What Silver Lake means for community rugby: Short term reward comes with risks

Community rugby has arguably the most to gain from the Silver Lake deal, while being the area most at risk, writes Gregor Paul. Photo / Photosport

On Thursday, New Zealand Rugby is expected to sign off on a $200 million partnership with US investment firm Silver Lake. In the fourth instalment of a five-part series, Gregor Paul looks at what it means for community rugby.

Community rugby has arguably the most to gain if a deal with Silver Lake is approved, but so too is it potentially the area most at risk if things don't work out as planned once the US firm comes on board.

Provincial unions, Māori rugby, clubs and other stakeholders such as the Rugby Foundation will share $37m of the initial $200m Silver Lake investment.

The 14 major unions will be given $1m each; the Heartland unions $500,000 each and clubs a total of $7.5m ranging from a few thousand dollars to a maximum of $30,000 depending on how many members they have.

It's a significant windfall, particularly for the Heartland unions, but that initial sweetener will be surprisingly easy for the major provinces to burn through.

The more pressing question they have is whether Silver Lake can help New Zealand Rugby achieve long-term revenue growth which exceeds historic levels.

NZR say Silver Lake can generate new and lucrative revenue streams – mostly linked to digital technology – to create excess profit to invest in legacy initiatives that grow the sport at the grassroots.

The current financial model is not generating that excess capital and many provinces and community entities are in poor financial shape.

Silver Lake's $200m injection is an immediate means to alleviate balance sheet distress – plus it will put $60m into a legacy fund for grassroots initiatives - and their access to technological expertise to increase NZR's revenue, is potentially the long-term solution to ensure community rugby is sustainably funded.

These potential rewards are not without risk, however. Because Silver Lake – and local institutions - are taking an equity stake, total NZR income will need to increase by almost nine per cent in perpetuity just to off-set the impact of dilution.

In their independent assessment of the deal, major accountancy firm PriceWaterhouseCoopers noted: "Revenue growth is required with the transaction to avoid any adverse funding risk to the provincial unions."

Unquestionably, for the unions, this deal is all about the money. Silver Lake have no capability to run grassroots rugby: no understanding of it, no ideas how to fix it.

Silver Lake's impact will be at the professional level: attempting to generate more money there that flows back to the community game.

A NZ Rugby press conference at Ponsonby Rugby Club last year. Photo / Photosport

To support the deal, the provinces must take a leap of faith that Silver Lake have a strategic business plan that can produce enough new money to off-set their dividend.

And it is a leap of faith, because Silver Lake have not produced this comprehensive plan and their ability to transform NZR's revenue profile is being taken on trust based on their wider, successful investment record.

The only detail to emerge is in the PWC report, which says that Silver Lake hope to produce an accumulated, additional $76m over the next five years through new business initiatives such as selling All Blacks leadership programmes, virtual signage, esports, an OTT broadcast application and e-commerce and merchandise.

There is no real way of assessing whether these forecasts are hugely ambitious or conservative.

There is also, a second, equally relevant issue for the unions to consider. They have to ask whether, even if Silver Lake exceed all their investment targets and flood the game with cash, will it enable them to fix the most pervading problems that impact the community game?

"We know the issues," says NZR chief executive Mark Robinson. "Broadly they are associated with participation drop off in teenage rugby, safety, engagement, coach and volunteer resourcing.

"We have to be more focused on what the participant wants and crafting a game that they want.

"Be more conscious of game formats when they train, what their coaching is like, what their competition is like, what changing rooms and clubrooms are like.

"They are the challenges we face and the solutions we hope in part can come from greater resourcing of these organisations."

Auckland Rugby chairman Stuart Mather believes that money will be an enabler, up to a point.

It will provide the certainty to invest in more development personnel to connect with more schools and find and nurture more players.

But he wants to see NZR demand that unions produce detailed strategic plans about how they use future funding to ensure it is channelled into smart initiatives like the nationwide under-85kg tournament which has proven to be a massive success.

Provincial rugby has not suffered so much from a lack of funding over the years, but from a lack of strategic planning and investment in the right areas.

Mather says money is helpful, but it can't be a substitute for innovate thinking or that anyone should think the community game can be transformed by an influx of cash alone.

The immediate cash injection that will come from Silver Lake is tempting, but the reality as many provincial executives are aware, is that the short-term reward comes with long-term risks.

Tomorrow: The potential red flags in NZ Rugby's Silver Lake deal