Issue link: http://winesandvines.uberflip.com/i/152772
FINANCE be invested in a much shorter period. Bacchus launched as a second lien (or "mezzanine") fund with an equity side pocket (a small allocation of capital to do direct equity investing within the fund's charter). They raised between $40 million and $50 million and closed on the fund to pursue the model with wineries in January 2008. While commonplace in many other industries, before Bacchus the concept of secondlien finance did not exist in the wine industry. A second lien is much like a second mortgage: The lender provides capital in the form of a loan, but their security position stands behind the primary lender, i.e., the first mortgage. Because of the weaker security position, these loans are viewed as higher risk and command either higher interest rates, equity-style participation, or both. Equity-style participation could take a variety of forms: a percentage of profit, success fees, an equity percentage in the business or warrants or options to create the right to buy a portion of the business at a pre-agreed price if so desired by the lender. In addition, while the security position is "behind" the primary lender (such as the bank that lent on the land or building, the insurance company that provided long-term finance or the line of credit used for grape purchases), the security interest typically includes the right to "foreclose" on the business in the event of a loan default—although generally in coordination with, or upon commitment to repay, the primary lender. turns out, that's what we looked for in Bacchus: high-end wineries that needed additional growth capital or financial support." "We did our first deal fairly quickly," Bronfman said, "Cameron Hughes in 2008." Cameron Hughes, a négociant-style U.S. wine business, was "growing really fast, and the growth was outstripping their capital from their primary lender. So we made a second-lien loan to them, and they did a fantastic job of continuing growth." Hughes later repaid the loan, "our one realized event," Bronfman said. Difficulty gaining traction After that initial fast close on a first deal, things ground to a halt. "We had a heck of a time getting traction within the industry," Kaufman said. "People didn't understand what a second lien was, and finding investments we felt comfortable with from a valuation standpoint wasn't easy. We only did one deal in the first three-and-a-half years." The firm eventually did more second-lien deals, but the partners soon learned that the barrier of communicating a new style of finance was more significant than expected. W hile commonplace in many other industries, before Bacchus the concept of second-lien finance did not exist in the wine industry. The advantage to wineries and related businesses is the ability to draw additional capital when no capital would otherwise be available from primary lenders, and to continue to run their business without having to sell out. In addition, in the case of Bacchus, Bronfman's extensive network and his team's expertise in winery operations, distribution, sales and marketing could be an exceptional value. The Gordian team also brought financial expertise when needed. "The original idea, before the fund, was to get a string of pearls," Bronfman said. "Buy high-end brands and put together the sales and marketing into a joint effort. As it Win es & Vin es s ept em b er 20 13 37