Transcript

Patrick Grimes:

All right, I think we’re live. Go ahead and drop into the chat. Make sure you can hear me and if you can’t hear me and everybody else can, make sure hit refresh on your browser. Sometimes the sound does glitch out on this program. Thank you Eric, are you in Tokyo still? Glad to have you here. Glad you can hear me. I’ve got an amazing session. This is our Passive Investing Mastery session series on alternative investments. And it’s all about us educating our investors on how to achieve mastery in the art of passive investing. And today we have two awesome people whom I’ve had the pleasure meeting just over the last few weeks here. Morgan and Mike, they’re going to introduce themselves in a second, and they come from the Alcohol and Bev industry. It’s very far removed from a lot of us that are in our equities and our stock portfolios and retirement accounts.

Or maybe we’ve ventured into real estate and some of us went into oil and gas, some of us haven’t. But what are the alternatives to that? What are things that have recession-resilient characteristics outside of real estate, outside of oil and gas? What are some of those non-traditional investments, more niche or novel investments? And we’re all about those. We have litigation finance right now, that is another niche one. And this is going to be an awesome one because we’re going to go through what is involved passive investing in bourbon and craft spirit brands today. So for that, and as you know, our mission is not only to sponsor investments but to provide education so that you receive not only the financial security you’re looking for, but so that you get to the point in which you have the abundance to contribute towards the causes you care about most. So we’re going to talk about how some of these investments might get you there.

The next event is going to be something that’s super out of left field for me. As most of you know, I’m not really a crypto guy. I’m not really a crypto guy. Sure I have Bitcoin. Sure it’s double, I’m doing great, but I’m not necessarily proud of it. I don’t think it should necessarily be proud of that per se, unless you do it right and you have a strategy buying it. But we’re doing cryptocurrency. It’s going to be very interesting, not just one type, but we’re going to talk about the top 20.

We’re going to talk about various aspects of how you can put together a crypto portfolio, not just for the long-term hold and let it bake and cold storage like I’m doing, but also this is a very interesting one on how you can do options and calls puts to actually generate some income on the ups and downs of crypto. And so it’s going to be very fascinating, some advanced strategies in cryptocurrency. I’m going to learn a lot on that one, just like how I’m going to learn a boatload or a sifter load of liquor information today. So I hope you’re all ready to kick back and have a sip during this one.

So how to get started in Alcohol Bev, in bourbon, in brands, in alcohol brands. Passively investing versus actively investing in these brands. How the crafting process works, how it affects value. We’re actually creating some value in this industry just like why we create value in real estate. What’s the growth potential? What are some of the risks and is there recession resilient factors around it? This is the big hitter. So Morgan Salsman is CEO founder of LQD Assets and Mike is the partner at 99 Proof Partners. And we’re going to have them introduce themselves here. Because it’s a completely new industry, I know I’m going to botch the jargon. Let’s go ahead and ladies first. Morgan, why don’t you jump into it and then Mike, why don’t you follow?

Morgan Salsman:

Thanks for having me Patrick. My name is Morgan Salsman and I’ve been around the bourbon industry my entire life. I grew up in Bardstown Kentucky, so bourbon capital of the world. And I got started investing in barrels when I was in college, had the opportunity to learn about all of that kind of stuff at a very young age. And it’s been something that’s been a passion of mine forever and it’s really allowed me to dive deep into the industry on a multitude of levels, particularly on the financing side and the barrel investments. I’ve had several years of being invested in this program and programs similar to this. And I see this as a great way for me to pursue my entrepreneurial passions while combining it with an industry that’s near and dear to my heart.

Patrick Grimes:

Glad to have you. Very excited to hear what you have to say here today. Mike.

Mike Solow:

Thanks Patrick, thanks for having me. Mike Solow, I’m a partner at 99 Proof. We are a SPV fund, so that’s deal by deal. We look at deals only in the beverage alcohol sector. We’ll do debt equity and real estate deals in our sector. We traditionally most often will invest in brands. And so just important to understand, a brand is an actual bottle, a label as it sits on the shelf at a liquor store. So if you think about what we get into, we get into companies that are bringing brands to life and bringing them out to market and it’s something that you could enjoy at a party with your friends. That’s the fun part about investing in our space.

We started 99 Proof out of an investment bank here in Dallas. We all come from advisory and management consulting backgrounds. And our goal really in launching it was to provide value to investors that really didn’t understand the beverage alcohol sector that we were neck deep in. How does valuation work? How do brands build equity value and how do exits that look like Ryan Reynolds or George Clooney’s exits, how do those even occur? So we work as a go-between between the brands and the investor base, both from an information standpoint and then from an active management standpoint post-investment.

Patrick Grimes:

All right, and if you don’t know who I am, and this is your first time, Patrick Grimes, CEO of Passive Investing Mastery, we do alternative investments in the acquisitions of commercial real estate debt. We have acquisitions and income investment products as well as litigation funding. And I came from automation and robotics background and made my way from being a hardworking professional like many of you into full-time investments. And so now we sponsor alternative investments and we educate investors like yourself. And so very excited to get this one started. So let’s dive in and keep in mind that these are usually very interactive. We have lots of questions that come up. Glad to see Clyde already jumping in there. Fidel, you’re out of Houston, that’s great. Eric, yep, is in Tokyo. And Luke, “Finally, I can buy a bunch of bourbon and have my wife yell at me.” Perfect, I’m actually a bourbon fan, so this is a little bit of a passion product on my own too.

And actually on Oahu where I’m at, there’s actually only one bourbon distillery and you can’t see the mountain behind me, but it’s Pali Road and it’s literally Pali Road right there. So I get tickets for the tasting. So I hear you a 100%. Align those passions with your business and it’s going to be a fun ride. And I think that’s what Mike was just talking about a minute ago. So you’re in good company. Keep the questions coming because we want to make this whole… We’re here for you. We’re giving our time-out to give back and make sure that we can educate you on these alternative investments, so make it worth your while.

Really great audience here jumped in. So we’re going to get in, we’re going to talk about Alcohol Bev, we’re going to talk about craft’s brands and we’re going to talk about bourbon. So let’s go back and forth. Mike, I’d like if you can tee this up and then Morgan jump in there and give me your take on it and feel free to disagree with each other. Spice things up a little bit if you’d like. But what exactly are craft spirits? Let’s make this bigger. What is Alcohol Bev as an industry and how does that break down into your niche?

Mike Solow:

Sure. So starting at the top, Alc Bev is comprised of basically anything that you can find at a liquor store. There’s non-alcoholic, there’s alcoholic. And then within the ALC side, you’ve got all the different spirits categories, RTDs, like stuff in a can, seltzer based, tequila, sodas, beer, wine. So again, it’s really anything that you could buy at a liquor store or somebody could serve you at a bar or a restaurant. Craft is the vogue segment of distilled products. So craft spirits actually does have a definition. It’s defined as a distillery producing 750,000 gallons a year or less. Within the market, it’s taken on the definition of quality and transparency on the label. So that means they’re telling you actually what is the bourbon made of. And so that’s become more or less what people refer to now when they say, “Like a craft spirits” or, “This is a craft. Bourbon producer.”

Patrick Grimes:

I think I own some of those bottles because most of the smaller distilleries go on. I have Breckenridge bourbon, water of 9,600 ft for the rockies, the style of rye, all that. So that’s what you’re saying is that it’s not just, “Hey, this is a whiskey with a fancy name, this is actually how it’s made.” Is that what makes the difference?

Mike Solow:

Yeah, you’ve seen it in food for a long time. On the menu at higher end restaurants you’ll have, instead of just a salad, it’ll have the components of the salad on the menu and that’s supposed to get your mouth watering. And it’s the same in really across spirits. There’s a lot more disclosure about what goes into the bottle and you’re seeing the craft brands lean into that and the larger multinational brands are just lagging behind, if you will.

Patrick Grimes:

Got it. Morgan, sorry to interrupt.

Morgan Salsman:

On no, you’re fine. You’re continuing on the conversation. I was just going to… He’s talking about a great macro level and on the micro level I can talk about the bourbon industry specifically. So you’ve got Alc Bev and then you’ve got spirits, and then you’ve got whiskey, and then you’ve got bourbon. So on the smallest tier. And then there’s obviously craft within that as well. You’ve got your conglomerates that are your Jim Beam, your Makers Mark, et cetera, but then you’ve got your craft as well. And so the difference between the whiskey industry and bourbon is the way it’s produced, the materials that are used, things of that nature. Bourbon can only be produced in the United States. Contrary to popular belief, it can be made outside of the state of Kentucky. Although I’m from Kentucky, I personally have a preference, we’ll say.

Patrick Grimes:

Not real bourbon, you mean.

Morgan Salsman:

There you go. And 95% of the world’s bourbon today comes out of the state of Kentucky. Small but mighty, I like to say. And so like I’d mentioned, there’s different specifications. It’s pretty robust. I mean, you can’t have the product entering the barrel at more than 125 proof. It can’t be put into the bottle at anything less than 80 proof. You can’t have any additives, flavoring, coloring. The mash bill has to be at least 51% corn and it has to be aged in new charred oak barrels. So as soon as you put it in a wine barrel or something of that nature or there’s less corn than 51%, it becomes a whiskey. So that’s really the big difference between bourbon and whiskey, and like I said, bourbon is a distinct distinctive spirits of the United States and it is the pride of our country in terms of spirits.

Patrick Grimes:

So the pride of our country like vodka is to Russia, is that what I’ve heard [inaudible 00:12:10]? Interesting. So is there requirements around age of how long it has to be in the bottle for you to really call it bourbon?

Morgan Salsman:

So there’s-

Patrick Grimes:

In the barrel I mean, sorry.

Morgan Salsman:

Yes. So to be considered straight bourbon, it has to be at least two years old. To be considered Kentucky Straight Bourbon, it has to be aged in Kentucky. Aged and distilled in Kentucky for at least two years to be called Kentucky Straight Bourbon. And then anything over four years old is not required to have an age statement. So if it’s under four, it’ll have an age statement on the bottle.

Patrick Grimes:

Got it. Okay. Yeah, so I think that was when the distillery first opened up on the hill here, they had to call themselves whiskey, but they said they were bourbon, but it hadn’t been aged long enough at the time to make it. And they also said it is so expensive to get the virgin barrels. They had other ones that had been aged longer, but getting those to the island were just almost impossible. So I’m sure you’re probably selling a premium to the islands if you are, so that’s [inaudible 00:13:07] market, yeah.

Morgan Salsman:

There’s multiple different avenues of that. So the new barrel market was a little bit of a bottleneck for the last few years because the growth has been so vast. So those prices shot up there for a while and I’m sure when you throw in transportation, getting it to the island, that just exacerbates it even further.

Patrick Grimes:

So let’s stick with Morgan for a second here and talk about the bourbon crafting process. You’ve already answered why it’s different than regular whiskies and you may have said a little bit, but just on what the ingredients are, but what is that process and what makes it special or what is that niche that investors need to know why you would invest in bourbon versus other types of alcohol spirits?

Morgan Salsman:

Yeah, so crafting process, you’ll start with your distillation, you’ll source your grain. Obviously like I said earlier, at least 51% corn. The other 49% can be a mixture of different grains, whether it’s rye, wheat or malted barley. There’s different combinations of that. And so that’s what you’ll do. You’ll pick out that grain, grain bale, mash bale, and then you’ll talk to your distillery partner. They’ll distill that for you and put it in a barrel for you, that new charred oak barrel. And so that’s when it goes into the aging process and that’s when we step in. So I like to say we hold the financially responsibility of the aging process. So we will take those barrels, put them in our warehouse, age them for a period of time, then we sell them to a brand. The brand puts that in a bottle, bottle gets put on the shelf, that’s where it goes into your liquor cabinet at home.

Patrick Grimes:

So before we get into brands, let’s stick with bottles. Mike, you also mentioned that you do some barrels and tequila. Is there anything you can speak towards that may be different between those two specific varietals of Alcohol Bev products?

Mike Solow:

Yeah, I mean, so just at a general level, every different spirit category is produced in a different way, and so the same is true with tequila. Tequila only has to be produced in Mexico. So if you see stuff on the shelf that says it’s an agave spirit, then perhaps it’s produced the same way but just not in the regions of Mexico where the name tequila has been protected. So examples of that are like Sotol, Mezcal has different stuff associated with the production regions and production processes as well. So it’s all tightly controlled. Similar to bourbon. Within tequila, so tequila is another barrel aged spirit. We like it from an investment standpoint, similar to bourbon because it’s never worth less than the day that you put it into the barrel and that that’s great. There’s debt opportunities and investment opportunities that come along with those types of asset classes similar to real estate investing and stuff that’s based on hard assets.

And so this isn’t really any different from that from a thesis perspective. Tequila we like because it is the fastest growing spirits category currently. I’m in Texas and so we drink a boatload of both, but tequila is fun in the summer, there’s lots of fun stuff you can do with it. And so that’s a dumbed down wave saying the market opportunities are numerous for that spirit. And so it’s catching fire these days. The last year and change have been extremely explosive in the tequila space and so that’s certainly a category that we’re paying attention to.

Patrick Grimes:

So it’s interesting. First of all, I didn’t know the regional thing applied to tequila out of Mexico. It’s a little bit similar to champagne too. Out of Champagne, France and you see sparkling wine or California Champagne sometimes on some rogue bottles out there. So let’s talk about that comment you made, which is interesting because it’s not always the case that when we put tenants in a rental property, it never loses value. And so sometimes cap rates, the price we trade at sometimes expenses can go up, the profitability can squeeze. Right now we’re seeing insurance go up, we’re seeing interest rates go up squeezing our operating reserves and decreasing our valuations. So how is it possible that you could have something so recession resilient or so unaffected by greater market volatility that once you put it in a warehouse it never loses value? I’d love to hear Morgan, and then maybe after that Mike, you guys can tackle that one.

Morgan Salsman:

Yeah, I mean you’re very right in comparing it to real estate as well. I like to say it’s a tangible asset-backed investment and opposite of real estate, it truly is passive, whereas managing a property takes a lot of your time and energy and sometimes you don’t have that to give and so when you’re investing in the spirit space, you really have the opportunity to park your money and let it grow for you. So barrels do appreciate and value over time. That continues, of course there is a sweet spot where that flattens out a bit. We typically say in that six-plus-year range is where we’re like, “We would like to sell this.”

You start to see those returns decrease slightly in a percentage basis. Obviously, you’re still gaining value over time. But it really does provide you with that opportunity to have an appreciating asset. And if you know anything about age statements after the four years old, that’s when people want to start putting them on there. That’s when they are the most valuable. So even though that four-year-old product is where you can stop saying, “Hey, it’s this age,” that’s typically when people want to say it and that makes it more valuable and more desirable to be on your shelf.

Patrick Grimes:

Interesting. I didn’t realize that the diminishing returns thing is a component. I’d be interested in understanding the economics behind that. I guess some brands just don’t age better. I know certainly with wines they turn eventually. They’re too young and then eventually they turn. So you got to be… Is there a narrow window on the flavor or quality profile during that that caused that or is it purely just the optics of the consumer saying, “This is old enough.”

Morgan Salsman:

Well, it’s not even… Once you put the liquid into a bottle, it’s no longer aging. So your age statement stops as soon as you take it out of the bottle, oh sorry, take it out of the barrel. So your barrels are going to continue to appreciate. The diminishing or return shows up. The returns are, I don’t really know how to describe it other than value doesn’t necessarily decrease, but the value, it starts to slow down a bit over time.

Patrick Grimes:

Okay. All right. So Mike, back to the recession resilience, how is it that your statement could possibly be true because it’s pretty magical?

Mike Solow:

Yeah, pretty magical. So this works the same way, I’ll use bourbon and tequila as the two primary reference cases here, but it works the same way in both. There’s an entry cost, it’s the price that it costs to secure the raw materials, that’s the mash bill. If it’s bourbon and produce the product so it runs through the stills, they extrude the liquid out into a barrel. So there’s a cost for all of that plus insurance and putting it on a rack to begin an aging process. It’s the same in tequila and bourbon as far as a process goes. The prices are slightly different but they’re low. Let’s just say it’s a thousand bucks. It could be more, it could be less, it could be certainly more if it’s tequila, it’s trading at a higher value than that for what we refer to as new make or Blanco tequila.

But just rough numbers, you can start with a thousand bucks and then it goes up from there. It’s never worth less than that in the open market. You’ll see as you walk through a liquor store, the old adage is the darker the liquid, the longer the age statement. That’s basically means that liquid has had more time to interact with the barrel. The more that the liquid goes in and out of the barrel, the more times that occurs, the more complexity, the more flavor profile that the barrel is imparting onto that liquid that’s resting in the barrel. And within the marketplace, the more that occurs, the higher the price point. So you can sell, if you’re in an arbitrage play, you can sell Anejo tequila that’s 16, 18 months old. That’s about what the market is determining Anejo tequila should be trading at the earliest points. And you’re looking at least two and a half, three and a half X return depending on how you’re selling it, where you’re selling it, what your cost basis look like and it can go up from there.

It can go into the four and a half X return in that 16, 18 month period. So as an investment standpoint, from an investment standpoint I should say, that’s a pretty fun product to have under your roof. And bourbon works the same way. The basic economics and processes behind the aging process and the inventory arbitrage process are the same. So you put it into a barrel, you age it becomes better, higher quality. And the longer you can let that occur, the more value you can extract out of that sale. And both spirits eventually will flatten out as far as the precipitously steep way that they accumulate value at the beginning. And so that’s at a very high level, at a fly by level, that’s how it works. And then you become beholden to an arbitrage or a sales process at the end of it to extract your return.

Patrick Grimes:

Conceptually that makes sense. Is there data that shows over various recessions that we’ve had, here’s the value of these investments over time and how they have gone up or down, returns or just the value? Have you ever had to like, “Oh, let’s wait it out. Let’s sell it on the other side,” like sometimes we do in real estate?

Mike Solow:

Do you want to take that, Morgan?

Morgan Salsman:

Sure, I’ll start it and you can hop onto it. There definitely have been opportunities in the past where there have been little blips on the radar, but as Mike mentioned, you really don’t ever see this. There’s never been a time in history where these barrels have sold for less than they’ve been purchased for. And so of course supply and demand, it’s a rubber band. The elasticity of it, you’re going to see ebbs and flows with consumption. Supply and demand is really going to drive all of this. The last several years, particularly during Covid, at-home bars were huge. So you were seeing all kinds of demand for these really, really high ticket items. There wasn’t enough barrels to supply that. We’re seeing that curve even itself back out to pre Covid levels like you are in the majority of markets right now. And so we did see that spike, but we’re back down to pre-pandemic consistent levels at this point.

Patrick Grimes:

Is there any knowledge during potentially the subprime mortgage collapse? What happened during then, there was both the stock market and real estate down same time, doesn’t happen a lot. Do you guys have any awareness? I’m just curious of what happened back then. Mike?

Mike Solow:

Specific to that timeline, I don’t, but that data exists of course because bourbon has been in the market for decades. I can tell you a couple of things just about the ebb and flow. This is a commodities game and so there’s plenty of reading that people can do on commodities, commodity cycles, the things that affect pricing within them. It’s important to understand this is consumerism as well, and so times like we’re in right now, definitely on the brand side, which is going to drive distillery demand as well. That as families tighten their belts or maybe they drift down from a higher price point to a medium price point depending on what kind of spirit it is. Those are the kinds of things that we see within the overall growth or CAGR on an annual basis. Those are the kinds of things that we see affecting that.

That’s issue one, Patrick, to understand is that this is a commodities play and also important to understand within the bourbon space, we’re still not at the levels of consumption that we were in the ’70s. It’s still growing. And depending on who you talk to, they’ll say we’re in the sixth inning of the game or the fifth inning of the game, but most people will tell you that there’s still a lot more baseball left to play. They’ll also tell you that in the tequila space, we’re in the first game, so there’s lots of wag left on that tail too. So the more people have been paying attention to just specifically the barrel aging process, arbitrage process, the more that they’ve gotten active in investing in that side of the equation, if that helps.

Patrick Grimes:

It’s fascinating me… Sorry, go ahead.

Mike Solow:

Sorry. That was it.

Patrick Grimes:

Yeah. Fascinating me. I went to Yamazaki, which is the original distillery in Japan and now they’re world-famous for their scotches. And I recommend anybody that goes to Japan make little pilgrimage, if you’re an alcohol Bev consumer of any kind. You can try the vertical, you can try the current vintage, the 12 year, the 18 and the 25 and exactly what you’re saying. And the Japanese are known for very delicate light flavors. So their current vintage and the rest of their liquors are almost pure white. Generally rice wine that’s very proliferate and rice liquor is very proliferate in the Asian countries. But it’s impossible to get away from that when you go from that 12 year to the 18, which is just so much richer. And then when you get to the 25 year, it’s like plum, it’s jammy, it’s like you’re drinking a Zinfandel all of a sudden. It took 25 years to get there, but it was just like an extraordinary experience to see how you can go along the vertical.

So recommend anybody try it. And it would make sense to me because there would be some diminishing return along the way because the 25 year, you can’t even find anywhere. You can’t buy anywhere, even at the distillery, you can’t buy anything there. Even the 12 year you can’t even buy there. So it’s very challenging to get those. So the price point just skyrockets and so not a lot of demand for that.

Morgan Salsman:

Very true.

Patrick Grimes:

Yeah. So we’ve talked a little bit and so we’re hinting around barrel, investing in barrels. That’s what’s been part of some of this conversation and the aging process, that piece of the puzzle. You said there’s never been a put on the rack that was sold for less. But this is really barrel, there’s really multiple ways to access this and we’re highlighting barrels and brands during this one. I think that’s where Mike picks up because it’s a little bit of a barrel first brand little deal, although he’s dueling inside of himself for it as well. But let’s talk about the brands. You hinted towards some stars that created their own brands and sold off for a billion dollars. What is more realistic in this brand investing? What would investors expect? What’s the process? Maybe you could give us a crash course, just a couple minutes here. I’m sure there’s lots of parts you could unpack. But what’s the first step that investors would need to know to understand that investment class?

Mike Solow:

So the brand investing game, first off, the opportunities are more numerous. There’s tons and tons of brands and there’s less distilleries. There’s several thousand distilleries, a couple thousand distilleries in the US for bourbon. There’s 164 for tequila, so not a lot. And so from there, everybody else is doing what’s called sourcing. I saw that question come across. Sourcing is done in all spirits classes. Nobody in the spirits game has any misguided dispersions that every bottle on the shelf is produced by their own distillery. That would be massively expensive. And so instead, contract manufacturing is what occurs. And so brands, brand investing is essentially creating a brand that’s the imagery, the ethos. What is the brand about? Is it a clean product, is it female focused? Is it any of the marketing speak the things that draw you to pull that brand off the shelf, up to and including how the liquid actually tastes.

So that’s more along the lines of brand investing. It’s closer to a advertising and salesmanship than it is actually producing the stuff that’s on the inside of the bottle, whether it’s gin, vodka, bourbon, tequila or mezcal. So some of the things that we look for maybe that would be helpful to lay out. So in our space, we’re in private equity so we’re constantly evaluating these opportunities and the things that we’re looking for are solid demonstrable team track records. People that come from the space and have done this before, solid understanding of how to market that product within their territories. Not all of these products that we see are nationwide, so they’re almost always in high growth mode, expansion mode. And being a proper steward of the investment, doing so with an eye on profitability is unique.

In our space most of the time, maybe to take this to the financial end of things, most of the time brand work in our space is run in the red. So EBITDA is not part of the evaluation criteria. These are sub-ten million revenue businesses. Once they get to the 20 or so, maybe 25 million top line revenue line, they’re getting taken out by strategists in our space. That’s how they extract value in their acquisition plans. They don’t do venture very well, so they wait for the brands to prove that they can sell well and then they buy. They’ve tried venture before and every single one of them have had failed venture arms, and so they basically just hang around the rim now and wait for the brands to prove themselves in the market and then they clear rebounds and dunk in their own ways.

So in that regard, we’re looking for those high-growth brands within the high-growth segments of the market. We’re not paying attention too much to the ancillary categories right now. Bourbon and tequila, there’s enough activity in those categories plus a couple other smaller like gin and aperitifs and then barrel investing and inventory, that’s enough for a PE shop to cut your teeth on. So those are the things that we look for. And then from there, it’s about activation in the marketplace and salesmanship marketing.

Patrick Grimes:

So I’m assuming every brand was never sold for less than it was bought for?

Morgan Salsman:

I don’t know if that was.

Mike Solow:

Yeah, the risk tolerance is different on the brand game.

Patrick Grimes:

Well, let’s talk about the risk, let’s talk about the downside and the upside with brands because really what the nuts and bolts down to it. Just from the outside, it doesn’t seem like there’s a tangible asset. It sounds like there is a corporate asset, like an identity, a marketing, the marketing collateral, maybe the trademark. I’m trying to understand if it’s not the distillery and it’s contract manufacturing, is it a trade secret? Is this like Coca-Cola thing where they… What is it that you’re actually buying? What is it that you’re actually investing in?

Mike Solow:

Yeah, so caveat point, the answer to that actually depends on the asset class, whether it’s bourbon, gin, tequila, they could have their own proprietary way of making things. We invested in a gin that has that and they source their own raw materials that are from their own farms and ranches and in Europe. So that’s an example. If they’re just sourcing and they don’t have a production facility, then really on the asset side you’re looking at do they own their own inventory, some of their own inventory. There are brands that certainly are acquiring their own inventory and aging it. They’ve understood then that there are lower cogs in that instance. It’s a healthier business if you’re evaluating it. So there’s that. But yeah, on the brand-

Patrick Grimes:

Morgan is not happy that you said that. Morgan is like, “No, you don’t want to do that.”

Morgan Salsman:

No, they’re very different. So I mean the thing that I’ve always understood in brand versus barrel investment is when you’re building a brand, you’re looking for growth for buyout. You’re not looking for profit margins every year. So they have completely different models. They’re looking for different results.

Mike Solow:

Yeah, so the return profiles are totally different. It’s much more venture when you’re looking at brand work. We look for a three to five X multiple on invested capital in three to five years at a minimum. We have an exit that we’re working through right now that’s going to be in the significant double digits, and that’s largely not possible on the barrel side. You’re not going to see a 20, 30 X, 40 X return on invested capital when you’re investing in bourbon and tequila barrels, you’re just not. But they’re safer. It depends on, again, across your entire portfolio, how you’d like to see that allocated and look, in our own portfolio we’re doing that. So there’s not really a case that you have to choose one over the other, it’s just they’re different. It’s great to swing for the fences and try and clear a couple of grand slams before you’re all said and done with investing, but you also have to have singles, doubles, some triples, you need to be walked sometimes as well. And so you’ve got to evaluate it as well as that holistic approach.

Patrick Grimes:

It really resonates to me on the continuum. For example, on real estate, you’ve got some pre-development deals which look very promising. And actually that’s how I got started. I was like, “Well, I can double, triple, quadruple in just a few years,” but then you could potentially lose it all sometimes. And potentially if there’s a recession, would that be affected similar to how that pre-development play in real estate? Are brands affected by those?

Morgan Salsman:

So I would say on the barrel side of things, you’re really going to see you can hold. You can always hold through a recession in that situation with a barrel. I can’t speak towards the brands and what you do with your inventory and how you pay off your bills and that kind of thing. I’ll leave that to Mike, but really with the barrels, you are not tied to a sale timeframe. So you can still see that appreciation while you’re holding those barrels. So if you do need a little bit more time or the market’s not right or you are not seeing the returns you want, there’s always the option to hold longer.

Mike Solow:

Yeah. For brands, in times of recession it’s actually interesting. In times of recession, at least in our industry, more often than not utilization is up. So we always-

Patrick Grimes:

People drink more, people [inaudible 00:38:37].

Morgan Salsman:

I like to say when times are good people drink but when times are bad people drink even more.

Mike Solow:

Exactly. Exactly right. It’s exactly right. And Covid is a very recent example of that, and one could make a solid argument that it was actually harder to buy booze during Covid because the liquor stores were shut down, but people were making more runs to the liquor store than they were to the grocery store during Covid and consumption went through the roof. So again, when times are bad, people find a way to drink alcohol, they may trade down or they may look at a different category, they may, excuse me, drink more wine. They may actually level up and drink more bourbon or more distilled spirits because you get more out of the bottle, you don’t have to drink as much of it, and you get more pours out of the bottle than you do out of a four-glass bottle of wine. So again, it just depends on preference and how they choose to stretch their dollar in the bad times.

Patrick Grimes:

The venture way in which you describe the brands, it’s venture capital, would you agree?

Mike Solow:

Agree.

Patrick Grimes:

Very analogous in my world to… The early stage of a real estate deal or an early stage of an oil and gas deal where you’re like, “Hey, look, somebody’s already stuck a straw in here. It looks like it’s showing some promise. Let’s get in and see what kind of promise,” and you could potentially get you saying 10, 20 extra turns out of that or angel investing. I know that a lot of our family offices, they have an allocation. Their whole portfolio, they have an allocation towards angel investing which they expect us put a lot of small amounts into things that can double, triple, quadruple 10, 20 X their return.

And they’re expecting probably half or three quarters though those ships do not come back to them on the angel side. But the ones that maybe the 25% that do come back make the difference for the other. Is it that kind of game? When you look at the need to diversify into some of these little higher risk brands, is that the kind of spread? How do you conceive of making sure that you’re getting a win on the back end of a brand investment?

Mike Solow:

On the brand side, it’s not magic, it’s just difficult. This is a long trudge that these brands go through from seed round through exit. And I will say just in terms of timing series C, D rounds are fairly… Definitely D rounds are fairly rare on the private equity side in beverage alcohol. So you are looking at still a palatable hold time. We invest, like I said before, in a three to five year hold period, but realistically that’s like four to five, that three is a bit of a moonshot. So that’s what the hold time looks like. Over that period of time these businesses are going to go through all of it. I mean uptimes, downtimes, they’re going to have… They’re building actively their company as we’re investing in their early stage. So it is, it is more risky, but with that risk, that’s where your reward is. And for us, the markers that we’re looking for, that team, can they figure it out? Do they have the right distribution relationships? Is their supply side solidified?

When you spend enough time evaluating brands and the people that are running them and you see or hear enough of the, “We don’t have that.” When you see the ones that come through and all of a sudden they are in the right portfolio at the right distributor and they do have enough of a capital stack, their investor base is broadly diversified such that they can activate an A round and a B round and a C round and stack multiple rounds of meaningful amounts of money together. You can see that journey now in an A round, it doesn’t take a genius to evaluate that. So for us, from there we get into the weeds and make sure that everything is stress tested and everything that we’re reading and hearing is true, but that’s the golden goose. That’s what we’re looking for and they’re out there. I don’t want to misrepresent the level of risk. It is definitely risky, but those deals-

Patrick Grimes:

As their allocations at higher risk, some at lower risk, the purpose of this is understanding you got a really high return. Obviously it comes with risk, and what is that? Giving some feel for that is exactly what you’re doing. Are more of your investors larger institutions, for both of you, are they 5 million, 1 million, 100,000, 10,000 type investments? Are they accredited investors, qualified clients, qualified purchaser, equips? What do you typically see in terms of your typical investor avatar and then how much of your portfolio do you see or their portfolio do you see them allocating? Is this like a 5%, 10%, 20? If you have that visibility, what do you typically see out there in terms of your investor based funds? You get started on that one, Morgan.

Morgan Salsman:

Yeah, so we have all accredited investors who are all privately funded. We’ve got about 90 investors to date, and over those 90 investors we’ve raised about 16 million. So we’re somewhere around 200,000 around that range over a four-year period of time. So each round that we raise, we have an annual raise and then we have a four-year contract. So you’re buying in four times over the period of four years and then you’re also selling out four times. So it’s a long-term investment in that sense. And we’re seeing, I would say probably somewhere between five and 10% of their net worth is what the general group is working with. We’ve got some definitely high net worth individuals involved, all accredited. We’ve got a few that are approaching that million dollars a year investment, but that’s the range of investors that we see.

Patrick Grimes:

Got it. Okay. Mike, and then it’s going to be different from your brand business versus your barrel business potentially. So why don’t you bifurcate those two for us?

Mike Solow:

Yeah, so the brand business, as you might imagine it’s a bit like the wild west. The way that we’re set up is we’re not a dedicated fund. So we jokingly say that we raise investors and not capital. So we work right now with about 500 accredited investors. It’s a bit of a worldwide network, but most of them are in the US. And so on a deal by deal basis, we bring our deals out. So our average check size, this is where we end up going with this kind of conversation. Our average check size ranges between half a million and 1.5, 1.75 on the top end when we make investments. And then from there we actively support. So we spend most of our time in the boardroom or in observation roles. We have an ancillary arm, a services arm of our business that we can leverage to help brands grow into new sales geographies.

And so we have sales teams that we can put onto the field in six, maybe eight month increments and allow those brands to stabilize a new expansion geo and then backfill with their own people over time. And that gets into the minutiae of how a product is sold that I won’t bore you with today, but there is some nuances to sell in the beverage alcohol sector. So that’s designed to just be a buoy that our investments on [inaudible 00:47:05] can make, excuse me, can use as they move forward post-investment. On the barrel side, we’re a lot less general on the barrel side. Our vehicle for barrel investing is done in 20 million tranches split between tequila and bourbon. And so we’re always, obviously with that top end, we’re always actively raising for that and at the conclusion of a 20 million tranche, we open the next 20 million tranche.

Patrick Grimes:

Is it still a JV no fund set up, no Reg D fund set up? These are entities set up?

Mike Solow:

Yeah.

Patrick Grimes:

500,000 [inaudible 00:47:50] you’re saying is typical on that side as well?

Mike Solow:

Yeah, correct. So on the brand side, that’s an aggregated amount. So regardless of what our target is, our investors have the ability to participate or abstain on a deal by deal basis. So whatever we aggregate, that’s what goes into that SPV. That SPV makes the investment into the brand and we’re off and running. On the barrel side each 20 mil, that is its own SPV, that’s its own JV. And the individual investors make that up. So it’s however much they want to allocate into that is how that works. And we cap it after the 20 and we move on. On that it works differently than the brand side does. So that hat produces a programmatic payout over a six-year period and that’s when it terminates so-

Patrick Grimes:

So let me break it down because they’re hearing you use like SPV words that we use differently in our industry. What Morgan is saying is she’s setting these up a little bit more similar to how we do our real estate, our oil and gas, our debt funds or our litigation finance funds. So Reg D and then a 506 election, either B or C. But either way it’s a securities offering where you have a bunch of limited partners signing subscription agreements into that securities offering. And so that’s what I hear from Morgan.

What I hear from Mike is different. He’s doing, “Hey, let’s get 20 or 30 or some number of people together and let’s all joint venture. Let’s all be essentially active. Let’s not have technically, legally passive.” Even though you’re not doing a lot, you’re technically all active and you’re in a joint venture together. And that joint venture is an LLC split up and he’s saying SPV. When we say that we mean a securities offering fine with limited partners getting together in a special purpose vehicle to do one thing. What he’s saying is a special purpose in our world to be special purpose entity. They’re not filing with DSCC, which is fine and there’s a huge world that do real estate deals out there like that too. And then there’s a huge that do it with a general partner, limited partner style, which is much more prevalent to the people that are listening to us here today. So I just wanted to make sure that I made that clear.

We’re out of time right now. What I want to do is I want to give Morgan and Mike before we hit the hour, the opportunity to share and then we’ll get into some questions. I’ve tried to pepper in some of the questions as we went along. I like for them to, and we’ll circle back right after this, your questions, I’d like for them to share a little bit about how you can get a hold of them and so that they have that opportunity. Morgan, Mike, please feel free to drop that into the chat as well. So those that are watching this live, but also verbalize it for those that aren’t. We have a lot more people watching it and the replays that live evergreen on our Passive Investing Mastery series channel than actually attend live. So make sure that you give that ability for people to catch you after today. So ladies first. Morgan, why don’t you go ahead and then we’ll have Mike do it.

Morgan Salsman:

Yeah, you can reach me on my website at lqdassets.co, you can reach me on LinkedIn. I’ve also got an Instagram page for my brand and personal. And then if you want to reach out to me personally, it’s Morgan M-O-R-G-A-N dot Salsman S-A-L-S-M-A-N @lqdassets.co. And phone number (502) 827-8089.

Patrick Grimes:

Mike.

Mike Solow:

Yeah, LinkedIn, email, whatever works for you. Our website is 99-proof.com. I’ll drop my LinkedIn into the chat now and there’s a contact us on the website if the website is the easiest way. Regardless, I do all the inbound stuff for 99 Proof so it’ll all come to me regardless. So pretty easy. So yeah, 99-proof.com or hit me up on our LinkedIn that I just dropped into the chat. Those are the two easiest ways and I’ll get back to you as soon as I can.

Patrick Grimes:

All right, so we’re getting through the laser round on the questions in just a second, but before we do that I want to make sure that for those of you that showed up a little bit late, this is the bourbon and barrel Alcohol Bev mastery session that you just listened to. Up next is investing in cryptocurrency, suitability for different cryptos. We’re talking about 20 different crypto strategies, what kind of security you can get. We’ve got Chad Whitfield, who is the co-founder of Crypto Renegades, the educator, very impressed by the knowledge that he gives from very easy crypto strategies to very complex strategies that you would likely see and call and put options and trying to make a return on crypto on the ups and the downs. Very interesting.

I’m not necessarily a guy, so I mean although I’ve done well on crypto, it hasn’t been on purpose. It’s just been set it and forget it, which is a strategy, but this guy makes it his business. He’s an active crypto guy. So it’s going to be interesting to see also the various kinds of cryptocurrencies out there. We have dropped in the information for both Mike and Morgan, so mine is in there. If somebody could drop it in there, [email protected]. And I always give this away because we’re giving our time right now. And it’s a book, it was a bestseller, Persistence, Pivots and Game Changers, Turning Challenges Into Opportunities. I tell my whole story about losing it all in real estate at high-tech professional machine design, automation and robotics and how I got free of it. And there’s a bunch of cool people Phil Collen, [inaudible 00:53:44] did a chapter in here, NFL, NBA players. Such a fun project, I loved it.

I actually sign these and send them to you as long as you go to passiveinvestingmastery.com/book, passiveinvestingmastery.com/book. And it’s just my way of giving back and that helps inspire people along their journey. Then it’s enough of a thank you for me and I’m happy to chat with anybody, all of us here, even if we don’t get to your questions because we’re going to wrap up pretty quick. We’re going to laser around. You now know how to get hold of us. So the good news is we’re here for you to continue the journey and if you want to drill down on any of these strategies, go for it. There’s been a lot of pointed questions here and we just need to go quick. So we got to go real brief. So I’ve got one here from… Go to the top, see which ones I didn’t cover. Will there be a Pappy Van Grimes bourbon available soon? I don’t think either of you can help me do that, but I love that idea.

Morgan Salsman:

I think together we can make it happen.

Patrick Grimes:

Yeah, okay. I love it.

Morgan Salsman:

Yeah, I think so. I’ve built a few brands though.

Patrick Grimes:

Mr. Chris Jones standby. That may be coming your way pretty soon here. Luke, “How to get started investing in Bourbon?” I think we just covered that. If you didn’t catch, Morgan even gave her phone number, not very many of our guests go and do that. She’s very available, turns out, to level you up on that, so we’ll let that go. Looks like a lot of a great experience on the line. I agree. I’m impressed by the presence here. Let’s see. Can I invest in big brands I’m familiar with? And that’s a good one, Mike, because you are looking at startup venture brands, what’s the path to get involved in brands you’re familiar with?

Mike Solow:

Yeah, there’s definitely a limit to the brands that we see in terms of their size. Now I will say that we do see some very large brands raising money, but the ones that are public or owned by a strategic, so a Diageo, Pernod Ricard, Moet, Hennessy, Heaven Hill. Once they get to that level, then you’re not going to be able to invest in them unless you invest in the public company that owns them. Outside of that, you’re looking at private companies.

Patrick Grimes:

Got it. Okay. A long one from Ruben. “I know a lot of liquor producers source their whiskey. Are these investments in the cellar like Jack Daniels or the companies that they source their whisky from?”

Morgan Salsman:

So for LQD Assets, we’re sourcing partners. So we are who brands come to when they’re looking to build a brand, they don’t have their own distillery and they need product to put in a bottle, they’ll come to us. We’ll supply them with the products and we buy from a variety of different distilleries. Some you’re probably familiar with, some you’re probably not. We can talk about that offline if you’re interested. And then I’ll let Mike explain his.

Mike Solow:

On our side, the answer is both. We invest in brands and we invest in production. It’s anything, if you’ve ever heard somebody say the three tier system, it’s anything that’s on the supply side. So that’s somebody that produces and/or puts liquid into a bottle and that includes brands. The middle is distributors, we don’t invest in that. And the third tier is places where you can buy it. So that’s bars, restaurant and retail. So we’re only on suppliers.

Patrick Grimes:

Got it. Another one from Khalif, “I’ve been approached to invest in Jackson Purchase bourbon. Do you like that brand?”

Morgan Salsman:

I actually know the guys over there pretty well, so I would be supportive of them. They’re long time friends of ours. Actually, one of the guys actually helped me get started in my investing career in bourbon. So two thumbs up from me.

Patrick Grimes:

Awesome. Right on. Small world, right?

Morgan Salsman:

Yes.

Patrick Grimes:

Mike, did we lose you? You still there?

Mike Solow:

I’m here.

Patrick Grimes:

Aaron, “What is a mash bill?”

Morgan Salsman:

It’s your grain recipe. So it’s the percentage of grain that you’re going to use, whether it’s rye, wheat, barley or corn, variety of the recipe that you’re putting into your liquid.

Patrick Grimes:

Okay. And there’s a one about the difference between whiskey and bourbon. I think we beat that one to death. Although Morgan, I’m sure we’ll have a long conversation with you Jared and debate that if you’d like to get ahold of her. How does aging affect bourbon’s value? We’ve talked about that and the diminishing returns there. What’s the return on investing investments like for bourbon? So what should investors expect?

Morgan Salsman:

So we usually anticipate a 20 to 30% annualized return on your investment. So we usually do a hold period of three to five years similar to Mike, and you’re going to get two and a half X, three X, maybe three and a half on your money.

Patrick Grimes:

Mike, what about brands?

Mike Solow:

So brands, they’re a longer hold, but we again, we’re looking for a three to five X return in about five years on the tip. So that’s going to be multiple on invested capital, not IRR.

Patrick Grimes:

Which spirits have the highest returns from rainy?

Mike Solow:

Tequila and bourbon.

Morgan Salsman:

Mike I’ll let you take that one since I’m the bourbon gal, you can talk about the variety.

Mike Solow:

Yeah. Tequila and bourbon are going to have the most… Well two things, they’re going to drive the highest enterprise value. They’re also going to have the highest number of exits. You are going to see subcategories like gin, possibly rum over the next couple of years. Wine and champagne are also high exit targets. You see Ace of Spades with Jay-Z’s brand and shoot, there was one other one that just recently had an exit in the champagne category. Those are all high enterprise value exits as well.

Patrick Grimes:

What’s your take from Chris Jones here on the growth that’s seen in the sector of non-alcoholic drinks?

Mike Solow:

We’re in one, it’s a great category. Low no, is how they refer to it in our space. There’s a whole slew of products that are coming out with cut proof. So instead of 90 proof vodka, it’s like in the 45 range. So people that want to enjoy alcohol but don’t want to get hammered. And then similarly, there’s products that have just zero alcohol. It’s a fast moving category. Truthfully, there’s been limited M&A in that space and so people are still trying to figure it out on the strategic end. I think you’re going to see M&A in that space that picks up over the next three to four years. There’s definitely some larger companies in our space. Take that with a grain of salt. They’re not large as far as other large businesses, but they’re getting to the point of being interesting from an acquisition standpoint, from the strategic. So I think you’re going to see some of them get picked up. So yeah, it’s definitely a space that we’re paying attention to and we’re participating in.

Patrick Grimes:

All right. Trey is asking, how are you doing and Trey? “What are the tax implications of bourbon and spirit investing?”

Morgan Salsman:

There aren’t many really wins in terms of taxes. However, you do get to claim capital gains rather than ordinary income when you invest through our program. I’m sure it’s similar for you, Mike, but I won’t speak for you.

Mike Solow:

Yeah, I mean, if you’re investing in other stuff, then this isn’t going to be too dissimilar. We send K-ones annually, it’s a pass through. And you do get to claim losses when there are losses and you are going to be subject to cap gains. There are some other tricky things we can take offline that you can get into as far as limiting your exposure to cap gains, and lots of our investors will be glad to get on the phone and talk with you about that.

Patrick Grimes:

Khalif asked another question, “Do you recommend CaskX for bourbon investing?”

Morgan Salsman:

I mean, that’s a competitor for me, so I’m going to say I’m the better option there. But I’m happy to talk to you about the details between the two.

Patrick Grimes:

Yeah, Khalif, reach out. I’m sure that’ll be a very enlightening conversation for you. Ronald asked an interesting one, “How do I get started? I assume I don’t have to actually store the barrels myself in my garage, right?”

Morgan Salsman:

Right, yes. So we actually have our own storage facility. So when you invest with us, we’re storing your barrels in our facility, which helps us standardize our storage and insurance costs, and also lets you know exactly where your barrels are and what they’re doing.

Patrick Grimes:

Another one here from David Danielson, “Do you guys have minimum investments in your respective offerings and what are they?”

Morgan Salsman:

Yes, we have a minimal investment of $20,000 a year for four years or a one-time investment of a $100,000 or more.

Mike Solow:

Yeah, on our end, on the brand side, 25K is the minimum check size. On our barrel side, a 100,000.

Patrick Grimes:

What factors should I consider when choosing between barrels and brands? I think we probably talked about that for some time. I probably will skip that one. We got to get through these. Let’s see. We talked about locations already. We talked about supply and demand. Do any of them provide consistent income? It doesn’t sound like these are consistent income, either one of these consistent income investments. These are stash it and let it come back to you eventually, right?

Morgan Salsman:

I would agree.

Mike Solow:

Yeah. Our barrel deal pays out every year except for year one. That’s as consistent [inaudible 01:04:11].

Patrick Grimes:

Well, there you go, Sal. There’s an option for you. Let’s see. “Are there specific spirit brands that are considered safer investments?” Keith asked that question.

Mike Solow:

Yeah, I mean, anything that’s in the most frequently purchased categories of spirits are going to be a little safer in that the bourbon and tequila sectors are both high performers. I mean, really on the brand side, if it’s the brand side that you’re referring to within the categories that I just mentioned, you’re going to get into a private equity evaluation protocol. At that point you’re going to want to de-risk the investment based on the acumen of the team and the value proposition that they’re bringing to market.

Patrick Grimes:

So this is one from Eric in Tokyo, “What are the minimums for barrel?” We just talked about that, but the second part is “How do we ensure someone doesn’t take a portion of the barrel for themselves saying there was less volume than there really was?”

Morgan Salsman:

Well, I mean, you’re dealing with that all the time because have you ever heard of angel share? They take their share all the time.

Patrick Grimes:

Yeah, there’s quite a bit of evaporation that happen in these things. My director of marketing just recently did one of these barrel filling things, they had to cover it in wax. And I had a barrel for a while and I was supposed to bathe it in water every couple of weeks so the angels took less, and then there’s the angels share and then the devil share. The devil soaks into the barrel and the angels go to heaven.

Morgan Salsman:

There you go. But in all seriousness, there’s security to make sure that doesn’t happen. But angel share is really what you’re fighting there. And on the brand side, that’s where the concern is on the barrel sourcing side. The liability falls onto the purchaser.

Patrick Grimes:

So I think we’ve covered most of these here. I’m looking through if there’s any that we haven’t covered. We’ve already talked about the exit strategies. I think that that about sums it up. Hey, Mike, Morgan, truly educational. Wonderful job, very excited to have you. Is there anything you want to finish up with here before we sign off?

Morgan Salsman:

I give a few pieces of advice. One is educate yourself, know what you’re investing in no matter if it’s real estate, no matter if it’s bourbon, no matter if it’s stock market. I’m a huge advocate for diversification. As with any investment, you should be taking calculated risks, not putting all your eggs in one basket. So I like to point out that this is an opportunity for diversification to hedge against your other investments.

Mike Solow:

Yeah, I would add on this is a great industry to make investments in. It is definitely protected against downturns that you’re subject to in other investments, in other industries. But there’s lots of moving pieces, take the time to educate yourself. It’s definitely, the further you get into it, the more fun it is. So I would encourage anybody that’s remotely interested in it to just start taking steps. And due to the experiential nature of this industry, you’re going to find lots of resources, lots of people who will help guide you along the way. And then there’s lots of free reading that can be done via IWSR if you want to take a look at the global market. And then there’s Park Street and some other like US based pieces of, excuse me, companies that distribute pieces of information on a daily, weekly, monthly basis that you can just sign up and start reading. So there’s lots of stuff out there. And then there’s businesses like ours today that’ll be glad to pick up the phone and just have a conversation with you with no expectations on the end.

Patrick Grimes:

Mike, Morgan, thank you so much. This has been our Passive Investing Mastery series on bourbon and craft spirits, barrel and brand investing, fascinating stuff. Don’t forget to check us out in two weeks from today. We’re going to be talking about cryptocurrencies, beginner and advanced strategies. Thank you so much. Awesome time. I look forward to having this again in two weeks. Thank you.

Morgan Salsman:

Thanks for having-