Art, watches, jewellery, and coins have emerged as the best performing passive luxury investments in the twelve months ending June 2023, as per Knight Frank’s luxury investment index.
The panel discussion on luxury investments spoke about passion investing – collecting objects of desire and turning them into profit.
Watches: Shahzaib Khan, Managing Director, Salon Des Horlogers & K2 Luxury
Wine: Alfonso De Gaetano, Founder, Crurated
Heritage Cars: Maroun Jalkh, CEO, Azimut Italia (ME) Limited
Moderator: Nigel Sillitoe, CEO & Founder, Insight DiscoveryÂ
Nigel Sillitoe: Â The data on alternative investments shows that whiskey, over last ten years, has performed very well, as has art, wine, cars, and watches. The long-term returns have been good over the last ten years. Let us start with wine.
Alfonso De Gaetano: I was with Google as a director in the region for 12 years, before starting my wine and spirit investment business ‘Crurated’ in June 2021, with the vision to build something for the next generation of collectors. We use blockchain as a functional technology for physical products, instead of virtual products.
We changed the business model by building a marketplace, between the producers and investors (collectors), bringing the value of access. Next, clients want guarantee of the provenance, which is critical in the world of wines. We do not work with the secondary market, and so from the outset our products are bought directly from the producers, and we can give clients the certainty that every bottle is authentic and guarantee provenance. Furthermore, we register each bottle on blockchain with a unique NFT, digital certificate. We provide real time information to clients. We built the first infrastructure that connects the platform with the warehouse management system with our blockchain. This helps us know exactly where each bottle comes from, which is important for our clients.
It is stored in our warehouse in Burgundy in perfect conditions, free of charge – no asset management fee, which is also a game changer. The next hurdle is reselling, which can be a long expensive process, risking spoiling the wine along the way, and paying a 25% premium. Instead, through Crurated, you can put your NFT on the exchange with far lower fees of 3%-5%, and the bottle, which is certified directly from the producer, stays in perfect condition since it is not moved out of the warehouse.
In January 2024, we are launching the first metaverse with blockchain. We will have a 3D model of every bottle, and clients will be able to look at their collections via VR and walk into your virtual cellar. And interestingly, every time you touch a bottle, you will see the NFT and description of the bottle.
It is important to emphasize that we are not selling virtual goods on blockchain, rather a smart certificate associated to a real physical bottle. You can buy the certificate on our exchange and deposit it back on the Curated marketplace, or you can keep trading the NFT until someone decides they want to consume the wine. This might happen even after a decade, but you can keep making money from each trade while the bottle stays in perfect conditions in our warehouse. If you ship the bottle, then you will not be able to trade it on our platform because we would lose track of how the bottle is being stored and thereby its value. We only allow people that keep the wines in our warehouse to trade the NFT on Crurated platform.
Nigel Sillitoe: Moving on to cars, why did you launch a fund?
Maroun Jalkh: As asset managers, our job is create new investment ideas. The fund is in partnership with Ferrari, which is unprecedented in the history of Ferrari, as they have never associated themselves with an investment vehicle before.
This idea emerged from the passion of some people in the company who are car collectors, and portfolio managers. They combined their job and passion into an investment vehicle, a unique fund.
One of its features is that it is ‘evergreen,’ i.e. does not have a maturity date. Unlike other funds with a termination date, nobody can be forced to sell at a certain time. Another aspect is our partnerships with car makers who have a keen interest in seeing their vintage cars and their supercars gain in value and be well maintained over the years. We have a formal partnership with Ferrari, which was announced during Le Mans Grand Prix earlier this this year. And we also have agreements with Lamborghini, Mercedes, and other car makers. We also have workshops, certified by car makers, to ensure that when a car is maintained or repaired at these workshops, the methods used are approved by the car maker.
We launched in May 2023, and have already raised USD80 million into the fund. Interestingly, Ferrari is an investor in the fund as well because we do an equity swap. They provide the cars, and we give them shares into the fund, which shows how close the partnership is. Ferrari participated at Le Mans, after a 51-year hiatus, with the goal of winning again. That car from 51 years ago is now valued at around USD40 million. We have access to this car at a fair price in our fund.
Our hope is that the cars will appreciate over the coming years, benefiting our current and future investors. Currently, we do not have vintage cars, and have five new cars, and the goal is to close the year with ten cars in our fund. Our strategy is to have three main verticals, including hypercars.
Mercedes and Ferrari prototypes have sold for millions of dollars. Interestingly, one of the most profitable aspects involves purchasing poorly maintained or tampered cars at a low price, with the expertise in repairing cars, allowing us to resell these at a price of 50-100% of the original cost.
We are not traders, as some cars will be kept for 10 years. We have an agreement with Ferrari to not sell any of their cars for less than 5 to 7 years, as car makers dislike flippers and traders. We aim to be seen as a valuable marketplace and a dependable partner for car makers.
We aim to partner with car collectors to address their storage, maintenance, and other concerns. Car collectors face challenges in finding storage space, ensuring proper maintenance, access, and insurance for their valuable cars. Without regular maintenance, a car’s value decreases significantly, thus requiring someone to actively care for and check the car regularly. We offer services to car collectors to ensure the preservation and drivability of their vehicles, even after decades since their manufacture.
Many car collectors are getting old and looking for a way to exit from their collection. However, they love their cars so much that they want to find a partner who will take care of it for the long term. They are not willing to sell to just anyone who can pay. They want to ensure that the buyer will preserve and maintain the cars for years to come. In this scenario, we step in and talk to collectors who are interested in creating a partnership and are given access to their cars for several reasons such as succession, tax, or family purposes.
The investment proposition of vintage and supercars is not only interesting due to the emotional attachment people have towards these cars, but also because it offers a financial opportunity. By investing in a diversified pool of cars, anyone can benefit from the growth of the market. In the past decade, the average yearly growth of vintage cars, including supercars, has been around 18 to 20%.
The luxury car market currently has a total size of around USD635 billion, according to a recent report by Bain and Company. This makes it a great asset class with less volatility compared to other investments. Investors in the fund can also enjoy a certain level of liquidity, with the option to exit after two years. However, there are some limitations to prevent forced liquidation. Investors with USD1 million or more also gain access to exclusive perks, such as visits to warehouses, driving events, and exclusive access to Ferrari and their collection of both new and vintage cars.
The minimum price for the cars we invest in is estimated to be USD2 million, but some can cost up to USD10 million. We cannot currently disclose the prices of the cars in the fund, but it will be revealed later along with the official Nav and valuations. Investing in private markets or alternative assets is a careful process, not a quick decision like investing in equities. The portfolio will end the year with about ten cars, so approximately half of the USD80 million will be deployed.
The remaining funds are currently being assessed by the investment committee and will be invested over the next year. It takes time to deploy substantial amounts of money, but our team is constantly evaluating the pipeline to start investing as quickly as possible. This fund is only six months old and in the initial stages, but in three years, we expect to see higher incomes, a larger amount of money, more car investments, and a diversified portfolio beyond just hypercars and Ferrari.
The goal is to increase diversity among hypercars and vintage car investments, while also including a wider range of brands. However, most cars in the fund will still be Ferraris, with an estimated 70-80% allocation. This is because Ferrari holds significant value as a brand and its cars will continue to make up the largest portion of the fund.
Nigel Sillitoe: Let us move on now to horology. How can you make money from watches, and which brands are coming to the fore these days?
Shahzaib Khan: Our family business, K2 luxury, specializes in sourcing highly sought-after models from prestigious brands. They offer a unique service where customers can skip the typically long waiting lists by paying a premium. For example, if someone wants a popular Patek Philippe model, they will typically have to wait 5 to 8 years, but K2 luxury can provide it immediately. This sets them apart from others in the industry. K2 luxury covers top brands like Piguet, Rolex, Richard Mill, and more.
Additionally, we have another company called Salon Des Horlogers, which was created 4 or 5 years ago when we noticed that their customers were becoming more sophisticated and were interested in personalized products. Salon Des Horlogers represents artisanal watchmakers who produce a limited number of watches each year, unlike bigger brands like Rolex. These watches are all handmade in a workshop in Switzerland.
Shahzaib Khan: Luxury watches have seen a significant increase in value over the past three years. For example, a Patek Philippe watch that was sold in 2015 for USD145,000 is now valued at USD635,000, representing a 45% premium over its retail price. Luxury watches are considered an alternative asset class and have performed well, with an average annual performance of 27% in 2021-2022. This trend of robust performance has been consistent since 2018, with watches compounding at approximately 20% annually.
From August 2028 to January, the average price of top models in the second-hand market increased by 20% annually, which is significant considering the zero interest rates and volatile stock market. This increase can be attributed to the bottleneck created during the Covid pandemic, where manufacturers were closed and travel was restricted, leading to high demand and limited availability of watches.
The bubble burst due to the impact of cryptocurrencies and geopolitical events in Eastern Europe, which caused the stock market to decline. However, this correction as necessary and beneficial. There is no rationale for Patek Philippe Nautilus to be priced at over USD150,000 when it originally sold for around USD25,000 to USD30,000.
The demand for both small independent watch brands and top names has skyrocketed recently. This is due to the ease of moving and storing watches, as well as the low service cost compared to other luxury goods like cars. Watches typically only need servicing every 3 to 5 years, whereas cars require annual or semi-annual maintenance. Therefore, people are finding it more convenient and cost-effective to invest in watches and wear them on their wrist instead of dealing with the hassle of moving and storing other goods.
In 2022 and 2023, around 30% of people expressed an interest in buying a watch or diversifying their investment portfolio. Unlike the stock market and real estate, the watch market is not as volatile. However, making money from luxury watches is not easy and requires a 3-to-5-year time horizon to ensure safety. This is why my clients eventually became my competitors.
Nigel Sillitoe: What are the pros and cons of each of these luxury investments?
Alfonso De Gaetano: There is a limit to the size of the land and how much wine can be produced, so there is a constraint on growing the vertical from each producer. However, it is easy to identify valuable brands and potential money-making opportunities, by analysing wine lists in restaurants, where the availability of certain bottles decreases with higher consumption, leading to a rise in prices over time.
The price of Burgundy wines has significantly increased in the last decade, making some wonder if the market has peaked or if there are still opportunities for growth. This is evident when looking at wine lists in restaurants worldwide, as it is difficult to find old bottles of Burgundy due to high demand and limited supply. This is because Burgundy only accounts for 3% of wine production in France.
Maroun Jalkh: Investing in hypercars or vintage cars is a wise decision as it guarantees a rarity effect. Hypercars have a limited number disclosed by the manufacturer, and vintage cars are no longer produced, and many have been destroyed. Moreover, some vintage cars were also released as limited editions. This rarity factor ensures that these cars will only increase in value over time, making it a favourable investment.
The value and desirability of collecting cars as an investment depends on factors like market demand and the economic cycle. One advantage is that it is a heartfelt investment where the collector genuinely enjoys owning and driving the car. It is important to invest in something you genuinely like, as opposed to buying solely for potential value increase. However, there are also disadvantages to consider when investing in cars, such as challenges of storage and maintenance issues.Â
Shahzaib Khan: The advantages include the ability to easily move it and to store it securely in a safe. With regular servicing, high-end watches like Rolex can be safely stored for up to five years without any issues. Additionally, these watches tend to increase in value over time. However, there are some drawbacks. In Europe, popular luxury brands can attract thieves, leading to potential attacks on owners. Therefore, some people prefer wearing valuable watches that are not easily recognizable to the public. Another downside is that less popular brands may have lower liquidity in terms of reselling.