The days of sports properties being beholden to banks as the sole provider of a loan – be it to build a new stand or to finance an overseas tour – are long gone.
Sports teams and rights-holders are today presented with a panoply of funding mechanisms to help raise money: issuing of mini-bonds, shares and other crowdfunding initiatives; financing against commercial rights; and insurance-backed loans are all competing against the high-street banks.
If that wasn’t enough choice for finance directors, cryptocurrency is on the horizon, with one sports finance expert saying conversations about possible digital currency-financed loans are already happening.
While lending from banks remains a cornerstone of the market, sports properties are increasingly taking up some of these alternative options; partly because the banks don’t have the wherewithal or are withdrawing from lending and partly because sports properties believe alternative forms of financing offer more benefits.
Trevor Watkins, global head of sport at law firm Pinsent Masons, says: “The sport industry is no different to any other industry. There is a demand for financing for various purposes, whether it be debt, cash-flow management or specific projects like building a stadium.
“Generally speaking, they [high-street banks] won’t be adept enough or able to go for more esoteric forms of finance.”
The Jockey Club
The mini-bond has become an increasingly popular mechanism for clubs seeking alternative sources of financing in recent years, with these types of bonds issued in cricket, football and racing.
Mini-bonds, unlike other types of bonds such as corporate and retail bonds, allow investors to invest a small amount of money, sometimes as little as £1,000.
Investors earn interest as with any other bond, but the fact that sports mini-bonds are often aimed at fans is reflected in the additional rewards some offer, such as reduced season ticket prices or cheaper food and drink on match days.
Rates on mini-bonds are typically issued at a competitive rate to interest rates offered by banks and building societies.
But they are riskier than retail bonds because they can’t be traded in the secondary market while, like all bonds, should the issuer go bust, then the bondholders could lose their money.
The Jockey Club issued a £25m, five-year mini-bond in 2013 to help finance a new stand at Cheltenham racecourse – the first time one of these instruments had been used in British sport.
The Jockey Club group finance director Nevin Truesdale says: “We did not see it as a big risk. We looked at a number of options because historically we had been very reliant on the bank for financing.
“It really changed the game in terms of our relationship with our banks. We have a very long existing relationship with our bank syndicate. But for them to be able to look at us and say that these guys are not completely beholden to us has been hugely successful for us.”
One key advantage of the mini-bond, says Truesdale, is that it does not require the use of assets as security like bank financing, so it can be used to avoid the risk of repossession, or as bonus funding on top of other asset-backed financing.
And in this case, it helped forge a closer relationship with horse-racing fans.
“We have been clear in our minds that it has given a huge benefit to our business, in terms of our profile and engaging over 2,000 people, who have been made to feel almost like insiders,” adds Truesdale.
Research found that almost all the bondholders were racing fans, who were attracted by a loyalty scheme – as well as the 4.75-per-cent interest rate – that gave them discounts on tickets and as well as food and beverages at the club’s racecourses.
Robert Wardrop, who runs a unit studying alternative finance at Cambridge’s Judge Business School, says: “An important outcome for the Jockey Club is that it has changed the psychological relationship with the fans. They have new experiences and they now want more.”
Last week, the Jockey Club announced that a majority of investors had chosen to extend the bond beyond its five-year period.
Hertha Berlin
German top-flight football club Hertha Berlin launched a five-year mini-bond in 2004. It sought £6m from fans to help restructure its youth academy training grounds.
Chief financial officer Ingo Schiller says: “We were quite inventive bringing new instruments to market. We were the first German club to issue a bond in 2004. It strengthens the involvement of the fans. It gave us the names and contact details of the subscribers of the bond so we could communicate with them. A lot of other clubs followed us in Germany.”
Like the Jockey Club, Schiller says a key driver in issuing the bond was that the club did not have to offer up any assets as security. Hamburg and Cologne are amongst a number of other German clubs have followed suit in issuing mini-bonds.
Last year, Hertha Berlin underscored its faith in crowdfunding by issuing another bond via German online marketplace Kapilendo.
Others to have issued mini-bonds include Lancashire County Cricket Club, which raised £3m, and Wasps rugby club, which sold out a £35m retail bond offer in a few days.
The financial middleman
Italy and Chelsea legend Gianluca Vialli believes fan funding will the norm for football clubs within ten years.
Vialli has put his money where is mouth is and helped set up Tifosy, an online financial intermediary focused on crowdfunding for football clubs.
Co-founder and chief executive Fausto Zanetton, a former investment banker with Goldman Sachs and Morgan Stanley, explains that Tifosy helps football clubs on two fronts: with financing and fan engagement.
Zanetton says: “Crowdfunding regardless of the football industry is a mechanic that is being used more and more by companies, both smaller and increasingly larger companies.
“The rationale when we started the company is you have all these sports clubs that have an incredible digital reach, and fans that are very passionate about the clubs. And have all these people at the fingertips.
“What if you were actually presented with an investment opportunity where people could deploy capital and put it into their club and give them a return?”
To date, Tifosy has raised £600,000 in just six weeks for a new stand at Stevenage FC, £270,000 to give Portsmouth’s academy a permanent base, and £150,000 for Italian football club Parma, to create the ‘Crociato’ Museum to house the club’s trophies and memorabilia after it went bust.
In return for their investment, fans are offered rewards, bonds or even equity in a club. Tifosy, in turn, takes between 6- and 8-per-cent commission from the clubs.
Business is booming, says Zanetton, who says Tifosy is now working with a Champions League club, which is using crowdfunding not out of financial need but because it believes giving fans a financial stake in the club will help foster closer relations between them and the club’s ownership.
Tifosy has a Financial Conduct Authority licence to operate in the UK and Italy and is now hoping to extend its operations further into Europe and beyond, as well as extending its remit beyond football to Formula One, cricket and rugby.
Finance secured against media rights and sponsorship
Mini-bonds are not for everyone, says Richard Price, the founder of sports sector financial adviser New Century Finance, who argues that mini-bonds are effective for raising money for capital projects but not filling cashflow gaps.
NCF has raised over £500m in 16 years and specialises in funding football clubs and other sports entities, offering finance against future income, whether that be future broadcasting revenues, season tickets, sponsorship stadium naming rights, even income from catering contracts.
Despite the riches of the Premier League, many of the teams outside the top six borrow money against future income to, for example, pay for a player transfer.
“The biggest deals are going to be in the Premier League and they are going to be advancing against the media rights, mainly because the value of those media rights are significant,” says Watkins.
A typical deal would involve a Premier League club borrowing tens of millions through a financial intermediary and offering up future TV money as security which it would pay back in two chunks.
These deals go through financial middlemen, as “banks generally don’t like football clubs. They always perceived them as high risk,” says Price.
Cryptocurrency
Bitcoin and other cryptocurrencies have been heralded as the future of banking and other industries, and it seems sport may be no different.
While still an embryonic industry, which would need to step over significant regulatory hurdles to be approved, Watkins believes there is a determination for digital currencies to succeed in sport.
“Could you buy and sell a football clubs using cryptocurrency? Could you operate the transfer market using cryptocurrency? We are having those conversations with clients on an international basis,” says Watkins.
“There is a determination for it to be a piece of the market. It’s like digital replacement advertising which has been going around for the last five to ten years, but it’s still as yet not perfected.”
According to Michael Broughton, partner at Sports Investment Partners, the technology behind digital currencies could be a good fit for certain aspects of football.
He says: “There are lots of things within sports that can be operated on the blockchain, such as ticketing for example or player medical records.
“If you want to stop any brown envelopes doing player transfers, then the block chain where it can be verified what is being paid, I can see that happening down the line.
“It’s early days, I don’t think we are going to see it for a number of years, but you will start to see it.”
As the river of money flowing into top sport grows ever wider, it’s inevitable that more complex financial products will follow.