Matthew Dolan and David Jesse Detroit Free Press
Published 8:00 AM EDT Mar 20, 2019
The description of the proposed investment by the University of Michigan read like the fine print few people can fully comprehend.
U-M’s elected leaders voted in December 2017 to pour as much as $130 million into a new fund to target “mining, distressed opportunities, operating businesses, and commodities or production inputs that exhibit attractive upside potential due to valuation dislocations, transactional complexities, or supply and demand imbalances.”
Even with all those words, there may have been a surprising ingredient still missing:
Records and interviews show the fund’s managers at a Canadian private-equity firm are behind a new bourbon operation in Kentucky. Known as IJW Whiskey, the low-profile company has already erected large warehouses in Danville to store the corn-based, barrel-aged whiskey used to make bourbon and have bought a multimillion-dollar Main Street building as a potential headquarters along Louisville’s Whiskey Row.
The team at Toronto-based Waterton Global Resource Management, who launched the natural resources investment fund known as Bay & King with U-M, declined through a spokesman to say whether some of the university’s funds are also backing the bourbon effort. U-M officials refused to answer any questions about the fund.
“Most people when they come in, they have a marketing angle. They get on a rooftop and they say, ‘Hey, look at me,’ ” Fred Minnick, author of the book “Bourbon: The Rise, Fall and Rebirth of American Whiskey” and editor in chief of Bourbon + magazine, said of IJW and Waterton. “These guys have been ninja-like.”
Questions around the whiskey investment swirl as Michigan and colleges and universities around the country wrestle with binge drinking among students. On the U-M campus, nearly 40 percent of undergraduate students said in a 2018 survey they had drunk in a high-risk manner — at least four drinks for women and five drinks for men — at least once in the last two weeks.
High-risk drinking is “one thing that keeps me up at night. I’d say our progress has been slow. It’s been a struggle,” U-M President Mark Schlissel told Bridge magazine in 2017, the same year the university invested with fund managers behind the new whiskey business.
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Moreover, the mystery surrounding IJW illustrates the stealth investment strategy employed by many universities, including U-M and its nearly $12 billion endowment.
Many colleges contend that revealing their portfolios in detail would risk losing a competitive edge. Critics counter more openness is needed, especially at schools with tax-exempt endowments.
At regents’ meetings, U-M publicly commits millions of dollars to hedge, private-equity and venture capital funds, among others. After the regents vote to approve the investments, the state university releases almost no information about where that money ends up. U-M also lobbied the state Legislature to pass a law 15 years ago to exempt the university from open-records requests regarding those same investments.
U-M in 2017 pledged to invest up to $130 million with Bay & King, described as a fund based in Toronto where Waterton has its headquarters. Founded in 2009, Waterton is a private equity firm best known for in investing in the metals and mining sector.
There is a Bay & King Investment Fund, LLC registered in Delaware, but records there reveal little, failing to disclose the identities of any other limited partners or the scope of its holdings.
University spokesman Rick Fitzgerald declined to answer any questions about U-M’s investment, including its total size. He said by policy, U-M does not discuss its investment strategy or fund managers.
Asked specifically whether U-M has any financial ties to an investment in the whiskey operation, Fitzgerald added: “We have nothing to add regarding the investments.”
News of a university taking a stake in the bourbon industry could be seen as problematic, according to some experts in socially conscious investing. “It doesn’t send a great message,” said Harvard Prof. John Ruggie, faculty chair of the university’s Corporate Responsibility Initiative at the John F. Kennedy School of Government.
But Neal Stoughton, a professor at Vienna University of Economics and Business who has studied college endowments, said that many schools rightly choose not to place many limits on investment types, including alcohol.
“They can have a policy for responsible drinking, but still, alcohol is a permitted beverage for older people. There are ads all over television,” said Stoughton, now a visiting professor at the University of Arizona. “So until the whole of society decides that we have a problem with alcohol, I see it’s very unlikely that universities are going to go in that direction.”
U-M regents have generally been reluctant to adopt so-called socially responsible investing principles, which advocates say can mean staying away from vice-related businesses such as alcohol (though not all such funds ban alcohol). There have been exceptions, including U-M’s divesting from apartheid-era South Africa and the tobacco industry.
In 2017, U-M activists convinced the student government to pass a resolution calling on regents to divest from Israeli companies the activists say are violating the human rights of Palestinians. But the regents declined to make the recommended change. The university also has invested millions of dollars in funds related to fossil fuels that some criticize as hastening global warming.
If U-M has put millions into an alcohol-related investment, it wouldn’t be the first.
Harvard University’s endowment manager quietly built a controversial grape-growing business on California’s Central Coast with underlying water rights in a drought-plagued region, according to a Wall Street Journal report in December. A spokesman for the endowment declined comment.
Overall, U-M’s approach has improved its bottom line. With a 20-year annualized return of 9.6 percent, U-M claimed in October that it ranks in the top 10 percent for long-term investment performance among university endowments.
The investment in Bay & King was approved unanimously and without public discussion, according to meeting minutes. Regents Michael J. Behm, Denise Ilitch, Shauna Ryder Diggs, Ron Weiser and Katherine E. White, as well as former regents Andrea Fischer Newman and Andrew Richner, did not respond to questions about the investment they supported. Regent Mark Bernstein, who also voted for it, declined comment.
Newly elected regents Jordan Acker and Paul Brown, who took their seats in January, declined to speak on the issue in interviews this week. Acker and Brown ran for public office on a platform pledging greater transparency at the university, including how its endowment is run.
A key adviser who helps guide the university’s endowment said he’s in the dark.
“I know nothing about it,” said investment fund veteran and alumnus Robert Jones, who is a member of U-M’s Investment Advisory Committee.
In recent months, critics have questioned whether U-M manages its sizable holdings appropriately. The Free Press reported last year that the university invested hundreds of millions of dollars from its endowment with funds run by alumni who also serve as U-M investment advisers. Those practices have been slammed by some industry professionals and academic experts as conflicts of interest.
The university also invested with some of its biggest donors, including Stephen Ross, who publicly has pledged at least $378 million to the school. Ross founded The Related Companies, whose real estate funds have received more than $140 million in U-M investments. The New York developer also made campaign contributions to former regent Newman before and after the regent voted to invest with Ross’ funds.
After the votes were disclosed by the Free Press, Newman returned thousands of dollars in campaign contributions from Ross and his wife. Newman lost her re-election bid to the regents board in November.
In response, U-M has made some reforms, including pledging to identify any investments in firms with ties to members of its investment advisory committee.
Today it’s still difficult to know exactly where the university’s millions end up. Leading private market data companies say the public won’t know where U-M’s Bay & King fund has placed its dollars unless the fund discloses the information. The Free Press could find no such public disclosures.
Waterton Global Resource Management directly oversees Bay & King, according to William Clarke of Preqin, a data company that tracks the private investment fund industry.
“It appears to be structured as an unlisted natural resources fund, which means it is being run to a private equity-style structure; a finite pool of starting capital and a finite intended lifespan (usually around 10 years),” Clarke wrote in an email.
U-M has described Bay & King as “an investment vehicle being formed by lsser Elishis and the team that manages the University’s investment in the Waterton Mining Parallel Fund,” the university’s chief financial officer wrote in a December 2017 memo to regents. Earlier, the regents in May 2016 approved a $30 million investment targeting gold and copper mining the separate Waterton mining fund that includes other institutional investors.
Waterton officials are also deeply involved in the new whiskey company known as IJW, according to interviews and public records.
The Kentucky-based company is linked to another limited liability corporation called IJW Class A LLC, based in Reno, according to state records. The filings do not reveal its owners.
According to a Free Press review, there are no publicly available documents showing a direct U-M investment in IJW. But there are links between IJW and Waterton, which controls millions in U-M endowment funds.
The corporate suite address for the IJW Class A matches one for Elko Mining Group. State records show Elko’s only listed officer is Richard J. Wells. A person with the same name is also Waterton’s chief financial officer and partner at the firm, according to the company’s website.
Efforts to reach IJW directly were unsuccessful. Two lawyers for the company did not returned phone calls. Two bourbon-making distillers reportedly hired by IJW failed to respond to several emails.
Riding the ‘bourbon boom’
The man who helped seal the deal for IJW’s bourbon operation in Danville said in an interview that Waterton executives have taken an active role.
In late 2017, Jody Lassiter, who heads up Danville’s public-private economic development arm, toured the Danville site with a local master distiller and three Waterton executives, including Elishis. That was shortly before IJW backed by the Waterton executives bought the county-controlled property last year.
“They wanted a piece of the bourbon boom,” Lassiter said of the effort dubbed by local officials as “Project Angel.” It was a reference to the “angel’s share” of alcohol that escapes during bourbon’s aging process.
Early on, IJW imagined there could be large complex devoted to bourbon across more than 100 acres, according to Lassiter. IJW would have room for as many as 17 multistory “rickhouses,” each able to hold more than 20,000 oak barrels of bourbon. A concept plan also called for a distillery and visitor center. In the end, IJW may invest as much as $25 million on the site, Lassiter said.
At least two well-known distillery experts have already joined IJW, according to one of the bourbon company’s suppliers. Shane Baker, co-founder of Wilderness Trail Distillery, said his new neighbor in Danville is now buying whiskey in bulk, aging it in barrels and “maybe one day bottling their own or (making) private brands for others.”
(Wilderness Trail also supplies whiskey to IJW, according to Lassiter; Baker declined to comment on the relationship.)
The state government has been supportive, offering as much as $475,000 in tax incentives for businesses linked to IJW, according to officials and documents from Kentucky’s economic development arm. Part of the incentives could be used at a $2.9 million building along Louisville’s Whiskey Row slated as a possible IJW headquarters.
In Kentucky, boosters are touting bourbon as a smart bet.
Kentucky has at least 68 distilleries spread across the state, up about 250 percent in the last decade. That’s thanks in part to growing demand from younger consumers, marketing toward women and a taste for American craft spirits in China and India.
Kentucky’s bourbon distilleries boosted the state’s overall inventory to 7.5 million barrels of aging whiskey — the highest volume since 1972, according to the Kentucky Distillers’ Association. It’s the latest sign that investors are flocking to put money into a commodity that could take years to come to fruition, said Jeff Hopmayer, managing partner with the Nashville-based Brindiamo Group, which provides strategic consulting for the alcohol industry.
Still, there are risks. Among them are the threats of increased trade tariffs and a surge of highly marketed, but poor-quality bourbon that could help sour consumer tastes and dampen international demand, according to Minnick.
Boxing out booze
While its investment arm may be hoping for big profits with bourbon, U-M has been less receptive to hard alcohol in other corners.
U-M bans all advertising for alcoholic beverages on campus.
“The University of Michigan will refuse advertising inconsistent with the fundamental missions of the University, or in conflict with the image the University seeks to project or the well-being of the University community,” U-M said in a policy statement updated in December, citing alcohol as an example.
U-M fraternities have also decided to stop serving hard liquor at some of their largest parties after a spate of alcohol-related problems. The athletic department does not allow adult beverages sales inside its facilities during school games and matches (unlike some other Big Ten universities).
“As long as I am here, there will be no alcohol,” former U-M President Mary Sue Coleman told the regents in 2006 about the athletic facility prohibition.
Colleges and universities trying to curb some of students’ most harmful drinking habits have targeted liquor. In 2017, advocating for the end of the now-repealed state law restricting beer keg sales, U-M’s current president, who is also a medical doctor, weighed in on the particular dangers of drinking too much hard alcohol.
“It’s very difficult to drink enough beer to become toxic,” Schlissel said. “It isn’t difficult to drink enough vodka to get toxic.”
Contact Matthew Dolan: 313-223-4743 or [email protected] Follow him on Twitter at @matthewsdolan
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