Fine Wine Bonds?

Wine lovers of the world rejoice; the first Fine Wine Bond has been launched for UK investors.

The Naked Fine Wine Bond is on offer from Naked Wines UK, offering gross interest of 7% per annum on investments between £500 and £10,000.

This comes with the option to receive your capital back after three years.

Alternatively, investors can opt for a 10% per annum return in Wine Credits, used to buy fine wine from Naked Wines UK.

Cash or wine at these levels sounds like a good deal, particularly in the current economic climate with interest rates at record lows.

To put the rates in context, you can get around 2.5% gross per annum from a three year fixed rate bond from a proper bank right now.

But that is the main difference here; 2.5% from a regulated bank with various protections  in place or 7-10% from a four year old business which is setting up a special purpose company to issue the bonds.

Naked Fines UK itself looks (after brief examination) to be a well established and successful business model.

During the past four years they have invested £25m in over 40 winemakers. Their sales have grown to £34m in the UK and the business has EBIT (earnings before interest and tax) of over £1m, so not a bad business at all.

The Naked Wines UK business model to date has been based on funding wines which take less than a year to reach your glass. The £5m they are attempting to raise by issuing this Fine Wine Bond is targeted at longer term maturity requirements.

Unlike a bank, investing – rather than ‘saving’ – in a Fine Wine Bond offers none of the usual protections of the Financial Services Compensation Scheme (FSCS).

Should the business or its new special purpose company go belly up, you risk not getting the promised return or seeing your original capital ever again, or both.

There is an unbreakable link between risk and reward which is illustrated quite nicely by the returns on offer here – 2.5% a year for three years from a bank with FSCS protection or 7% a year for three years from a wine company which might or might not succeed in paying you the interest or returning your capital.

For those with a genuine desire to drink the wine on offer, and the ability to tolerate a complete loss of capital, it might be a deal worth considering.

For investors who want a higher return than cash savings but cannot tolerate such high risks as the Fine Wine Bond seems to offer, something like peer to peer lending where risk is spread across a large number of issuers might be preferable.

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