We started Money Talks because I don’t really understand finance and never have. Given this context, I could copy and paste 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 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 I understand.
The first guest is Jason Traub, co-founder of 23Capital, which 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: They're middlemen, 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?
This is a good question, and I'll keep asking it. 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 (cue shit/fan gif).
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
I found my interview with Jason Traub really interesting first time round. But then, as I listened back during the edit, I kept thinking of other questions I wished I'd asked, or that prompted thoughts about who else we could get on the show for future episodes - see round up at the bottom.
The obvious Covid question
At 35:45 I get around to asking the Covid question: where does 23Capital get the money from now?
There are a few bits to the answer, here’s Jason’s quote and my reading of it.
Specialist v generalist
“We see the challenge you allude to. We have been a broader beast across sports and entertainment world, but we see an immediate need from sport now that is probably going to align to our absolute focus” So, sport needs cash and 23Capital understand sport more than general banks and other lenders. So they can make a case better.
Liquidity and price
"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.
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
“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.
Flight to safety. (Subtext: sport isn’t safe and therefore has to pay through the nose?)
“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."
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? Are they leveraging the ignorance and complacency of the big banks - ’sport is too small and/or complicated to take seriously so we'll 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.