James Watt, the co-founder of BrewDog, is launching a new beer business called Second Best. He is promising to give free shares to the retail investors that were wiped out when BrewDog was sold.

BrewDog’s brands, brewing facilities and UK pubs were bought out by a US firm earlier this year in what is known as a prepackaged administration sale, i.e. the business was sold off as a package to deal with debt liabilities.

Thousands of retail investors were left empty-handed, being referred to as ‘equity punks. ’ This is after their stake had already been diluted through an earlier sale of BrewDog to a private equity firm.

Analysis

BrewDog’s collapse signifies how rapid growth fuelled by retail funding can create unsustainable business models and leave smaller investors completely unprotected when things go wrong.

What makes this uniquely unfair on the retail investors is that they invested through a crowdfunding scheme, which means they received shares with fewer protections than if they had bought publicly traded stock the usual way.

Watt’s Second Best endeavour comes off as calculated reputation management. He had personally extracted £50 million from the private equity sale that diluted the retail investors’ protections, which created resentment. By framing this new endeavour as a redemption, James Watt seems to be trying to convert former investors into supporters.

What does this mean for retail investment and the beer industry?

• Retail crowdfunding without proper investor protections creates pretty catastrophic losses when these companies fail

• Private equity investments in consumer brands often benefit founders whilst retail investors bear downside risk, a win-win situation for both the founders and private equity investors

• Rapid pub expansion creates quite a high cost base, which is a model that collapses when consumer spending weakens, which is currently what is happening with BrewDog