Institutional Investors Making Wine Plays

Harvard endowment among those shopping for vineyards as safe investments

by Andrew Adams
wine winery vineyard value ranges grape prices
With strong grape prices and rising values, premium vineyards remain a popular choice for institutional investors. Source: The Correia Co.

Napa, Calif.—With vast resources and a preference for opportunities with stable returns, institutional investors continue to eye the wine industry as a place to park some of their money.

Entities such as pension funds and university endowments have made significant moves either in acquiring vineyards or developing new ones. Executives from two firms that coordinate and manage such investments, Homestead Capital and Grapevine Capital Partners, were part of a recent conference hosted by the Seminar Group in Napa.

Matt Turrentine is the grandson of the founder of Turrentine Brokerage and worked for the company for several years before launching Grapevine Capital Partners with partner James Ontiveros in 2012. Turrentine and Ontiveros—a former executive with the Thornhill Companies, which is the owner of Bien Nacido Vineyards—have a wide network of contacts in California’s Central Coast and saw an opportunity to work with large investors in vineyard development.

The small partnership scored an exclusive deal with the company that manages the nearly $40 billion endowment of Harvard University. Turrentine said Harvard had been one of the first investors in Napa-based Silverado Premium Properties and maintained an interest in wine grapes. “We’re really bullish about the long-term potential growth, particularly for wines priced $10 to $25 per bottle,” he said. “This is a price point that has seen really strong growth, and we think it’s poised to grow over a really long period of time.”

The vineyards needed to support the growth of wines at those price points aren’t going to be developed in Napa or Sonoma counties, but the Central Coast does offer such an opportunity, Turrentine said. Harvard has reportedly purchased more than 10,000 acres of Central Coast vineyard land, and much of that property came with good water rights, raising its value even higher.

‘Want to play very safe’

Turrentine said institutional investors are “extremely conservative and want to play very safe.” The growth of the U.S. wine industry, strong property rights and relatively stable political system make it ideal for such investors. He said his firm has developed around 5,000 acres of vineyard land in Paso Robles, Santa Barbara and Oregon.

One of his biggest challenges is finding the right deal, because Turrentine said these funds can be looking for opportunities in the range of $10 million to $25 million. “It’s not easy to find projects of the right quality with the long-term investment returns at this scale. There’s a lot of money out there looking for 1,000-acre vineyards, and they can’t find them.”

Other challenges are finding a good partner for on-site management, and thorough due diligence that can include cleaning up any environmental issues or protecting endangered species. Turrentine said Harvard was especially sensitive to wanting to avoid any potential embarrassment, adding: “That’s their worst nightmare.”

Grapevine Capital Partners provides structured separate accounts for its investors, meaning clients have the final say on any potential investments and also retain full control of liquidity.

A different model is offered by San Francisco-based Homestead Capital, which was founded in 2012 and is a private-equity firm managing $575 million almost exclusively from institutions.

Vice president Alex Sauer said he grew up on his family’s fruit farm in Michigan, and most of his colleagues also have decades of experience in agriculture. The company owns or leases 38 farms producing 16 different crops on 30,000 acres in 13 states.

He said diversity is part of the company’s strategy, and its farms are in the Mississippi River Delta, the Midwest, the Rocky Mountain states and along the West Coast.

Homestead recently invested in a Napa County vineyard that Sauer said represented an excellent opportunity in that it could be redeveloped for quality rather than quantity. Improving the quality of the grapes also provides a hedge against a potential decline in grape prices following years of significant increases.

The company partnered with a local management company, has torn out the existing vines and is changing row orientation, planting material and improving subsurface drainage to produce grapes that will fetch higher prices. “We believe we can grow quality Cabernet,” he said.

Tony Correia, an appraiser, consultant and owner of The Correia Co., said he has worked with several institutional investors in the course of his career. He said agriculture will always remain attractive to them because of the “demographic dividend” of an ever-increasing global population. “Every minute of every day there’s more people, and they all have to eat,” he said.

He identified Silverado as being particularly thoughtful. Early in its growth the firm acquired vineyards in different regions for difference returns. Napa County vineyards didn’t offer much in annual returns but paid off in the long run with capital appreciation. Central Coast vineyards offered good operating returns early and have now matured into valuable assets, particularly early investments in Pinot Noir acreage. Lodi provides stable, regular returns each year. “They were very clever in recognizing risk versus return,” he said.

Vineyard prices continue to rise
In his presentation about land prices, Correia said Napa County continues to see new heights for per-acre prices. Prime vineyards are selling for $300,000 to $400,000 per acre, and the “super-duper uber premium” vineyards fetch more than $500,0000 per acre. “That’s pretty serious money for an acre of grapes,” he said.

E. & J. Gallo Winery’s acquisition of the 600-acre Stagecoach Vineyard galvanized the market, as any available vineyards became more valuable. “That has had a very strong impact on this market,” he said.

Correia and his wife had to evacuate their home in the hills between Napa and Sonoma valleys during the October wildfires. While his house survived intact, he said the devastation is still “absolutely overwhelming.”

While vineyards and wineries may have avoided the brunt of the damage, the long-term effects on the economy of the entire North Coast region is unclear. In the short term however, Correia does not expect the market for vineyards or wineries will be adversely affected.

Demand has remained strong for Pinot Noir vineyards on the coast of Sonoma County ($175,000 per acre), the Anderson Valley of Mendocino County ($100,000 per acre) and Lake County Cabernet Sauvignon ($50,000 per acre) also remain popular. In the Central Valley, Correia said there still is little demand for any new vineyards, and the only vineyards that are selling at around $30,000 per acre have water rights and will be replanted with almonds, pistachios or other tree nuts.

Carol Kingery Ritter, a managing partner of the law firm Dickenson Peatman & Fogarty, said high land and grape prices are having effects on the contracts she helps draft between wineries and growers, particularly as bottle prices have not been able to keep pace with grape prices.

She said she’s seeing more short-term contracts to provide both parties more freedom, and it’s more common to see three-year contracts set on fixed prices rather than tied to the annual grape report. As prices have increased, so too have the conditions on farming by wineries that expect to receive the highest quality fruit if they’re paying premium prices. “If grape prices continue to rise, wineries are going to insist on additional viticulture controls,” Kingery Ritter said.

As wineries demand more passes through a vineyard to pull leaves or do multiple picks that increase farming costs, she added acreage-based contracts or short-term leases on vineyard blocks could be a way to address those extra expenses. 

Kingery Ritter said she’s still surprised by the number of wineries and growers who do business with a handshake. She said in today’s climate, when vineyards are demanding top prices, wineries are seeking to secure supply, and outside investors are looking for vineyard opportunities more transactions such as the Stagecoach deal will continue and some may find “relationships may not be secure as they thought.” 

Posted on 11.28.2017 - 18:43:03 PST
Kingery is partly right- and wrong. And it's a shame. We've been in the winery supply business for almost 50 years and we rely on our partnerships. Believe it or not, Kingery, some people are still honest and forthright.
St Helena, CA USA

Posted on 11.29.2017 - 09:20:14 PST
Agreeing with the previous comment, we have a small vineyard in
Rutherford and sell fruit to 5 wineries. All on a 'handshake' keyed
to the reported 'Napa Valley Average'. This has worked since our first
harvest in 1989.
hugh tietjen
Hugh Tietjen
Rutherford, CA USA