By Ellie Winninghoff

When it comes to investing in wine, the old saw goes something like this: How do you make a small fortune from a vineyard? Start with a large fortune.

In the quest for alternative investments, the business of wine is a fringe player that's getting more attention. Institutional investors such as Calpers, TIAA-Cref, Prudential and John Hancock are investors in vineyards. Individual investors can partake through private-equity opportunities, or through the public markets via real estate investment trusts.  

That can be quite different than investing in or buying wineries--something that has been especially popular among so-called lifestyle investors who have made their fortunes in other pursuits. Last year, for example, real estate magnate Donald Trump and AOL founder Steve Case and his wife Jean acquired wineries in Virginia.

One way investors can participate directly in vineyards is through wine REITs, which consist of sale-leasebacks that allow wineries to take their capital-intensive vineyards off the books. Silverado Winegrowers and Silverado Premium Properties, which operate roughly 10,000 acres in California, introduced the sale-leaseback to California vineyard owners in l982. It has done 12 sale-leasebacks as private deals, but won't divulge returns.

In recent years, two publicly traded wine REITs--Vintage Wine Trust and VinREIT, a part of Entertainment Properties Trust--ran into trouble. "Other than Silverado, wine REITs have not done well," says Neil Campbell, CEO of FUTR Family Management, based in Carlsbad, California.

That could change.

In June 2010, Escondido-based Realty Income Corp. purchased vineyard and winery properties from Diageo Chateau and Estate Wine for $269 million in a private auction. With 2,000 acres in Napa, and real estate owned by Sterling Vineyards Winery and Beaulieu Vineyards, a back-of-the-envelope calculation suggests the REIT obtained the properties at an astonishingly good price. The wineries will operate the properties and retain ownership of the vines. But in a different twist, Diageo plc has guaranteed the triple-net lease.

In the wake of the financial crisis, observers predicted widespread bankruptcies and foreclosures among California's 2,400 wineries. That did not happen. But where there were problems, lenders put pressure on wineries to sell, and they did, says Mario Zepponi, a winery and vineyard investment broker with the Zepponi Group in Santa Rosa, California.

Last year, 31 wineries were sold. That was "a big number," says Mark Freund, Senior Relationship Manager at Silicon Valley Bank, based in Santa Clara, California, whose clients include 360 wineries and vineyards.

But according to a survey published by Silicon Valley Bank and Scion Advisors in 2008, 60 percent of the respondents said they would undergo an ownership or generational transition by 2017.

"This is an enormous change for such a small industry to absorb," the report said. "The large number of retirements will produce a power shift throughout the industry that could have ripple effects."

Private Equity
Bacchus Capital Management LLC, based in San Francisco and New York, is uniquely positioned to ride this wave in a substantial way. Rather than just buying wineries, co-founder and managing partner Peter S. Kaufman says the private equity firm provides "flexible capital" (control equity, first lien or mezzanine/second lien debt) that wineries can use to finance growth, intra-family transitions, or acquisitions of other wineries.

The firm focuses on growing wineries  "where we can add value," adds co-founder and managing partner Sam Bronfman (older brother of Edgar Bronfman Jr.), a wine industry veteran. Describing the wholesale/retail system as an "hour glass with a tiny narrow opening that most small owners can't get through," he explains that distributors decide which wines will be sold. He says he can use his own relationships to assist wineries in this matter.

Bacchus has provided debt financing to Cameron Hughes Wine, Andretti Winery, Wine by Joe and Qupe. In October, it invested equity in Sbragia Family Vineyards, whose founder Ed Sbragia is the only winemaker in the world to have received a Wine Spectator #1 wine of the year award for both a red and white wine.