HLONI THANKGE AND TREVASHAN PILLAY: Private equity and SA’s ‘family business’, the Springboks

The SA Rugby Union (Saru) has faced a mauling from the Springboks’ “family” of supporters over its proposed $75m private equity deal with US-based Ackerley Sports Group (ASG).

The deal, which would give ASG a 20% stake in SA Rugby’s commercial rights, was kicked into touch after sports minister Gayton McKenzie supported the request from provincial unions to delay the planned October 17 vote to allow consideration of alternatives. The vote is now set for Friday.

Springbok fans have expressed concern over the perceived sale of a national treasure, but Saru explained that this deal is intended to ensure there will be a Springbok team to defend their title at the 2027 World Cup in Australia.

Saru says the deal entails an investment for a minority shareholding in the commercial rights to SA Rugby’s activities in a newly created Commercial Rights Company (CRC), with SA Rugby as the majority shareholder. After taking extreme measures to survive Covid-19, Saru says there are “zero reserves” and “a similarly cataclysmic financial disaster would wipe out the sport as we know it in this country”.

The commercial activities of selling broadcast and sponsorship rights and running events would continue as before “only in partnership with a company with international experience who believe that our revenues are capable of meaningful increase”.

This alludes to an important feature of private equity: in addition to capital, private equity investors contribute experience, expertise, networks and support, much like a coaching team for the company’s next phase of growth. A key difference between engaging an adviser and having a private equity investor is ownership of outcomes, with shared upside and downside.

Much has been written about the metrics and (de)merits of this transaction. Questions have been raised about the valuation (deemed below comparable transactions, including the All Blacks’ investment), structure and control (Saru forgoing majority control in the sale of a minority stake).

Private equity entails fund managers raising funds from investors such as pension funds, development finance institutions, sovereign wealth funds and family offices, to buy and manage privately held assets. Once known for aggressive financial engineering using high debt levels, the industry has evolved to bring operational and strategic insight to enhance company value.

Indeed, having a seasoned investment partner sharing lessons learnt from other companies can be extremely valuable to companies looking to stretch themselves into new areas of growth.

Choosing the right partner requires marrying strategies and approaches with needs. For example, Sanari Capital invests in midmarket growth companies with regional or global scalability. We have an active approach to building businesses that are sustainable, scalable and saleable (3S). Using our 3S framework as a guide, we ask: what role can private equity play for Saru, beyond providing capital?

Making a business sustainable

The challenge with the Springboks is not lack of engagement, but the inability to capture the value created by the brand. However successful, sporting teams are often poorly managed. A strong foundation for growth requires the healthy basics of business — processes, systems, governance, finances and people management — which an experienced investor can support while the team “stick to their knitting” (or try-scoring).

A relevant example in our portfolio is Edulife Group, a family-run affordable schools group. Having a vision for expansion, the CEO sought to professionalise the business, building on its entrepreneurial roots while maintaining its social impact. Overhauling financial operations, bringing in professional management and formalising environmental, social and governance practices, the company has more than tripled in size since our investment in 2019, while keeping the children first in mind (the school’s ethos).

Similarly, Saru needs to improve its financial performance while accounting for developmental objectives and support for community rugby. While it makes sense to separate for-profit and nonprofit objectives, it is important to ensure that development costs are assured, and the shareholders should be aligned around balancing profit and social impact. This requires an appreciation of the social framework in SA, where transformation is not simply a compliance requirement but about meaningful change.

Making a business scalable

Understanding the growth drivers of a business is where a private equity firm’s functional and sectoral experience delivers. Partnering with a firm with experience in growing regional or national teams globally is attractive.

The local private equity industry is large and vibrant, but in the field of sports investments they have yet to score the points, with private investment in the Stormers, Bulls, Sharks and Lions franchises dominated by high-net-worth individuals. Over the past five to 10 years well-known global private equity firms have increasingly entered the sports sector worldwide, driving growth and higher valuation metrics.

More than two-thirds of National Basketball Association teams in the US and a third of European football clubs now have a private equity connection.

Well-networked private equity firms provide introductions, and experience helps prevent costly mistakes, in licence agreements for example. Strategy is not only about setting direction; many companies fail in the execution and some private equity firms are particularly strong with support here.

Making a business saleable

This is usually an emotional point for the founders we invest with. Private equity firms are required to sell usually five to seven years from investment. Capital must be returned for future opportunities.

There are not yet many examples of big sports industry investments reaching maturity. Of six well-known ones in which the private equity investor exited, all were reported as successes, with the experience of rights-holders (other owners of these sports agencies) being extremely positive.

We emphasise the importance of having a saleable business. A sign of success, it affords value to all stakeholders, irrespective of whether they want to sell. A limited investment horizon means private equity firms bring discipline and focus with the objective of leaving behind a thriving business.

The right partner

Due diligence into ASG should be thorough, as with any bidder. Challenges are inevitable, and the ability to face them together will determine success.

A well-regarded international investor with relevant expertise would bring credibility to the Springbok brand, which Saru aims to grow internationally. Complementing this with a local partner would help navigate cultural nuances and developmental objectives.

Extending ownership to include local private equity, and perhaps even giving South Africans access through a retail-type vehicle, would be ideal. This combination would meet various important objectives.

Private equity serves an important role in funding and supporting the growth and profitability of its portfolio companies. South Africans value the Springboks much the way families cherish their businesses.

The objectives should go beyond profit-maximisation. It is therefore right to interrogate all the options to ensure SA’s family business is well poised for further growth.

• Thankge and Pillay are investment analysts at Sanari Capital (and avid Springbok fans).