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Courage, Commitment and Charred Oak Barrels = Niche Investments

Courage, Commitment and Charred Oak Barrels = Niche Investments

  • For a high-net-worth individual, non-equity investments, especially niche asset classes, can offer several advantages that align with their financial goals, risk tolerance and diversification preferences.
  • Tad Fallows, founder of Long Angle, a selective membership community for high-net-worth networking, says that in an economic landscape dominated by big companies and massive funds, going niche has serious advantages. One such niche investment is whiskey aging.
  • What are the market dynamics of the whiskey business? Tad breaks it down — and shares insights on Long Angle’s value proposition, as well as his own best and worst investments.

Serial entrepreneur Tad Fallows spent a decade bootstrapping iLab Solutions, an uber-successful SaaS startup that made lab management software for universities and research hospitals. In 2016, after years of working diligently on a bootstrapper’s salary (aka “very little money”) he sold the company to a strategic acquirer for an undisclosed sum — a “liquidity event” he describes as “one day, I basically got deferred compensation for the last 10 years.”

“It was a fairly abrupt introduction to a lot of the more esoteric high-net-worth questions,” says Tad, the founder and managing director of Long Angle, a vetted community for high-net-worth networking.

“As someone who was a personal finance hobbyist, I could understand … setting up 529 plans, 401(k) plans, low-cost ETFs — those sorts of things. But when you get into these questions of private equity, private credit, estate taxes and things like trust structures, there was a lot less information out there.”

Tad, who was in his late 30s at the time, was willing to take more calculated risks than older investors and was definitely not interested in the classic 60/40 split. But he knew that allocation was key and wanted to talk it over with people in similar financial strata, “who weren’t trying to sell each other anything,” he explains.

That’s the genius behind Tad’s brainchild Long Angle, a highly selective membership community that offers education, networking and unique access to private market opportunities “in an environment that puts confidentiality first and is free of solicitation, advertising, data reselling and other commercial conflicts of interest,” according to its website.

He and iLab Solutions co-founder Sriram Gollapalli assembled a group of about a dozen other entrepreneurs and hedge fund managers in “similar situations financially” who wanted to speak openly about their approaches to wealth management.

“It turned out that need was a lot more broadly felt,” Tad says.

In about three years, Long Angle has grown to roughly 3000 members, whose average net worth is $15 million. (Collectively, they control assets worth $30 billion.) Its members hail from more than 45 countries and are mostly millennial and Gen X entrepreneurs and professionals in fields like technology, finance, real estate, medicine and law.

Tad joined host Alan Dunne for an Allocator edition of Top Traders Unplugged to share strategies for navigating challenging markets, the importance of research, the search fund model, its potential for identifying and acquiring undervalued companies and more. Read on for highlights of their discussion about whiskey, “gut checks” and the courage to take really big risks.

Whiskey business

Long Angle’s robust online community includes fora on everything from quantitative issues like asset allocation and tax optimization to qualitative ones, like how to provide one’s children with opportunities without spoiling them or undermining their ability to succeed on their own merits. The organization also hosts webinars, peer advisory groups and in-person events.

Tad says Long Angle’s educational offerings “turbocharged my learning about a wide variety of asset classes,” including several he had no idea existed before, like search funds and whiskey aging.

The latter is a compelling example of a non-equity investment with “underlying return or economic drivers that are really transparent and pretty easy to understand.”

Take Kentucky bourbon, for example. Handcrafted in the U.S. state under strict laws (outlined in the Federal Standards of Identity for Distilled Spirits, for you curious readers), this bourbon is aged in charred oak barrels for at least two years but often many more. And it’s big business: American bourbon represents two-thirds of the $1.6 billion of U.S. exports of distilled spirits.

For the last few decades, investors have been able to buy newly distilled, into-the-barrel whiskey for about $1,000 a barrel. But the market price for five-year-old whiskey is about $3,000 a barrel — a “consistent premium aging curve,” Tad notes.

“You’re not doing anything with that barrel. You never even take possession of it. You just get a certificate that says you own a barrel sitting in a warehouse in Kentucky somewhere that’s licensed, bonded and insured. You can go touch it if you want to, but you don’t ever have to do anything with it.”

How does that age premium fit into a dynamic market? Well, anyone who wants to start a whiskey brand will need to either source already-aged hooch — or open a factory, distill some whiskey and wait at least five years to sell any of it. Spoiler alert: Most entrepreneurs in the spirits space will choose the sourcing option, “and the only place you can do that is from somebody who has been invested and sitting on it for the last five years.”

In a sense, we can think of investing in whiskey aging as “getting paid to do the patient [waiting for the oaky goodness to happen], less-sexy part of the value chain,” Tad argues.

Distilling the details

The dynamics of a niche investment like whiskey might cause some folks to ask whether the premium aging curve is actually a bubble.

Tad says that such an investor might think: “I’m not going to drink 1000 barrels of whiskey so I don’t want to end up owning them. And anything with that kind of return profile seems too good to be true. You can’t put up 40% IRR year after year without flooding the market.”

But if we examine the supply side of the bubble, “the only whiskey that can exist five years from now, as five-year-old whiskey, is whiskey that’s already in a barrel today,” Tad explains.

If that whiskey exists today, it doesn’t matter how many entrepreneurs break ground on a factory today, or who might begin distilling two years from now. Five years from now, their products won’t be competing with your whiskey.

There are some risks — like if other countries put a big tariff on whiskey, or consumer preferences change — either could produce demand-side shocks.

But a whiskey investor has “perfect protection from a supply bubble because it’s a known supply,” Tad says.

Modesty and inefficiencies

Alan notes that it seems niche investments leverage “inefficiencies — structural risk premia that exist for various institutional or structural reasons” — more than they anticipate structural demand shifts.

“Is that fair to say?” Alan asks.

“Yeah, I think that’s right,” Tad replies. “Part of that is probably modesty … none of us have better information than the world at large about what’s going to happen with the Ukraine war or what’s going to happen with China,” he says.

While efficient market theory suggests those uncertainties are “baked into the price” and that not all markets are efficient, “I wouldn’t pretend that I'm going to do a better job than the research desk at Goldman Sachs of determining how those macro drivers are going to evolve,” Tad adds.

He thinks that’s one of the reasons for Long Angle’s success: It’s a place where high-net-worth individuals can share information and analysis about private-market investments, especially out-of-the-box (or barrel?) ones like Kentucky bourbon.

Commit with courage

Reflecting on his best — and least successful — investments over the years, Tad says trusting one’s intuition is essential. Sometimes “all the numbers seem to work, the logic seems to work, but my gut is telling me there’s something off … it’s too good to be true.”

That’s why he recommends doing a “gut check” before writing a check.

On the flipside, some of Tad’s most successful deals have featured “position sizing,” particularly “being more aggressive when you have high conviction.”

He cites two examples: one in which he was aggressive; the other in which he wasn’t.

“About 10 years ago, I had super high conviction on Apple,” he recalls. The company was pumping out successful, quality products consistently and trading at three to four times cash flow. Today, the position Tad bought is up 1,000% — but he only invested about $10,000. 

“It’s nice to get 10x on $10,000, but it’s not a life-changing outcome,” he says.

As he reflects on that decision, he says that if he had spent more time doing research, he would have invested much more — like $100,000, or even $1 million dollars if he had the money to do so.

On the other hand, Tad did put serious money behind an investment about three years ago during the COVID-19 pandemic: a real estate opportunity in Santa Barbara, California. He was already familiar with Southern California and knew that other markets in the region — like Orange County and Los Angeles — have doubled in value over the last 10 years.

“But for reasons that just did not seem logical to me, Santa Barbara was trading the same price that it was 10 years ago,” he notes.

He knew that he could borrow at an interest rate that was lower than the (then-increasing) rate of inflation — and that he could rent out the property at an attractive price. So Tad went all in and invested half his net worth on the Santa Barbara site.

‘I really liked the risk-return skew on it,” he says. “And that turned out super well.”

So Tad thinks “being willing to make big bets” is a winning strategy — provided the investor does diligent research and understands “the particular micros of the deal.” 

I couldn’t agree more. That’s what we do here at Top Traders Unplugged: Strive to understand our market moves and proceed with confidence. “Put the courage behind it,” Tad advises. “If you don’t, even correct insights aren’t particularly valuable.”

This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.