BrewDog's private-equity gamble reveals stark choice for craft beer growth - Analysis

"It was just a lucky punt," says Steve Lofty of the BrewDog shares he bought back in 2011. That was when the Scottish craft brewer raised GBP2.2m (US$2.8m) in a second phase of crowdfunding. "I'd just got a bonus from work and it seemed like a fun company."

The fun just got real. With news last weekend that BrewDog sold a 23% slice to San Francisco private-equity fund TSG Consumer Partners for GBP213m, Lofty, a 40-year-old London credit manager, has turned his GBP285 punt into a near GBP8,000 windfall. "I might treat myself to a holiday," he says.

BrewDog will be hoping its own gamble pays off just as handsomely. But by eschewing the crowdfunding model that has fuelled its journey so far, and dipping into private financing, has the company put its future on the line?

An evolving business

As craft beer moves further from its roots as a cottage industry run by passionate enthusiasts and opportunistic entrepreneurs, and closer in style and ambition to the multinational brewers it was set up in opposition to, the question of how to fund future growth has been a troubling itch in a hard-to-scratch spot. There seem to be two distinct paths to securing the necessary cash to expand capacity - sell part of the company to a bigger brewery, or tap into the increasing number of funds keen to enter one of the US's fastest-growing industries.

Both routes have their critics - while craft beer drinkers decry deals done with big beer as selling out, others in the industry - Boston Beer Co's Jim Koch, for instance - warn that agreements with private-equity are a ticking time bomb. "Funds have finite lives," Koch said last year. "When those fund lines get to the end, [fund managers] have got to sell those assets."

BrewDog, however, faces an additional obstacle - itself. The self-styled "punk" brewer's past comments have effectively ruled out any deals with multinationals. When asked once if he'd sell to a big brewery, co-founder James Watt replied: "I'd rather shoot myself in the head." 

Until this week, Watt had been spared this fate by going straight to his consumers for funding. Step forward people like Steve Lofty, who together helped raise as much as GBP26m through crowdfunding. But, even though BrewDog overachieved in its crowdfunding efforts, it still has not been enough and, with an ongoing US$50m crowdfunding effort in the US stuck at GBP5m with just three months left to run, management turned to private financing.

The decision has netted Watt and co-founder Martin Dickie a reported GBP100m windfall, but TSG should get its own reward. Included in last week's deal is a clause that allows for the creation of a new class of preferred shares that will guarantee TSG a minimum compound annual return of 18% if the company is bought or floated.

Is this Jim Koch's time-bomb warning writ large?

"On first glance, it seems a little aggressive and makes you wonder why BrewDog would take those terms," says Rabobank senior wine & spirits industry analyst Stephen Rannekleiv of the 18% clause. But, the analyst also says that when it comes to choosing between taking money from private equity, from the banks, or from brewing partners, there's no right or wrong answer.

"The number of people wringing their hands about private-equity? I really never understood it," he says. "Fundamentally, the key is to have a clear vision of what you want to accomplish, what you want your company to become and then you can decide."

On the other hand, linking up with a brewer gives craft breweries a partner with a great deal of technical knowledge that can also tap into unrivalled distribution networks. "They bring you so much insight that to bash them is silly," Rannekleiv says.

"Serious about making money"

Lagunitas founder Tony Magee, has been there and done that. In 2015, he took his brewery into a 50/50 partnership with Heineken after dismissing other options. In Heineken, Magee saw a kindred brewing spirit, managed by people who were brewers first and foremost. Other paths to securing capital carried too much risk. 

Speaking to just-drinks about BrewDog this week, Magee said private-equity companies such as TSG are "serious about brands but also serious about making money, above everything else".

"The details are everything in a private-equity investment and are where the rubber meets the road," he says. "The investment will need to continue to grow and grow strongly."

The US beckons

BrewDog is confident it can continue the growth that has taken it from a garage brewery to an 800-employee company on the verge of opening its first overseas production plant, in Columbus, Ohio. But, the US expansion of BrewDog's journey will be fraught with peril, even without private-equity partners breathing down its neck. Recent figures show US craft beer and value growth slowing, partly because acquisitions by AB InBev and Molson Coors are taking some of the category's best performers out of craft.

"The piece of the pie that's left for smaller players is becoming smaller and smaller," Rannekleiv says. "It's a challenging time for Brewdog and others to be coming into the market."

Magee is more optimistic. "Despite Jim Koch's sentiments to the contrary in the New York Times [last week], craft is a thriving space right now, in the US and elsewhere," he says. "BrewDog has been quite rude towards us in the past even as they emulate the American craft ethos, but they are steaming ahead in their own way."

Steve Lofty isn't too concerned about BrewDog's private-equity play. He's done some research into TSG and likes what he sees, comparing the 23% divestment favourably to UK brewer Camden Town's sale to AB InBev in 2015. In the end, it's about growing the brewer that continues to make beers he enjoys.

"If BrewDog want to make an impact and grow in America," Lofty says, "they need the funding. And, if they wanted to stay as a little craft beer company forever then they wouldn't be doing all the things they have done. It would still be two Scottish lads up in Aberdeen having a bit of a laugh."

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