appropriate time, almost as a third partner, as somebody that could provide more context.

Speaker 1 So it's still evolving every day. And as AI gets better, I think that's going to evolve as well.

Speaker 2 So taking that step further and using it as a contrarian kind of counterpoint.

Speaker 2 So kind of to the third person point that you're mentioning, but really, you know, when we, we haven't talked much about the other side of our business on the brand side, but if we're making a

Speaker 2 business case that is worth making an investment in a particular brand, you can use AI to kind of poke holes. What aren't we thinking about?

Speaker 2 What contradict or contest some of the points that we're making in our assumptions here or in our business case? And

Speaker 1 take it a little bit less personally when it's AI versus individuals. Yeah, exactly.

Speaker 2 Yes. That's true, right? You do get some groupthink sometimes as a team, and people don't want to necessarily always fight against someone who's super passionate about something.

Speaker 2 And so you get an inanimate being kind of being the one that says, you guys are missing something pretty glaring here. That can be really useful.

Speaker 1 Goes full circle to the incentives we talked about in the beginning of the interview. Well, just

Speaker 1 looking forward to continuing this conversation live. And thanks for doing a full breakdown on the alcohol space and how you're going about investing.

Speaker 2 Yeah, no, really enjoyed the time, Dave. Appreciate it.

Speaker 1 Thank you. That's it for today's episode of How I Invest.
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