There’s no doubt that the bourbon business is booming.

Consider the zooming sales volume in the super premium American whiskey segment of the liquor market, which grew at a 15.9 percent compounded annual growth rate from 2003 to 2022, as tracked by the Distilled Spirits Council of the United States.

World Finance reports that during the past decade bourbon has witnessed an unprecedented resurgence with bottles such as Pappy Van Winkle achieving cult-like status. Throughout Kentucky’s bluegrass country, bourbon distilleries have been battling to keep up with the surge in global demand, largely driven by consumer appreciation for the spirit’s rich, unique flavor profile.

And the Northern Kentucky Tribune writes that during 2022 the Blue Grass State recorded its best-ever year for growth of its signature bourbon and spirits industry, raking in more than $2.1 billion in new investments and creating about 700 new jobs for Kentucky residents. Indeed, about 18 months ago the Buffalo Trace Distillery produced its 8-millionth barrel of Kentucky bourbon since Prohibition ended.

Sound like a potentially profitable niche investment? Here are four ways high-net-worth investors can invest in the industry, ranked in what I believe is the most- to least-likely to generate excess returns.

INVEST IN A PRIVATE INVESTMENT VEHICLE

Distilleries large and small sell barrels of “new make” bourbon to wholesale buyers to fund growth while capital is sequestered in aging barrels. This helps the distilleries lock in production profits, while investors capture the increase in the value of the barrels until they reach the age at which large bourbon makers want to buy them (typically two to four years).

Investment groups pool capital from high-net-worth investors to buy these barrels at the wholesale price, then sell them at a gain when large producers need the bourbon. Today, the wholesale price of new-make barrels is around $1,500, while the price of two-year barrels is around $2,600. This difference creates an opportunity for investors to capture value from the increasing value of aged barrels.

The challenge here is that because the liquor industry is federally regulated, buyers must have a distillery license to buy the wholesale barrels. It is also critical to know which type of bourbon barrels the large producers are likely to want to buy in the next two to four years, as well as which distilleries have a reputation for producing consistently high-quality product.

Investing in a group led by someone with the knowledge and expertise to source high-quality product, especially one where the fund manager invests 10 percent to 20 percent of the fund alongside less knowledgeable investors, aligns incentives in a way that is likely to create maximum value for all participants.

INVEST IN A BOUTIQUE DISTILLERY

There were 752 bourbon distilleries in 2022, about 100 more than 2021. The number of distilleries has been growing around 15 percent per year since 2017. Starting a new distillery is capital intensive, so it’s not hard to find a new boutique distillery looking for startup capital.

In addition to traditional equity investments, craft distilleries may also offer investors the chance to buy barrels of bourbon at wholesale prices to help the distillery offset its expenses during the aging process. Many banks won’t finance loans secured by distilleries’ aging barrels, due to uncertainty about the banks’ ability to take the collateral in case of default, so private debt may also be of interest to a boutique distillery.

Visiting local distilleries or touring boutique distilleries in Kentucky or your favorite vacation destination is a fun way to enhance your knowledge of the product and make connections with owners who would likely welcome investments from fans of their bourbon. They may even offer perks for debt and equity investors, such as early access to new bottles and invitations to investor-only events at the distillery.

INVEST IN PUBLICLY TRADED INDUSTRY PLAYERS

There aren’t a lot of choices for investors who want exposure to the bourbon industry via public markets. Brown-Forman, one of the top publicly traded bourbon companies, manufactures a number of brands you will recognize, including Jack Daniel’s, Old Forester and Woodford Reserve. Its products include whiskey, vodka and tequila. Brown-Forman’s shares trade on the NYSE.

Diageo, the U.K.’s largest alcohol producer, almost solely devoted to distilled products, produces Johnnie Walker, Buchanan’s, J&B and Lagavulin. It trades under the symbol DEO.

Constellation Brands, one of the biggest liquor companies in North America, has more than 100 brands in its portfolio, including Corona, Robert Mondavi wines, Svedka Vodka, Casa Noble Tequila and High West Whiskey. It also has a position in a cannabis company. Constellation trades on the NYSE under the symbol STZ.

I’m not an expert on liquor stock valuations, but I spent almost 20 years as a Wall Street investment banker, becoming an expert on valuations in the financial institutions industry, so I feel compelled to caution investors in any publicly traded company that unless you are an expert on valuing that industry, it can be difficult to consistently earn excess returns from investing in public companies. The U.S. stock market is incredibly efficient because there are thousands of people on Wall Street and around the country with years of experience figuring out the appropriate price for publicly traded companies. A given company that has the best management, in the best industry, in the best market might still produce relatively normal returns for investors because the value of those benefits is already baked into the price at which the stock trades.

INVEST THROUGH A WEB-BASED BOURBON BUYER

There are a lot of web-based vehicles that allow accredited investors to acquire positions in bourbon barrels to hold for appreciation. The problem with these, in my opinion, is the asymmetric information gap between the investor and the broker/middleman.

When you invest in the stock of a publicly traded company, you can find out the price of the underlying stock yourself. Your broker may charge a small fee for the transaction, but they disclose that fee upfront.

Unfortunately, the same is not true for bourbon barrel investments, and we have been shocked to find many of the brokers in this space mark up the price of the underlying asset as much as 100 percent, taking most of the profit potential off the table when the investment is made.

Historically, bourbon barrels have appreciated most rapidly in the two years after they are made, but many of these brokers will tell investors they need to hold their investment as long as eight years because the additional time is needed for the price of the barrel to overcome the initial markup from the broker.

PARTING ADVICE

The growth prospects in the industry continue to be attractive. If you want to profit from the industry’s future growth, I believe the best way to capture excess returns is either by investing in a fund whose managers invest alongside you, or by investing directly with a boutique distillery that you want to support.

Kate Lynch — an alumnus of Deutsche Bank, Bear Stearns and Performance Trust — is a financial consultant and in 2023 joined Estate Barrels, her brother Rick Lynch’s boutique investment vehicle.