Issue link: http://winesandvines.uberflip.com/i/152772
FINANCE Bacchus Capital, Unorthodox Financiers Wine Industry Finance 2013 Firm provides capital and expertise without removing management By Ben Narasin S am Bronfman completed his two-year stint at Diageo in 2004, after the wine and spirits behemoth acquired Seagram, the business his grandfather founded and his family had run for three generations. He set out to find a winery or wineries to buy, to return to the industry where he had spent his professional life. This turned out to be far more difficult than he had expected. Bronfman recruited his lifelong friend Peter Kaufman and Kaufman's business partner, Henry Owsley of Gordian Group, to act as his investment bankers, but whenever they found a winery to pursue, they got outbid. "We realized we wouldn't win auctions," Bronfman said. "It was just too tough to win." In one instance, when bidding on Chalone Vineyard in Monterey County, Calif., Diageo ended up buying the business for 50% more than Bronfman's group had offered. "We kept getting grossly overbid by strategics," Kaufman said. "We'd bid 12 times EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), and they'd bid 18 times." The team began to look at the obstruction as an opportunity. "We decided that while (paying high multiples of EBITDA) wasn't a good place to be as a buyer, if you were lending to the same companies, having that big valuation cushion beneath you would be a pretty good thing," Kaufman said. Peter Kaufman, Sam Bronfman and Henry Owsley (from left) co-founded Bacchus Capital Management, where they also serve as managing partners. The idea of lending created an opportunity to craft an alternative form of finance that would provide capital and expertise without having to remove the management team from the equation—or bid irrationally against other bidders. Of course, with a lifetime of experience in the industry, Bronfman also wanted to find a way to leverage his knowledge and contacts—and see the value of those assets recognized in the transaction. highlights • Outbid in attempts to buy West Coast wineries, Sam Bronfman and partners decided to lend to the wineries instead. • heir firm, Bacchus Capital Management, evolved from mezzanine lending to T taking equity stakes in Oregon, Washington and California wine companies. • ow with a focus on supporting proven winemakers, Bacchus leverages its N talents in marketing, distribution and sales. 36 W in e s & V i ne s s e pt e m b e r 20 13 "We looked for ways to use my expertise and Gordian's financial acumen," Bronfman said. "Henry came up with idea to see if there was room for second-lien funding in the wine business." With that idea, Bacchus Capital Management was created. Private equity business The business was structured as a Private Equity (PE) business. A typical PE model is to create a limited partnership whereby the operating principles—known as general partners, in this case Bronfman, Kaufman and Owsley—run the fund and provide a small initial investment in exchange for an annual fee and a percentage of the profits. The bulk of PE businesses are then funded by outside investors, be they private institutions or otherwise, who take no active role but receive the majority of the returns generated over the life of the fund in exchange for providing the capital to use for the fund's investments. Funds typically last 10 to 12 years, although the money they raise may