Sunday, July 20, 2008

Investing in sporting talent

Have you ever wondered why venture funds and corporate groups do not invest in cricketing talent in India? In an age where money managers are constantly scanning the market for every imaginable money making opportunity, how could they have missed one of the biggest money making opportunities?

Consider this. Here is Batboy, an 8 year old with a precocious talent for scoring big runs, and currently making waves in the local school cricket league in Jharkhand. But Batboy comes from a poor family and his family has to struggle to ensure that Batboy's promising career is taken forward. There are times when Batboy almost gives up the game, as the trade-off between cricket and studies appeared to have tilted in favor of studies. But Batboy is one of the luckier ones and manages to struggle his way to the top and ten years down the line gets selected to play for India. Under Indian colours, Batboy becomes an instant hit, and is soon heralded as the new Sachin Tendulkar. Corporate endorsements and millions of rupees follow suit.

Given the huge popularity of cricket in India, the massive money involved in it, and the recent emergence of platforms like the IPL, it does not require a Sachin Tendulkar to make any reasonable investment look like a windfall. Further, the early age at which cricketers get to don the national colours in India, reduces the probability of failed investments. In any case, the commercial stakes involved in the game makes cricketing talent investments a very profitable one, even with a high failure rate. With the game expanding beyond the traditional bastions of the game, to even the remote and interior villages, the opportunities for massive profits increases.

Brazilian corporates appear to have realized the opportunities available and are investing in footballing talent. The modus operandi is something like this. Buy contracts of young talented soccer players, using the company's own money and that raised from investors. These players are then leased out to Brazilian football clubs, who pay them a salary and provides a platform to showcase their talents. If they perform well and get recruited by a European or another Brazilian club, the contract holder gets a large share of the transfer fee. The player gets his signing fee and hefty salary. Last year, 1085 Brazilian players were transferred to places as diverse as Vietnam, Qatar and the Faroe Islands, according to the Brazilian Football Confederation.

Julio Mariz, the President of one of the largest such firms, Traffic, is spot on when he claims, "Instead of investing in the stock market or real estate, these people are investing in buying the economic rights to football players." Traffic pays dividends every six months, raised from player trades. When a player is traded, investors split the transfer fee with clubs, according to their ownership percentages.

Several funds like Traffic have sprung up over the last year, and some major Brazilian companies — including supermarket chains (like Grupo Sonda) — are creating football departments to invest in young players they hope will one day send European clubs reaching for their checkbooks. Grupo Sonda has been investing over $10 million a year and growing fast, and has been providing returns in excess of 150%.

Brazilian clubs embrace the new investor model because the clubs get to raise cash without having to trade their players as quickly or as often. They can loan the players from the individual investors or funds, who hold a share in the player's value. And when they do, inevitably, trade the players, the huge sums, as much as $50 million, guarantee the clubs’ survival. It is good for fledgling players from poorer backgrounds who struggle to get access to good training and other facilities, and a platform to showcase their talents.

But there are also problems associated with such models. The NYT writes, "Investors could be tempted to sell a player as soon as his value increases, robbing the team of a key figure at a vital moment. If funds control players on opposing teams, there is the appearance of conflict of interest. And many supporters fear that people with no emotional attachment to a club might exert too much control". Then there is the danger of exploitation of players, especially with contracts that seek to capture a share of all the future revenue streams associated with a player.

The day is not far when the Indian fund managers will be getting into the business of scouting out and buying contract rights for Batboys and Spinboys. How about a Dhoni inspired Jharkhand Cricketing Talent Fund?

Update 1 (19/11/2010)

NYT reports of investors from the United States investing in Latin American up-and-coming baseball players, some as young as 13 and many from impoverished families. They expect to subsequently sell these players to major league teams for multimillion-dollar contracts.

1 comment:

Unknown said...

How can I get a hold of Julio Mariz, Traffic's president to invest. This is a real question. Please let me know