New Zealand Rugby faces financial crunch: Silver Lake cash investment running out

New Zealand Rugby’s (NZR) financial health has taken a dramatic turn for the worse, with the national body having made high-level presentations to stakeholders late last year which showed it is losing so much money that it will have burned through its $200 million of Silver Lake cash by 2031.

These disastrous forecasts are being made because the transformational lift in revenue NZR projected to deliver once Silver Lake came on board as an equity partner in 2022 has not materialised.

It is also believed that the costs of winning new income through the company - New Zealand Rugby Commercial [NZRC] - that was formed to house NZR’s revenue-generating assets, are significantly higher than forecast.

The combination of lower-than-forecast revenues and higher-than-predicted costs - which includes a $10.5m per annum interest payment to Silver Lake - have led NZR to project a new financial scenario in which the reserves built from selling a 5.7 per cent equity stake in its commercial assets will be seriously depleted before there is a material lift in income.

The issue for NZR is that while it posted record revenue of $270m and has a $100m per annum broadcast deal locked in until the end of next year and high-value sponsorship agreements secured with Altrad and Ineos until 2027, its cost base materially changed when it sold equity to Silver Lake in 2022.

Of the initial $200m it received, $38m was invested in NZRC to fund revenue-generating initiatives, $10.5m per annum has to be paid to Silver Lake in interest, while agreement was reached with the provincial unions prior to the deal being struck to marginally increase their annual distribution to 17 per cent.

In selling the initial proposal to the provincial unions and the Māori Rugby Board, NZR forecast that it would generate an additional $76m in what it called New Business Initiatives.

But these revenue streams are unlikely to materialise, and while NZR and Silver Lake are both confident that NZRC can develop a strong business plan under new chief executive Craig Fenton - who began in the post a few weeks ago - they accept that revenue will take longer than forecast to meet those initial expectations.

And it is because of this significantly worse financial projection that the New Zealand Rugby Players’ Association (NZRPA) took out an injunction at the High Court late last year to stop NZR selling more equity.

NZRPA approved the transaction with Silver Lake on the grounds that the deal contained a separate provision for New Zealand mum and dad investors to buy up to $100m of equity in NZRC.

Silver Lake agreed to underwrite this second capital raise, which was supposed to take place in the second quarter of last year, guaranteeing to invest a minimum of $62.5m.

Dame Patsy Reddy: "It was just not possible to do an institutional placement." Photo / Photosport

NZR chair Dame Patsy Reddy says that 19 institutions were approached in May last year, but due to “the state of the market”, the relatively small size of the investment and the illiquidity of the fund, none wanted to commit.

When there was no prospect of institutional buy-in, NZR wanted to push ahead with the option of taking another $62.5m from Silver Lake - a further 1.79 per cent of NZRC’s equity - so it could set up a $60m Legacy Fund, which was an integral part of its sales pitch to provincial unions back in 2021 when it first proposed a private equity partnership.

“We tried hard and by about late May last year it was just not possible to do an institutional placement,” Reddy says.

“We went back to all the parties and said ‘we just can’t do this’ and are proposing to call on the underwrite.

“NZRPA said ‘hang on, we haven’t looked at other options’. Under the terms of the original deal, there weren’t any other options specified, although there was an undertaking to explore NZRPA participation either directly or indirectly in that syndication.”

NZR did listen to but rejected NZRPA’s proposal to launch an investment vehicle called Black Jersey Fund that would buy units in NZRC and would be open to retail buyers willing to put in a minimum stake of $2500, as well as local institutions and high net worth individuals.

When it was clear that there was a stalemate about the way forward, Silver Lake agreed to extend the deadline for the underwrite until the end of 2023 and NZR and NZRPA agreed that they would take the period between the end of the World Cup in late October to the December 31 deadline to determine the best way forward.

NZR appointed a steering committee, composed of NZRC chair Ian Narev, NZRPA chair and former All Black David Kirk, Silver Lake managing director and NZRC board director Simon Patterson and the highly respected fund manager Catherine Savage, to analyse what capital raising alternatives were viable in the short timeframe.

Reddy and NZRPA boss Rob Nichol both agree that none of the proposed capital-raising opportunities explored by the steering group could realistically be achieved by the end of the year, but the latter remains adamant that NZR did not need any more capital and hence it took out the injunction to stop the sale to Silver Lake.

That led to NZR and NZRPA entering mediation, at the end of which it was agreed the latter would lift the injunction and both parties would present to provincial unions and the Māori Rugby Board on December 18 to let them determine, via a straw poll, whether to take Silver Lake’s $62.5m or not.

The unions voted overwhelmingly in favour of selling to Silver Lake and Reddy says the NZR board approved this because the creation of the Legacy Fund had been a core promise.

“Raising funds for the Legacy Fund was a commitment the provincial unions insisted upon to do the [initial] deal,” says Reddy.

“From an NZR point of view, we felt we had both a contractual and moral commitment to the Legacy Fund and that was reinforced to us by our voting members.”

But while the transaction has been approved, the NZRPA remains convinced it was a poor decision to sell more equity and it has exposed NZR to unnecessarily high financial risk.

“What has become clear to us is that a lot of the assumptions that the Project Future plan and projections were based on have not been able to be relied upon,” says Nichol.

“What that means is that revenue growth does not come as quickly as initially promised by NZR and the cost of revenue growth looks like it is going to be more than projected, so the net result is that the distributions from the commercial business are not going to achieve, in the short-term, anywhere near the targets or projections that were pitched by NZR.

“NZRC does not need additional capital in the short-term. NZR does not need any more reserves at this stage. Thirdly, the reason for the sell-down is to invest in the Legacy Fund and we don’t think it makes sense.

“We said preserve operational revenue and don’t sell down unless you absolutely have to, because it is not the right thing to do at this stage. That was our view and that remains our view.”

Gregor Paul is one of New Zealand’s most respected rugby writers and columnists. He has won multiple awards for journalism and has written several books about sport.