Private equity gets thirsty for ‘ultra-luxury’ wines

TSG-backed Duckhorn Wine is the latest portfolio company to seal a high-profile acquisition in a sector dominated by families.

Duckhorn Wine Company, a TSG Consumer Partners affiliate, has acquired Kosta Browne Winery from Boston-headquartered buyout house JW Childs Associates at a time of growing institutional interest for super-premium wines.

The deal includes the company, its assets and inventory, and ownership of long-term leases on more than 170 acres of vineyards located throughout Northern California. Financial terms were not disclosed.

Founded in 1997, Kosta Browne is headquartered in Sebastopol, California, and produces Pinot Noir and Chardonnay from cool-climate appellations including the Russian River Valley, the Anderson Valley, the Sonoma Coast and others. Its assets include a winemaking facility opened in 2012 and a hospitality space, slated to open this year.

Duckhorn president and chief executive Alex Ryan told Agri Investor that such assets are an especially important element of the sales and marketing efforts for a company like Kosta Browne, which sells ultra-luxury wines that retail for between $40 and $120 per bottle.

“As the price per bottle goes up, the more people want from that brand,” Ryan explained. “The consumers absolutely know where it sits [among price categories of wine] and you can’t market your way out of a lower category into a higher category. People demand authenticity and legitimacy and it’s all got to be real.”

Ryan said Napa Valley-based Duckhorn plans to operate Kosta Browne as a separate unit, which it intends to develop through both organic growth and acquisitions.

Maturing on the vine

After operating as a family-owned business with limited outside investors since its 1976 founding, Ryan explained, Duckhorn was acquired by GI Partners, a mid-market private equity firm headquartered in San Francisco, for about $300 million in 2007. After expressions of interest that initially included many wealthy individuals, the sale process ultimately became a contest between a strategic industry investor and GI, Ryan said, with many other investors deterred by the long-term nature of the wine business.

When time came for GI to exit its investment in 2016, Ryan said, Duckhorn found there were more private equity investors, asking more sophisticated questions, than had been the case 10 years before. That process too resulted in a contest between a TSG and an unidentified strategic investor, yielding a final price “north of $750 million,” according to Ryan.

More recently, Ryan said that the $75 million recapitalization of Santa Barbara, California-headquartered Vintage Wine Estates in April, which included participation by agribusiness-focused TIAA-affiliate AGR Partners, fit into a wider pattern of increased investor interest in wine and other ag-related businesses.

“I was interested to see that size and scope of an investor coming into the space, which I think is really good,” said Ryan. “It’s good to have scalable, professional investment coming into the space, that just shows the maturation.”

A banker with decades of experience in the wine industry told Agri Investor that Duckhorn is evidence of consolidation in a sector that has for long remained the remit of family-owned businesses motivated by lifestyle and prestige. Private equity investors that do get involved in the wine market are often more focused on capital appreciation than lifestyle, and accordingly take a different approach to growing the business, he said.

“The original Duckhorn investment took a well-known brand and expanded production significantly under new brand names and extensions of existing brands,” the banker noted.

It remains to be seen, said the banker, whether it will be possible to repeat this strategy with Kosta Browne itself.

“Historically, family ownership, individual wealth investments and now private equity are all pursuing a somewhat limited number of assets and brands. This will likely keep multiples at very high levels.”