If you are in that unique position of needing to raise debt while owning a wine cellar to die for, or want to earn returns of up to 12%, then Stephen Burton, CEO of Bordeaux Cellars, might just be your man.
Since 2011, the British-born, Australian-raised businessman and wine connoisseur has been bringing lenders and borrowers with premium wine collections together.
Using a loan-to-value ratio of 35%, the peer-to-peer operation turns dusty wine cellars filled with lovingly curated vintages into highly liquid assets.
So far, Bordeaux Cellars has made more than 600 loans worth more than $100 million to cash-poor collectors and had only two defaults in over six years – a track record that has confirmed to Stephen that his original hunch about an exotic asset class that banks will rarely touch was right; in both cases the lender was repaid by selling part of the borrower’s wine (held by Bordeaux Cellars as custodian).
How did you first get the idea for your business?
A little over five years ago I was reading The Sunday Times and there was a story in the business section about a guy who was sitting in front of a warehouse that was just full of Aston Martins, aeroplanes, you name it…
It was just when the credit crisis had hit and all these bankers were driving up and giving him the keys and saying “give me a loan against my car”. These guys had school fees to pay, expensive holidays booked – all the usual outgoings.
That’s where I got the idea; I thought we could do that with wine. And it’s a lot easier because it’s a lot more transparent in terms of its value.
Liv-ex and other firms now quote wine prices based on recent trades, just like stocks and shares.
And how does it work?
The secret of the loan business is very high security with a very stable loan-to-value ratio. We have an LTV of 35% and we haven’t wavered on that. In essence, if someone comes to me with £1 million worth of wine, they’ll get a loan of no more than £350,000. This provides a margin of security which insulates the lenders from short-term price fluctuations.
Obviously we take possession of the stock. If it’s duty-paid, it will come to our warehouse, if it’s in bond ownership will be transferred to our bond account as custodian.
So that’s really the secret of the whole investment model – a very low LTV provides security for the lender, who will earn an attractive 8-12% pa dependent on the size of the loan. The borrower pays 12 -16% pa fees and interest. This is much lower than a pawnbroker would charge, and is comparable with the cost of bridging finance.
Where are your clients for the most part?
We’re focused on Western Europe but in May we’re expanding to the US. The American move is partly because we have a lot of American clients - lenders mostly – but we’ve also had a lot of requests from borrowers.
Three years ago I got a call from The Washington Post from a reporter who asked me if I knew anything about a Goldman Sachs partner who borrowed against his wine cellar. It just goes to show how these things work.
Seemingly, here’s a guy who earns millions a year but he wants to borrow on the back of his wine collection. It’s horses for courses. There are people who are wealthy on paper but don’t have any cashflow, or they run up against a lifestyle problem. Other people are using it as bridging finance for property deals or the launch or expansion of a business. They’re already factoring in the 16% interest rate because they are likely to double or triple their money in some business venture. When we come in is when they are closing a deal or it’s time-sensitive in some way. The quickest that we can turn around a loan is 24 hours.
Are your clients wine drinkers or just wine investors?
Both. They’ve usually got very valuable collections and we do several multimillion pound loans a year. The average loan is about £250,000 and we don’t do anything under £100,000.
You get guys who have inherited cellars and they would never dream of selling because their grandfather owned it and it’s been in the family a long time. Some of them don’t know anything about wine and they just see it as an asset and they’ll borrow against it but only if it makes sense.
On the occasion that a borrower doesn’t like the terms, I’ll often get a chance to buy some of their stock instead. It opens doors to a lot of new clients who may not otherwise be coming onto the market.
Can you see wine growing as an asset class?
Absolutely. Globally the financial world is not in great shape, and we go through ups and downs, with bubbles in stock and property markets around the world. But in general the world is becoming a wealthier place and we’re getting all these brand-new markets. There are more people collecting fine wine to drink, and as an investment it is performing well against equities and property over the medium to long-term (the Wine Owners 150 Index has returned 170% over the last decade) and is seen as a store of value.
When I started collecting wines, Americans were not big wine buyers – they were more into beer and whiskey – but they came on board in the 1990s.
Hong Kong has overtaken everyone. In the past 10 years, the market in Hong Kong has become bigger than New York and London combined. India is an untapped market too.
In the end, however, it’s a simple matter of supply and demand. A vineyard is essentially a plot of land and they can only make a certain amount of wine from that land. At the same time as people are getting wealthier, production is actually going down because vineyards are focussing on quality rather than quantity.