4 Top Scotch Whisky Investment Tips To Avoid Cask Scammers

This post was originally published on this site

Over the last decade, Scotch whisky has gone through a remarkable transformation. Overall, the global Scotch whisky market has seen explosive growth while records for the most expensive bottles have been constantly shattered. As a result, new businesses and firms have introduced opportunities allowing eager consumers to invest in bottles and casks.

Casks in particular have received a lot of recent attention as an investment vehicle. However, along with opportunity comes risk. Marketing materials and social media ads from a plethora of new firms and brokers promise enormous returns on whisky casks, reflecting Scotch whisky’s huge market growth. If these claims are to be believed, investing in whisky casks seems almost like free money. Most recently, that potential was highlighted by a story showing how a lucky cask owner managed to make a huge return on a cask purchased in the 1990s.

However, profit is far from certain. The truth is that while buying a Scotch whisky cask can lead to returns down the line, the market for casks is not as explosive as some would imply. There’s also serious risk involved. Many cask investment firms and brokers use murky technicalities around ownership that put investors’ money into more risk than they know. Scammers are also out in force again, trying to trick people into paying too much for unremarkable casks.

So here’s a list of tips that can help anyone who is interested in buying a whisky cask, whether for profit or pleasure, on how to do so safely.

1.    Avoid firms that mention a ‘586%’, ‘564%’, or ‘562%’ 10 Year ROI

Many cask investment companies mention that whisky is a high-performance alternative investment vehicle, claiming either a figure of 586% or 564% 10 year ROI.

This figure is often displayed prominently on ads and websites, and it comes from the Knight Frank Rare Whisky Index, which only tracks the changing prices of 100 rare and desirable bottles of whisky, a measurement created by whisky consultants Rare Whisky 101. Note that this doesn’t include casks, and is a poor indicator of the potential market performance of whisky casks.

MORE FOR YOU

The Knight Frank Wealth Report itself, which publishes the Index, is also dismayed about how their data is misused by these companies. In a recent excellent Whisky Magazine article about cask investment firms and their alarming practices, the report’s editor Andrew Shirley stated: “Our index is tracking 100 bottles of rare and valuable whisky – it has absolutely nothing to do with cask whisky.”

Companies using the index in their promotional materials are therefore either pretty clueless or intentionally providing badly contextualized information to potential cask purchasers.

2.    Beware claims of ‘guaranteed returns’

Some firms have quoted anywhere between 10-20% annual returns on cask investments, but this is misleading, and any company that promises this should know better. There are also, at the time of writing, no reliable or recognised measurements of overall cask investment performance.

In these cases, specific historic data is being twisted into what seems like official information about overall returns on casks. This kind of misinformation is a real pet peeve to whisky cask broker Mark Littler, who facilitates cask purchases between sellers and buyers and strongly believes that increased transparency of information is necessary in cask investment. While he recognizes that some casks rapidly increased in value over the last few decades, especially certain casks purchased in the 90s, he cautions that the market is also rapidly shifting today:

“The health and buoyancy of the market in 2021 is significantly different to how it was in the mid 1990s. For instance, Springbank had only just started intermittent distilling in 1987 after being closed since 1979. Single malt Scotch whisky is now an internationally recognised luxury asset, so the gains that have historically been possible are not necessarily going to be possible going forward.”

3.    You don’t really own a Scotch Whisky cask without a Delivery Order

There’s a few legal documents and designations that form the heart of Scotch whisky cask ownership, and it’s useful to be familiar with them.

One is the register of Warehousekeepers and Owners of Warehoused Goods Regulations, also known as a WOWGR. Anyone that is buying and selling whisky casks as a business (classified by UK tax law as a ‘revenue trader’) needs to be on the registry, which is a complicated process. Individuals buying a couple of casks as a long-term investment do not, though the distinction between an individual investing in a few casks and a ‘revenue trader’ can be a legal grey area.

A Delivery Order is also important. This is a written contract between the cask seller and buyer, and addressed to the warehouse keeper who is storing the cask, confirming the transfer of ownership. Without a DO, a buyer doesn’t legally own the cask. A few brokers and companies issue an ‘ownership certificate’, however it doesn’t have any legal merit, it’s just a fancy piece of paper.

This isn’t to say that a company that doesn’t issue a DO is a scammer, however it does mean that you’ve got a much higher risk of losing your investment if the company actually owns ‘your’ cask goes bust. Whisky consultant and cask broker Blair Bowman illustrates the conundrum:

“Most of these cask companies are simply not set up to issue DOs as this would mean that the warehouse keeper would also have to set up a new account for every cask owner…all of this is quite onerous for all parties involved, hence the reasons companies are not going down this route.”

One more important note. If an investor is not a UK resident then they need someone to act as their duty representative, someone who is on the WOWGR registry and is responsible for communicating with the HMRC (the UK’s tax authorities) about their warehoused cask.

4.    The scams are still around

The UK’s Financial Conduct Authority doesn’t regulate cask whisky investment, making it a space where scammers can thrive. At the start of the new millennium, there were many fraudulent companies in operation, many of them making similar promises of large profits as some cask investment firms today. In the whisky world the names of Nant Whisky, Grandtully, Cavendish/Hamilton Spirit Management, the Napier Spirit Company and others are uttered along with curses for the way they swindled investors not too long ago.

Littler finds that the pitches made today for whisky casks, and the practices to sell them, often echo the scammers of the past: “The resemblances to these old scams, including inflated sales prices, no transfer of ownership, misleading sales information, manipulated/falsified returns, and Ponzi selling, to the practices of some firms today is quite remarkable.”

A big problem is that cask purchasers won’t realize they have a problem until years from now when they want to cash in on their investment after the whisky has matured for a while. As Bowman explains: “My biggest fear is that these companies will continue to pull in naive investors in the short term but when the bubble bursts they’ll be long gone with all the cash they generated today. I have a strong suspicion that many of these companies will no longer exist by the time an investor looks to sell their cask.”

This means that the ‘cask owner’ will be in a tough situation in a few years when they are ready to cash in on promised profits, especially without that DO.

Though investing in a Scotch whisky casks is a riskier proposition than may be advertised, it’s still possible to do so responsibly and enjoy the results years down the line. However, like any investment situation, it’s important to do the proper research first before putting money down.