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Digital whiskey fund aims to provide 20% returns

Wave Financial managing partner Benjamin Tsai says tokenization of spirits expected to appreciate 3-5x over a five-year fund life could eventually support a liquid market offering exposure to the aging of whiskey.

Digital asset manager Wave Financial Group is targeting 20 percent net internal rate of return through a real asset fund focused on Kentucky whiskey.

The Wave Kentucky Whiskey 2020 Digital Fund had raised at least $525,000 from four LPs since its first sale in late August, according to an early September Securities and Exchange Commission filing. Wave has now raised about $1 million and expects to close on between $5 million and $10 million by the end of November, Wave president and managing partner Benjamin Tsai told Agri Investor.

Minimum investment for the fund is $100,000 and LPs thus far have been high-net-worth individuals in the US, Europe and Asia, he added.

“Right now, people are not going to bars because of the lockdown, but liquor stores are selling at a brisk pace as long as they are open,” Tsai said. “Not surprising to anybody, consumption of whiskey was actually flat during the financial crisis and is up during the current pandemic.”

Los Angeles-headquartered Wave initially planned to target a larger fund of up to $25 million, confirmed Tsai, but scaled back after covid-19 related travel restrictions coinciding with the fund’s late February launch limited its ability to market directly in Asia and Europe. Conditions have been improving since August, he added.

“There is a change in mentality,” he said. “There is also a feeling that clients are trying to catch up because they have not invested during the first half of the year, so you are starting to see more interest.”

Tsai said Wave came to focus on whiskey about a year ago, after a comprehensive study of real assets with tokenization potential, that included water, fine art and Japanese racehorses, found returns available through whiskey were the most stable. By partnering directly with Danville, Kentucky distillery Wilderness Trail and storing the fund’s barrels on-site, he explained, Wave secures the consistent supply necessary to offer investors 20 percent net IRRs, while mitigating key risks, such as fire.

Whereas existing whiskey and fine wine funds have focused on potential returns from continued growth in the value of rare and high-priced items, he added, the WKW20 fund aims to harness more reliable 3-5x appreciation of commodity-grade whiskey that costs about $60 per bottle over its six-year fund life.

“With fifteen dollars of ‘juice’ [profit per bottle], multiplied by 200 to 240 bottles per barrel, you can work your way back up, at year five, to that barrel being worth three to five thousand dollars,” Tsai said. “That is something that people can get relatively comfortable with. From a bottom-up perspective, that calculation works.”

Wave’s other investments focus largely on crypto treasury and digital asset management, but Tsai said the securitization aspect of its whiskey strategy has not been a focus of its fundraising for the vehicle.

The firm’s plans do call for ownership of WKW20 to be put on a blockchain about a year after the fund’s launch. Such tokenization, Tsai explained, will provide liquidity options for LPs looking to exit early and could also support other evolutions of the vehicle over the long-term.

“By having this capability, there is a possibility of us creating, pardon the pun, a liquid market for these units,” Tsai explained.

“Investors might not be the only group of people that would buy our product. I used to run commodities, and if you look at what we are doing, we are creating an asset that a distiller could potentially buy or sell. What they call an NDP, a non-distiller producer, or other distilleries could potentially buy and sell this financial instrument, to gain exposure to aging of whiskey.”