Alcoholic Redemption Venture
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.
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
How to use this in applications
Capital markets teams at law firms will have to support crowdfunding and retail investment structures, ensuring compliance with FCA rules whilst managing founder interests. This will include drafting share subscription agreements and preparing crowdfunding disclosure documents.
The private equity teams at law firms will have supported TSG - the US PE firm that first bought BrewDog. This will involve drafting the preferential share terms that protect TSG’s returns whilst subordinating the existing retail shareholders. An example is liquidation preference, where TSG gets paid first where the business is broken down and sold on.
And the restructuring & insolvency teams at law firms will have been involved in coordinating BrewDog’s sale while managing competing creditor interests and employment obligations tied to the affected jobs.
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