With sports salaries growing at a compound rate of 8 percent, and projected growth in assets under management of 30 percent at one bank, the sports and entertainment segment is appealing and potentially recession-proof. Will Cain looks at the strategies of some leading players.
Sports professionals and entertainers are known as a potentially lucrative community in wealth management because of the rapid growth in salaries in recent decades.
According to some estimates, salaries of sportspeople have grown at a compound rate of 8 percent a year for the last 40 years making it a fast-growing and virtually recession-proof segment.
“Generally, if you look at first division sports, they have weathered the recession incredibly well,” said Mark Pannes, head of the global sports group at HSBC Private Bank.
Television revenues, which make up a large part of sports club revenues, tend to be negotiated as multi-year deals. Ticket sales are 60 percent to 70 percent based around season ticket sales or debentures, meaning wild swings in revenue are generally rare.
“Commercial contracts tend to be linked to coincide with the TV deals so when the crisis started to hit, you realise it has to last three or four years for there to be a clawback on revenue,” added Pannes. “It’s not recession proof, but it is recession insulated.”
There are a number of onshore providers of wealth management services to the sports and entertainment segment and competition in this market is fierce.
Private banks, particularly in Europe and Asia, are seen to have the strongest advantage in working with international clients. In the UK, resident non-domiciled footballers are an important market, with around 420 of the 700 players in the league registered as such, according to Barclays Wealth estimates.
Standard Chartered set up a global sports practice in July last year to work on a target market of 600 athletes in Australia, New Zealand and South Africa with around $1 billion in assets under management.
Sports professionals, especially those that are internationally mobile, fall nicely under the purview of private banks because of their ability to operate across borders and offer tax, currency and offshore advisory services.
“If you look at athletes today you are seeing a growing trend in income, with athletes becoming more global” said Feroze Sukh, head of the global sports practice at Standard Chartered Private Bank.
“They are starting to play more internationally. There are various different streams of the game – cricket and the Indian Premier League is an example of how things are changing.”
Projections for potential growth in this market are rare, though SunTrust, which has operated in sports and entertainment for 20 years, is expecting 20 percent to 30 percent increases in assets under management, loans and deposits in 2010.
Key to this, according to Thomas Carroll, managing director of sports and entertainment banking at SunTrust, is the bank’s balance sheet.
The US-based bank, which has a retail, corporate and private banking offering, works with sports businesses on corporate financing, which opens up opportunities with wealthy clients.
On an individual level, it looks to acquire clients as they begin to emerge, often with products as simple as basic bank accounts or unsecured loans.
“We have many multi-Grammy Award winning artists who have perhaps tens of millions of dollars managed by SunTrust that may have started with a credit card or a bus loan,” Carroll said.
“It’s something small in the grand scheme of things that creates a loyalty to the bank that lasts over time.”
SunTrust has been active in the market for around 20 years, after it developed a strong client base of wealthy musicians in Nashville, Tennessee, and its links with the country music genre. At the recent Country Music Awards in Nashville, held in November, 80 percent of the winners were clients of SunTrust.
The bank also has an established motor sports offering. It counts 54 winners of the 101 races at the top three levels of Nascar among its clients.
Carroll plans to target actors in 2010 and is looking to acquire advisers in the Los Angeles area. He is also approaching independent production houses, intermediaries and business managers that have relationships with prospective clients.
“We have a good market share in a number of areas, but we have a 0 percent market share in film,” he said. “We expect that to change significantly in the coming years.”
Pannes said there were also spin-off opportunities to gain access to wealthy individuals not generally considered part of the sports and entertainment industry, but that derive much of their income from it.
He likened the business to a dartboard with a bulls-eye and two outer rings. There was a core of athletes in the public eye, which formed the bulls-eye.
Outside of that there was an “outer ring” of professionals that make most of their income from sport, for example the owner of a motor racing circuit, agents or club chief executives.
Beyond that is a web of people tangentially involved that still consider themselves to be part of the industry.
Pannes said his department targeted the inner ring of sportspeople, while those more loosely connected were referred from the sports practise to other parts of the private bank.
The most popular way to approach prospective sports and entertainment clients is through their management companies and agents, or through the acquisition of advisers or businesses in the market.
Standard Chartered Private Bank is actively approaching these organisations to get its sports practice off the ground in Asia.
It has a number of sporting ambassadors for the brand, including Australian cricketers Greg Chappell and Steve Waugh, rugby player Tim Horan and David Mitchell, a former football player and coach of Perth Glory.
HSBC Private Bank works with Steve Norton, a former Chelsea footballer and former managing director of Advantage International, a sports agency which was bought by Octagon. He is employed in a consultancy capacity. Andy Sutton, managing director and founder of a UK sports specialist IFA, Conforto, said these types of relationships were vital in this market.
“You ignore the advisers of sportspeople at your peril,” he added.
Pannes said targeting has become more professional in recent years. The bank has invested in better-quality research to identify prospective clients, but he said the process was still “more alchemy than science”.
The core group HSBC looks to work with is top-end athletes, but this approach needs to be blended with a focus on clients with upside potential.
In some cases, a member of the England under-19 team would be a more attractive target to the bank than a 33- year-old overseas footballer on a short contract earning £2 million to £3 million ($3.1 million to $4.6 million) a year.
“Sometimes, we would be happier taking a flier on a member of the under-19 squad, the England team, who might be making £50,000 per year because the upside potential is much more,” Pannes said.
Establishing relationships with player associations is also an important means of attracting potential clients. HSBC has an agreement with the Rugby Players’ Association (RPA), and has put around 130 players onto its Premier programme, a mass affluent service.
An adviser or two is assigned to each club, and some of the clients are passed through to the private bank.
“What we’ll find is typically we keep our sports clients/adviser ratio at 50:1 and our competition is at least double that,” added Pannes.
There have even been examples of sports management agencies setting up their own wealth management business – notably IMG, the world’s largest, which set up McCormack Advisors International in the US.
The business has struggled, however, changing ownership several times in the last 10 years. It was bought in 2000 by Merrill Lynch and sold back to IMG in 2002. The business is now in private hands and is run by Rick Buoncore. It has around $1.2 billion in assets under management.
Chris Aitken, a senior financial planning director at Rensburg Sheppards, a UK-based investment manager, said there was a perception in the industry that many of the players’ financial needs were handled through existing relationships between the players’ agent and a preferred adviser.
Aitken added it was difficult for more traditional businesses like Rensburg Sheppards, often associated with old money, to market themselves to a younger clientele.
“It’s a balancing act – we have a long-standing client base which we don’t want to alienate, but at the same time we’d like to attract a younger generation of sports stars and entertainers,” he said.
“We are sponsors of the Royal Liverpool Philharmonic Orchestra, which has been very positive exposure for us. But with the best will in the world, that’s unlikely to cut much ice with young celebrities or sports stars. We are trying to do something about that, by sponsoring sports events such as golf and cricket days.”
Part of the pitch to prospective clients at Barclays Wealth is creating the idea of a family office-type service, with the wealth manager bridging relationships between a client’s lawyer, accountant, agent and IFA, according to Paul Richardson, head of sports and entertainment at the bank.
Not everyone is impressed by the types of service provided by private bankers, however. Sutton, at Conforto, founded his business because he had been “underwhelmed” by the service he received as a wealthy rugby player.
He said the experience was impersonal and he felt there was not enough attention paid to individual circumstances. The idea behind Conforto was to do “the boring stuff” well, but also to provide a more proactive service, offering access to unique investment opportunities in private equity, property and offshore investments. Recent initiatives have included a focus on distressed property sales in the US.
Services and investments
As sports, media and entertainment is a broad segment, Barclays Wealth sub-segments its offering into sport, music and acting. Even within these, there is a wide variation of wealth management considerations, according to Richardson, and for the most part the general principles of financial management are applied to individual circumstances.
“For example, a motor racing driver will generally be on a fixed-term contract of three to five years and there are fixed earnings for them,” he said.
“Golfers are very much paid on performance and that in turn affects their rankings and drives their appearance fees and sponsorship revenue. If you are on a contracted cycle, we can plot what will happen over the next three years to five years, but the golfers are very much only as good as their last performance.”
In the early stages of careers, particularly in sport, there is generally a need for lending services, which is often where private banks have an advantage because of their balance sheets. Clients tend to have very strong cash flow, but are asset poor to start off with.
“You have to create lending products that are high LTV at the outset but with rapid amortisation linked to their cash flows,” said Pannes.
By their nature, sports professionals and entertainers are more willing to take on risk than the average wealth management client, and managing this desire is an important part of the financial planning process. Clients are typically young, successful and earning in some cases millions of pounds a year.
“They are highly competitive and also expect good returns, so it becomes imperative that you interact with them very differently to the way you would interact with a 60 year-old surgeon, for example,” said Sutton.
“The advice you provide clients by nature is quite different. Part of the challenge with any young person is to get them to understand the importance of the future.”
Insurance is perhaps the key product for sports professionals and entertainers, because it protects against career-threatening injuries and subsequent loss of earnings.
It is also important for banks in instances where money has been lent in the expectation of future cash flows, and is an important area of initial discussion between player and adviser.
“From an insurance perspective, it’s an opportunity to see if they have the right insurance in place,” said Steve Talboys at insurance broker Aon.
“Have they got the right type of insurance in place and would it trigger in the event of a claim?”
He said as well as looking at products that were the cheapest on the market, banks needed to consider whether the provider had a history of paying out in the event of injuries.
|UK and Europe|
|UK private banks missing a trick|
There are opportunities for private banks to gain a greater market share for sports professionals in the UK, according to Steve Talboys, who works with football clients at insurance broker Aon.
He said just three of the 370 footballers on his books had come through referrals from private banks. This, in part, is because players are often referred to insurance brokers by their agents before investment management or banking relationships are established.
It is still telling however, that Talboys, who counts 70 percent to 85 percent of the current England squad among his clients, says private banks “are missing a trick somewhere”.
Banks and independent financial advisers (IFA) spoken to by Private Banker International in the UK were unwilling to give market share figures. Conforto, a sports wealth management specialist in the IFA space, said its sports clients, who generally have investable assets of £250,000 or more, were “in the hundreds” following the recent acquisition of First Artist’s Optimal Wealth Management business.
One of the key areas private banks focus on are footballers in the UK’s Premier League. There are 600 to 700 players in the Premiership across 20 clubs, of which Barclays Wealth claims to have “a significant chunk”.
Within this niche, the most viable target market for private banks is expat non-domiciled players, usually from Europe, but also from Africa, Asia and South America. Cross-border banks have an advantage here over IFAs, because they are able to manage issues like foreign exchange and tax structuring across different countries.
The size of this market could be set to decline, however, following the introduction of a new 50 percent tax rate for high earners in the UK, which will affect top-earning sports people.
“On the wealth management side, the issue you have in the UK onshore market is that outside football you can’t get athletes to come here” said Mark Pannes, head of global sports and entertainment at HSBC Private Bank.
“And even within football, it’s a big issue right now because of the new tax regime. For us, it’s about steering and helping athletes structure wealth management.”
|North and South America|
|SunTrust sees 30% growth|
The US market for sports professionals and entertainers is probably the most advanced and lucrative for private banks.
Competition is fierce in the segment, but leading players such as SunTrust Private Bank are projecting growth rates of 20 percent to 30 percent in 2010 in deposits, loans and assets under management. This is driven in part by the favourable structure of the industry in the country.
Clubs in all of the main US team sports – basketball, American football, baseball and ice hockey – have the financial backing of their leagues if they get into financial difficulties. This allows private banks to become more involved in financing and corporate advisory services to sports and entertainment businesses, because the support of the league mitigates the club’s credit risk to the bank. SunTrust Private Bank is one bank to take advantage of this trend.
A May 2009 bankruptcy involving the Phoenix Coyotes ice hockey team saw the franchise purchased in November by the National Hockey League, which assumed the team’s losses since it filed for bankruptcy.
“On the credit side, we have taken a vertical approach to the industry so we are now serving film production companies, music publishing companies and sports franchisees, helping them with the capital and banking needs,” said Thomas Carroll, managing director, sports and entertainment banking at SunTrust. “We view that as an opportunity to expand our wealth business.”
Carroll said in one case, helping out with some financing and corporate advisory needs at one major sports club helped the private bank acquire the owner of that club as a client.
HSBC Private Bank in the US also participates in such deals, though does not pursue the same approach in other markets. The dynamics of the market in South America, which tends to be a net exporter of sports talent, particularly in football, mean international private banks have an opportunity to work with some of the brightest new talent.
Mark Pannes, head of the global sports group at HSBC Private Bank, said the bank’s global reach allowed it to help structure athletes affairs before they arrived at new clubs elsewhere in the world.
“South America tends to export and Europe tends to import, so you have to have a geographical reach to help a country like Brazil or Argentina structure the finances of the athletes they work with when they move,” he said “You structure their affairs so they have an onshore piece, an offshore piece and that they have their banking arrangements waiting for them when they arrive. Tax structuring is also important.”
|StanChart first mover in Asia sports market|
Though there are a few onshore sports wealth management programmes in the southern hemisphere, Standard Chartered has taken the lead on a pan-Asian basis in the region.
Last summer it launched a global sports practice which will initially target a core market of 600 sports professionals based primarily in Australia, New Zealand and South Africa, according to Feroze Sukh, the head of the business. He estimates these individuals to hold investable assets of around $1 billion, an average of around $1.7 million per account.
The sports practice piggybacks on StanChart’s Global Australian Executive service, which was launched in July 2007 in Asia, and now has 500 clients.
The Global Australian service is aimed at offshore high net worth Australian expatriates and includes tax and estate planning, risk protection, onshore mortgage services in Australia and offshore multi-currency mortgages.
“For the Australian community, for example, when you have a sports professional they will tend to have three key similarities to a corporate,” said Sukh. “They work in multiple currencies, have assets building in multiple jurisdictions and they have the need for cross-border advice because they may play across different countries – India, the UK, Australia, for example.
“We managed to put together an offering where we can manage some of their onshore needs, like Australian mortgages, property loans and a full currency offering. At the same time, we can give them a strong advisory capability for their offshore needs.”
In the future, StanChart’s sports practice will extend to other markets which are part of the bank’s footprint – for example, West African footballers and Indian cricketers playing overseas.