Money Talks, does anyone know an interpreter?
A new Unofficial Partner podcast series looks at the relationship between sport and finance
We started the new Money Talks podcast series because I don’t really understand finance and never have. Given this context, I could copy and paste the Swiss Ramble's threads and pretend to know more than I do. Or, I could fess up and luxuriate in my own ignorance. We've had a chat internally and taken the latter route.
The aim to ask simple questions to people who do know about it and to get them to come out from behind the language barrier of specialist banking jargon and explain it to me in a way that the rest of us can understand.
The first guest is Jason Traub, co-founder of 23Capital, a firm I mistakenly/lazily thought was ‘a VC fund’ and so began framing my questions to fit that description. See my email exchange with Darrell McLennan Fordyce, 23Capital's Global Chief Marketing Officer and Co-MD Sport, who gently put me right.
So, now I’m getting a bit closer to knowing what they do and who they do it for: 23Capital are essentially middlemen, sitting between the people who need money - e.g. a football team to fund a transfer fee, or a governing body to stay afloat - and those who can lend them it, or can give them money in return for some ownership of their business e.g. the infamous ‘equity stake'.
So what?
My favourite question. More specifically, what are the implications of where the money comes from? This seems particularly relevant now, we’re in the eye of the shitstorm.
The decisions made about where to borrow money - or who to give a chunk of your organisation’s future revenues to - are important, as they impact on real day to day life and shape the incentives of the people in charge of sport. This is true whether, say, your football club owner wants to sell to a petro-dictatorship, or the VC you sold a chunk of future media rights to wants to close off your league to make it less risky for their money.
See this as a dry run
Jason Traub gave some very good answers. And as I listened back during the edit, I thought of other questions, that in turn prompted thoughts about who else we could get on future episodes of the series - see round up at the bottom.
Here are a few of Jason’s quotes, with my attempts at interpretation.
Specialist v generalist
“Money is going to want to be more certain of risk. So you need groups who are able to convince big banks, asset managers, pension funds that the risk of sport per se - whether a football club or a platform* being built to deliver football to consumers (*this sounds like Otro btw, in which 23Capital has a stake), or a governing body, or individual players or athletes - you need someone who really understands those risks so they can inform the greater institutional market, or can raise money to help. That’s the approach we’re taking."
23Capital’s main argument is that they understand sport better than general banks and other lenders, so they can make a more powerful case. (Q. I assume such services exist in other sectors…or is sport special for some reason?)
Liquidity and price
This gets closer to the nitty gritty.
"There are still challenges around expectations of pricing. Just as in 2008, pricing has shot up. An example, for a risk that a bank or ourselves would have priced at 2-3%, if you think about a mortgage type cost of finance, rose overnight to the order of 10-12% for the same risk. That’s just a function of everyone going, I don’t know what’s happening, it feels terrible and we have no idea, so therefore we’re going to price in the worst case scenario.
There are buyers and sellers in every market however.
But, if you have that money to give, you start to play out the scenario in different ways. There are a world of actors within finance who say, ok 23Cap you’ve brought me an asset you price at 5%, actually I can go and find Ford stock, Marks and Spencer stock, Walmart stock, a senior secured debt and get 10%. So why am I going to try to make sense of this difficult, intangible asset called football, through this very uncertain period, when I’m going to run to the big investment grade opportunities because the likelihood is that Marks and Spencer are going to live through it, Boeing…maybe a good or bad example, but we know the government is going to step in to save these big investment groups, and I don’t need the headache and I need to move quickly.
Party like it's 2008
Are all crises the same or does this one have a different set of characteristics than the banking crash of the late noughties? Have the banks, regulators, lenders and borrowers learn anything useful beyond gaming the system?
“As in the financial crisis, banks will run to their core competencies. The regulators will really want to understand how they further manage risk in this new environment, which is going to put more pressure on the banks to be more certain about the risks they take. Liquidity dried up very quickly because those big companies that had arrangements in place with banks, such as overdrafts…well, the first thing that happened was they quickly pulled down as much money as they could because they realised they were in for some tough times and needed to get the cash in to the business. That sucks liquidity out of the big banking groups, and the numbers are huge.
Where do we go from here?
All of the above raises further questions, which we can use to shape guest and topic choices for the next episodes in the Money Talks series.
Here's a few to be going on with: What is the inherent financial value of sport? If much of it lies in intangible assets, how does the market calculate intangible value? When push comes to shove, i.e. now, are those methods really trusted by the people making investment and lending decisions?
This gets to other questions as to why 23Capital exists in the first place - put another way, what does the existence of 23Capital tell us about the relationship between sport and the money? They seem to be leveraging the ignorance and complacency of the big banks - ’sport is too small and/or complicated to take seriously so we're prepared to leave money on the table'. Or is it that actually the banks (a proxy for the broader financial money markets) have done their sums and worked out that the risk/return calculation for sport is flawed and they don’t want to touch it, and so borrowing for sport will always be expensive?
Need to talk to a generalist next I think. Your thoughts on guest choices for Money Talks are very welcome.
10 great sports documentaries you’ve never seen
Murray Barnett cleared his dvd cupboard. Freedom’s Fury is the perfect counter reference when boring people corner you at conferences - or Zoom calls - and start talking about The Last Dance.
What happens next?
James Toller and Rob Pope of Mallory Group came on the podcast to talk about their report, The New Normal for sports rights holders - get it here.
We hope you've enjoyed this week's newsletter. I'm sure some of your friends would love to read it. Sharing it would be really appreciated. If you've received this from a friend you can subscribe here and get it direct to your inbox every week.