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Bourbon, Mobile Home Parks and a Down Market Make a Good Mix at Freestone Capital

Q&A August 03, 2022 at 04:12 PM

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Pre-mixed cocktails in cans are flying off store shelves. And Gary Furukawa, founder and chief investment officer of Freestone Capital Management, with $8.7 billion in assets under management, is pleased as punch.

As one of the biggest investors in Kentucky bourbon, his clients are investing in the whiskey through a fund his firm runs.

"This strategy has been fantastic! [Bourbon] prices have gone up so much. The economics are really good," Furukawa tells ThinkAdvisor in an interview.

"Our clients like [investing in bourbon] because it's fun to talk about, much more than talking about an ETF," he says.

The bourbon strategy fits in nicely with Furukawa's overall strategy of investing in basic businesses with "high cash flow and inflation protection," Furukawa explains.

"We invest in areas other firms don't and in things clients can't do on their own," adds the advisor, a 2021 ThinkAdvisor LUMINARIES award winner for thought leadership.

"There has been a renaissance of drinking in American spirits — bourbon in particular," he declares, a "phenomenon" stemming from "the new hot category known as RTD."

That stands for ready-to-drink pre-mixed cocktails in cans. Several big brands are in on the act, including Bacardi, Crown Royal, Jim Beam and, new to the category, Jack Daniel's, which is marketing bourbon with Coca-Cola.

An advisor for more than 40 years, Furukawa, 62, dates the drinking "renaissance," with its emphasis on hard liquor, to the COVID-19 pandemic.

"Restaurant demand went down really low, and [people] were home in sweatpants drinking like crazy," he says.

Investing in bourbon may be jazzy, but Freestone's biggest vertical in alternative investments is unglamorous mobile home parks — the largest source of low-income housing in the U.S., according to Furukawa.

To invest, clients commit to a specific dollar amount through Freestone's mobile home park fund.

"We call the money as needed," he explains — that is, whenever they buy a park.

The advisor, with E.F. Hutton and Salomon Smith Barney before he opened his own firm in 1999, allows that he's waiting patiently for the stock market to plummet further so he can get some "good deals, when prices are low."

"This [bear market] seems like it has more room to go. The biggest bear markets last 12-18 months, and we're only seven months into this one," he notes.

ThinkAdvisor recently interviewed Furukawa, who was speaking by phone from Seattle, where Freestone is based. The firm has another office in San Francisco.

"We need the market to go down more for it to get really interesting," he says.

"When [markets] go bad, then we get [very] busy because all of a sudden, at a certain pricing, they start to make sense."

Here are highlights of our interview:

THINKADVISOR: What's the main differentiator of your practice?

GARY FURUKAWA: From the beginning, it's that we invest in areas other firms don't and in things that clients can't do on their own.

Such as?

We're one of the largest investors in Kentucky bourbon. We started three years ago and hired the former head of the Kentucky liquor control board as a consultant.

This strategy has been fantastic!

There's been a renaissance with drinking American spirits — bourbon in particular.

Our clients like [investing in bourbon] because it's fun to talk about, much more than talking about an ETF.

What's the investing process?

We raise money from clients in a fund format and have agreements with distilleries that make the bourbon in Kentucky.

We buy tens of thousands of barrels. The bourbon sits in warehouses aging, and then it's bottled and sold.

The economics are really good.

Who do you sell it to?

[Usually] craft bourbon companies. The prices have gone up so much that we've been selling 1- and 2-year-old barrels. The original idea was that we were going to hold them for four years.

Tell me more about the drinking "renaissance."

There's been a phenomenon in drinking: It's a new hot category known as RTD — ready to drink — already premixed in cans, like rum and Coca-Cola, margaritas [and so on].

Now the thing is premixed bourbon and Coca-Cola.

So this has been really great for our bourbon. [The cans contain] 90% Coca-Cola and 10% bourbon.

What else have you observed about changed drinking habits? Young people are drinking hard liquor [versus beer]. I think people started drinking more during COVID. Restaurant demand went down really low, and they were home in sweatpants drinking like crazy.

How would you describe your firm's overall investing strategy?

We do lots of basic businesses that have high cash flow and inflation protection. That's the big thing for us.

But some seem unusual choices. What other areas do you invest in?

Our biggest vertical within the alternatives is mobile home parks. It's a great space to be in. We look for those that are in disrepair, and we do a great job improving the ones we buy.

What's the attraction to invest in them?

Mobile home parks are the largest source of low-income housing in the country by far, but it doesn't get a lot of attention. Yet 6% of the U.S. population lives in them.

They were built after World War II when we had a shortage of housing. There has been almost no new creation in the last 20 years.

Still, the demand for low-income housing keeps going up. People wring their hands about lack of low-income housing; but when a mobile home park is proposed to be built close to their house, they fight it.

What's the process of how your clients invest in them?

We raise money in a fund in a capital call format. We have a mobile home park fund and another fund, Affordable Housing Partners, that finances the low-income housing with tax-exempt debt.

What do you require of clients to invest?

For the mobile home parks, the client commits to a certain dollar size of investment; and as we buy the parks, we call the money as needed.

So we don't raise the money and then have to go out and buy the stuff: We don't have the pressure of having to spend the money.

Do you have any other funds?

We have one that's building out car washes, in which we're real active. We're building automatic car washes in small towns.

How come you have such interest in housing for low-income folks?

Our offices are in Seattle and San Francisco, two very expensive places to live. It just made sense to provide the lubrication for low-income housing and also generate good returns — because that's important too. It's kind of a win-win.

You received a 2021 ThinkAdvisor LUMINARIES industry recognition award for thought leadership. What's your M.O. in choosing an investment strategy?

We probably get a thousand pitches a year. We [employ] people whose job is just to field pitches and look at new ideas.

They narrow them down, and then we have an investment policy meeting every month and decide whether to go further and get more information.

Quite often we'll get that and then won't do [the strategy]. But periodically we get more information and realize it's a good idea.

But it's not [only] me: We have 14 people that go through this stuff. We might do one or two [ideas] in a year.

What would prompt you to do more than that?

Bad markets, because the prices are going to be better. Prices have been really high the last couple of years up until recently, so we haven't done anything new.

But when things get bad, then we get [very] busy because all of sudden, at a certain price, things start to make sense.

I love it when [the market] goes down. It creates opportunities. You get good deals when the prices are low.

So things aren't bad enough for you yet?

That's right. We need [the market] to go down more for it to get really interesting.

We had such excesses with monetary stimulus that we need to wring some of it out. This time, I think the Fed won't be able to rescue the markets.

When do you think things will get awful enough?

The bigger bear markets last 12 to 18 months, and we're only seven months into this one. So it seems like we have more room to go.

You use both internal and external money managers. What's the advantages to that?

You want control. Some outside managers are really good, and some aren't so good. We have a lot more control doing some of the direct investing ourselves.

I feel we can depend on ourselves to do a good job.

What about the external managers?

Whether an outside manager will do a good job is hard to know in advance. They all sound earnest, great, experienced and smart. But our experience says that some are really good and some aren't.

We want to have as good an outcome as we can.

Are you helping clients during this market downturn in any way that's different from what you've typically provided?

We never used Zoom before COVID. But we've tried to use it a lot and have webinars — not based on the calendar, but when we think it's a good time to talk about stuff.

Right now is a good time.

We just had a webinar last week, and 550 people were on the call. Zoom is such an efficient way to communicate with clients.

We used to have dinners with them, but now we use Zoom. Way more people come. It's convenient and easier for clients. They really appreciate that.

We have them submit questions before, and we also have a Q&A period afterwards. Sometimes it's as long as the webinar itself because people have questions, and they're worried. They should be.

You were an advisor with big companies EF Hutton and Salomon Smith Barney. Then in 1999, you opened your own firm. What's your main challenge as an entrepreneur?

Being responsible for so many other people. I've got 100 employees. So you're responsible for lots of lives. It's a heavy burden.

Asians represent only about 7% of financial advisors in the U.S. Before becoming an advisor, you were a CPA with Deloitte and Touche. Tell me something about your early background.

I'm Japanese American. I was born in Seattle and grew up there. My family has been in the U.S. since 1910.

I don't speak Japanese. We were discouraged from learning it because my family was [imprisoned] in the internment camps during World War II [after Japan bombed Pearl Harbor in 1941].

The internment camps had a profound impact on Japanese Americans.

My family feels that one of the reasons [the camps were established] was that the Japanese all clung together. They didn't mingle with everybody else.

But my generation felt we needed to mingle and not be as Japanese.