Tech investor Silver Lake aims to help unprofitable NZ Rugby go digital

Thursday, 17 February 2022

Tech specialist Silver Lake is investing in New Zealand Rugby, offering the unprofitable sporting body its digital expertise to grow revenues off the iconic brand.

EXPLAINER: Playing the long game and holding out for a better deal from outside investors looks to have worked for rugby players.

NZ Rugby and the NZ Rugby Players’ Association have agreed a deal where Silicon Valley-based private equity firm Silver Lake invests in the commercial arm of the organisation, alongside local institutional investors, to grow its revenue for the benefit of all.

The deal gives Silver Lake a smaller stake in a more valuable company than the previous proposal that was rejected by players. The deal also allows for local investment alongside Silver Lake, which was a sore point of the last offer.

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How did we get here?

New Zealand Rugby has been losing money. It posted a $34.6 million loss in 2020 as the Covid-19 global pandemic restricted the rugby playing calendar and therefore the amount of revenue it could pull in. That hurt the amount of funding that it could provide to provincial unions to support the game at ground roots level. It has reported losses for five of the past six years. We don’t yet know the results of the 2021 year, as the annual report is usually released at NZ Rugby’s annual meeting in April.

To improve its finances, keep its players and support the game, NZ Rugby wants to bring in more revenue. The All Blacks are a top notch brand, with an impressive legacy, but like many sporting codes, rugby has been grappling with how to best monetize its brand.

How will Silver Lake help?

Enter Silver Lake. It is a global technology investment firm, with more than US$90 billion (NZ$132b) in assets under management with a portfolio of companies which generate more than US$227b of annual revenue.

Private equity firms generally invest in companies where they can see an opportunity to bring their skills and expertise to the table to make some money for their backers, which in Silver Lake’s case are institutional investors and massive pension funds.

Silver Lake’s ideal target company has a leading position in its market, a competitively advantaged business model, a strong management team, proprietary core technologies, sound business processes, and the potential for transformational value creation.

Its other big global sports-related investments include the mixed martial arts promoter Ultimate Fighting Championship (UFC), football club owner City Football Group, sports and entertainment company Endeavour, online licensed sports apparel retailer Fanatics, and New York indoor arena Madison Square Garden.

Silver Lake is betting it can use its digital technology expertise and connections to generate more revenue for NZ Rugby by helping it with areas such as data analytics to identify its fans, and then engage with them by creating content across different platforms. It’s an area that sports codes have struggled with globally amid rapid technological change that has disrupted the media industry.

Private equity firms have a reputation for exiting their investments after turning them around, so they can focus their skills and expertise on a new target, but building NZ Rugby’s digital capability is likely to take some time. Under the deal, Silver Lake would have to hold its investment for a minimum of five years, and there are exit provisions built in around process and consent rights for NZ Rugby.

What about the money?

The deal would see Silver Lake invest $200m in a new commercial entity that would hold all the revenue-generating assets of NZ Rugby, valued at $3.5b. New Zealand-based institutional investors will be able to invest as much as $100m in addition to this later this year, allowing locals to share in the growth of the game, with Silver Lake able to take up any shortfall. Depending on institutional take-up of that offer, Silver Lake would end up owning between 5.71 per cent and 8.58 per cent of the commercial entity.

Simplicity managing director Sam Stubbs said he hasn’t looked at the proposal, but he would if approached and expects other KiwiSaver managers would too.

“KiwiSaver managers invest almost $90 billion combined, so the right opportunity might be attractive, and affordable. But the devil is on the detail,” he said.

Castle Point Funds Management co-founder Stephen Bennie said he would certainly take a look at the proposed additional capital raise.

“It will be very interesting to see in more detail the strategic plans that NZR and Silver Lake have been working on,” he said. “Our business is more focused on listed equities so it will also be important for us to understand the potential for an NZX listing.”

Bennie said the tech investor was an interesting partner for NZ Rugby to bring on board.

“While the All Blacks are a heck of a global brand they are not remotely ‘technology’. However as we all know from streaming on our smartphones, content is key. The other aspect that will doubtless appeal is valuable brand endorsement and Silver Lake will have big plans on that front too.”

But Bennie questioned the $3.5b value.

“That looks pretty expensive in the context of an entity that currently doesn’t make a profit. However in the context of an iconic global brand you could consider it peanuts,” he said. “Time will tell which one of those is the correct assessment but I suspect Silver Lake will help unlock the global brand value, clearly they are highly incentivised to do so.”

Nikko Asset Management head of equities Stuart Williams said that while he hasn’t considered the proposal, he believes NZ Rugby should be applauded for seeking ways to broaden the monetization of their product.

ANZ portfolio manager Craig Brown noted there wasn’t much information available on the potential investment, but said he was always keen to have a look at any new opportunity.