Mandating 8% Capital Reserves for Sports and Live Entertainment
This week John Persico reflected on the sad financial impacts of coronavirus on the world of Sports and Entertainment for 2020 and beyond.
Among the perplexing issues has been Sports Leagues and Entertainment organizers and their raising of Debt Capital. Whilst some organizations were strategically clever and secured physical assets (like the AFL), other sports administrators raided their “Future Funds”, and as such had diminished financial capital or collateral to help borrowing. Specialist funders like Macquarie Bank and 23 Capital have played important roles of debt facilitated markets for Sports and Entertainment, whereas central organisations like FIFA play the “industry bank” as it carefully deploys $2.7b cash reserve to support the football ecosystem . Debt can be an important tool to creating and growing value, especially with low interest rates. Debts incurred this year will be paid back over the next decade, and in some cases, for the next generation. However, are there better governance and risk management ways we can help the supply chain of Sports Leagues and Live Entertainment organizers become more financially protected and avoid the current “bullwhip” effect that has so significantly impacted those like players, artists, suppliers, venues, broadcasters, grassroots communities and global fans? It seems irresponsible at a time like this not to ask this difficult question.
Should Sports Leagues and Teams need a mandatory “Emergency Fund”?
One solution I’d like to see international policy makers explore is the potential for the Future of Sports and Entertainment to include a mandatory baseline level of cash reserves, like Capital Adequacy Requirements for Sports and Live Entertainment. It would require major organizations to have a risk-adjusted level of capital (say 8%) set aside for a rainy day to ensure the sports and entertainment industry has the funds available. Just like any household and family, industry leaders should try to have savings and capital reserve for emergencies like coronavirus 2020 since so many millions of jobs and livelihoods have been impacted.
What is a Capital Adequacy Requirement?
For those familiar with the world of Banking and Financial Services, capital requirements have been around since the early 1980s in various ways across the world.
“A capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity as a percentage of risk-weighted assets. The capital-to-risk-weighted-assets ratio promotes financial stability and efficiency in economic systems throughout the world.”
Within the Sports, Media and Entertainment industry it might be productive to do something similar. Perhaps a figure of 8% of total annual memberships, sponsorships, advertising fees or some hybrid risk-weighted metric of their assets that promotes financial stability of the industry worldwide. Broadcasters, Federations, Leagues, NSOs, Stadiums & Live Major Events & Concerts might all benefit from the stability such global regulation could provide.
Is 8% a good target for cash reserve ratio for Sports and Entertainment?
Hard to say without further rigorous analysis, but 8% could be a good start. An 8% capital adequacy risk-weighted requirement would provide some more certainty and standardised stability across the board. When you look to the well-accepted description of the role and responsibilities of International Sports Federations (see below) there are a lot of financial obligations and external parties that make the Sports and Entertainment ecosystem work seamlessly. Unlike the world of Finance and Banking, one major difference is that Sports and Entertainment are “co-created assets”, often with hundreds of external parties helping to making them possible and arguably making a capital adequacy requirement even more important (e.g. merchandise, ticketing, facilities maintenance, grass, lighting, sporting goods, cleaners, food and beverage, hospitality, journalists, etc). Conceptually it would seem that capital Adequacy requirements should be implemented at the elite level where there are larger dollars, larger risks and larger audiences and doesn’t need to extend to community sport.
My final thoughts
Billions of households and families are struggling around the world right now in the midst of the coronavirus. Future governance steps need to ensure that the world’s Sports and Entertainment industries are more financially robust and sustainable. The clear lack of “rainy day” preparations has had a profoundly negative impact on millions of industry jobs and external stakeholders despite the efforts of Governments. The future risk management issue is too big to ignore. My recommendation is that Sports and Entertainment international bodies work together to create and adopt financial and risk management capital reserve requirements like what has occurred in the Financial Services and Banking industry for over 30 years. Saving entails sacrifice; maybe that’s why it brings rewards!
John Persico is a Director of the Sports Tech World Series, the world’s largest community for Sports Technology professionals.