UP400 Other People's Money - What happens when P/E owns you?

This is the second episode of Other People’s Money, our regular deep dive in to the world sports investment, with my regular co-host Matt Rogan, one of the co-founders of Two Circles and a serial adviser to sports organisations. 

Today the conversation is about private equity. We went to the Victoria offices of Phoenix Capital to talk to Tim Dunn, a partner in the firm. Tim and the company have no interest in sports as an asset class and that’s why we wanted his opinion. It’s an opportunity to look through the eyes of a private equity expert whose view is not coloured by skin in the game. So we talk about how they value businesses, what they look for in management teams, the red flags that can wreck an investment and the question of what happens at the end of the relationship?

Unofficial Partner is the leading podcast for the business of sport. A mix of entertaining and thought provoking conversations with a who's who of the global industry.
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Transcript

Richard Gillis UP: 0:00

Hello, and welcome to another episode of Unofficial Partner, the sports business podcast. I'm Richard Killis. This is part of our series called other people's money is a regular deep dive into the world of sports investment with cohost Matt Rogan, one of the co-founders of. Two circles and a serial adviser to sports organizations today, the conversation is about private equity. We went to the London, Victoria offices of Phoenix capital to talk to Tim Donner partner in the firm. Tim and the company have no interest in sport as an asset class. And that's why. We wanted his opinion. It's an opportunity to look through the eyes of a private equity expert whose view is not colored by a skin in the game. So we talk about how they value a business, what they look for in management teams, the red flags that can wreck an investment from the word go. And the question of what happens at the end

Tim Dunn: 0:53

I think the real skill is not to try to pretend. That you are knowledgeable in areas that you're not. And that's important for the, for the team as well as for the PE backer. Can

Richard Gillis UP: 1:03

Unofficial Partner is the leading podcast for the business of sport. And you can join our community of tens of thousands of people. By signing up to our weekly newsletter on sub stack, which goes out every Thursday. Or find us in the usual places, LinkedIn, Twitter, Tik, TOK, and Instagram on Unofficial Partner. Tell us a little bit about The job and the business. Want to just put us, put you in context.

Tim Dunn: 1:31

I mean, private equity overall is a ginormous global industry, growing at 20 percent a year. a partner at Phoenix and to give a bit of color on that, we are very much at the smaller end of the market. We manage funds of about 400 million pounds at any one time. We're doing two or three deals a year. We'll talk about trends. No doubt later on, but I would say the trend in the industry is becoming more and more specialization, both vertical specialization but also um, methodologies and so on, and our particular focus is working with founder entrepreneurs who've built their own business and still run it today, and are normally the major shareholder, and are looking to go through a transition where they stay with the business, But they do risk themselves a bit and in doing so open themselves up to a lot of opportunities, which they maybe haven't been able to take advantage of before, if that makes sense.

Richard Gillis UP: 2:31

Yeah, no, that's really interesting. So I'm going to come back to you on the methodology bit, which I think is interesting. I haven't thought about that. Give us a case study of what the business does.

Tim Dunn: 2:39

I'm. Typically working with two or three companies at any one time, and we're typically invested in 15 overall and on the board of two or three. So, if I pick my two, because I know them best I'm on the board of a cyber security business called Logic. It's 140 person business providing Cyber secure, highly security cleared cybersecurity advice mainly to the defense sector. So public sector oriented set up by four founders set up seven years ago now. And they were looking for a way to get from 120 people to 350 people. And although they were brilliant cybersecurity engineers, they were not clear on how to scale the business and triple it in size because. You're getting to the stage where you don't know everyone's name anymore and therefore you need structures in place to make it happen. And that is common to so many of the stories that we're backing. And it's an area where there's a lot of commonality between different companies and different sectors. And we can help them a lot with that. So we've invested a year ago All the four founders took out a bit of money, de risked we're helping them grow the business faster, we've hired lots of new people, we've restructured the organisation to make it a little bit more scalable we're still growing quickly and we're doing a lot of things that we didn't do before. So that would be a very typical, and we're now a year in, so that would be a very typical story for us.

Richard Gillis UP: 4:11

Matt, you mentioned last time when we had our sort of set up episode about the jobs that sports organizations usually need or want, and one of them is that growth thing. And we're talking, I think, probably on the agency side more than maybe on, you know, elsewhere. But the plumbing, as I always call it, there is a few that I can think of that are now looking to do exactly that, aren't they? They're to go from a number to a bigger number. So either, whether that's defined by people or money or.

Matt Rogan: 4:42

Yeah, definitely. Definitely that 120 odd people number resonates with me in terms of what you do for sort of, you haven't necessarily even interviewed everybody yourselves. You've got other people start doing that and the process and the discipline and the structures and all those kinds of things that I remember us needing to get to the next stage at Two Circles. are not things that necessarily come easily to entrepreneurs who really like looking at the top line of revenue and deals and all the exciting stuff and the freedom of governance and all the things why you set a business up in the first place. And it's the enlightened ones, I guess, who, who kind of recognize the skills they need, but don't have, which I'm imagining is why you find yourself. Knock you on Tim's door to have a conversation.

Richard Gillis UP: 5:25

Yeah, because it's sort of, I'm wondering what the risk is at that point. So 120 people, I completely get what you mean about, I know everyone virtually. I don't know all their names, but if I'm the CEO, if it feels I can handle that number. But then it gets to it. What are the worries and what are the risks at that point of a business's development?

Tim Dunn: 5:46

Well, we'll come on to some of the practical stuff. Personally, I would say the biggest risk is that you've got all of your wealth as typically as a founder entrepreneur, you've got the vast majority of your net wealth tied up in illiquid shares in your business and you're also working an 18 hour day to make sure that that Wealth continues to increase in value and there's lots of other personal stuff tied up in that as there is with all of our jobs. But what I think drives people and unleashes value through a transaction with a backer like you know, the smaller end of the private equity spectrum there is a de risking event which lets you think much more objectively. About the future of the business. And it's that personal risk that a lot, stops a lot of people from doing what everyone Knows objectively they should be doing once an organization gets to a certain size, which is hiring a dedicated finance director or CFO, which is really expensive. But when it's your money, you think, well maybe I can carry on going along with the part time financial controller. Hiring a people manager who does things professionally rather than you dealing, relying on your own personal relationships and putting proper systems and processes in so that, You're not any more relying on having late nights in, in the office eating pizza with your colleagues, but you're able to see who's working too hard, who's not, and take some of the difficult decisions that you need to make when you've got a workforce that size.

Richard Gillis UP: 7:20

And presumably the scary bit there is that those people aren't bringing money in. Most of those people sound like costs to me. They're saving money, or, but they're, if I'm an entrepreneur, I want to do it. I've been focused on getting the money in the door.

Tim Dunn: 7:33

And one of the tensions through, I'm sure we'll come on to talk about how people think about going through deals. One of the tensions through deals is that people tend to view a transaction with private equity capital very much as trying to get the best terms at a point in time. Whereas I think if you talk to most people in the industry, Matt will have a view on this as well having gone through it. We would say you're likely to end up doing two or three of these events with different types of backers. And generally speaking, every time you go through it, you get more relaxed and you make more money out of it. And therefore don't view it as a once in time event. And if you need to put in money to, for support functions to make your life easier, you should do it.

Matt Rogan: 8:16

Yeah. I think if we were fortunate in that we had Claire as our CFO. So my wife's a CFO and she was really really concrete with us in terms of saying, you know, build a good business and then you'll find a good investor. And if that means you spend on things that aren't driving a top line, but helping a bottom line and the five year sustainability of the business, do it. And that's, it's easy to say even if you're married to the chief exec, it's easy to say, but, but the But it's like a sitcom, isn't it? Yeah. It was at times. Yeah, it was at times and it was at home, which is one of the reasons we did feel we needed to de risk a bit because it was the first thing we think about in the morning and the last thing we talked about at night. But there's definitely a piece of that in terms of the personal circumstances, which is saying like this, the pace with which this is moving is taken us by surprise. It's great. And we can, you know, we can take a dividend at the end of the year. But actually we think we need somebody to lead on the people at the operational side. We just need more people in it to deliver really good work for clients. We're going to spend on that rather than take the money out ourselves. And the bigger the business gets, the bigger those decisions get, and your mortgage is still on the line. And at some point you think, okay, we need help operationally, we need help strategically, but we also, we have to de risk this. We've thrown our lives into this, and at some point

Richard Gillis UP: 9:42

we

Matt Rogan: 9:42

have to see some recompense.

Richard Gillis UP: 9:43

When you walk in the door of a sports agency or a marketing agency And this is, this bit of the conversation is quite relevant to that, you know, that, that world. What are the, what are the red flags? I'll give you one. Apples in reception. I always think, oh, there's money being wasted. They've become, they've become complacent. Bikes on the wall, all of that stuff. A receptionist.

Matt Rogan: 10:07

Well, you're, first off, you're making an assumption the apples are for you. I, Sean has taught me, we don't,

Richard Gillis UP: 10:12

we're a very, we run a very lean business. Yeah, see,

Matt Rogan: 10:15

but if, if you're enlightened, you're thinking, well, those apples, my employees get them down their necks. They're going to be healthier. If they're healthy, they spend less time off work, which means that actually it's the bottom line. So you know that this is a way

Richard Gillis UP: 10:28

into the client looking at, through the, at the meat and saying, well, yeah, well, my money's going on apples. For sure. Where

Matt Rogan: 10:35

else is it going? I'm a big fan of open plan offices. From an agency perspective, because clients then come in and can see people working, see the culture of the organization, it's not hidden away. So big offices and lots of swanky meeting rooms I think are a challenge. Other warning signs, I would say when you have client leads arbitrarily making decisions on prices of projects. Without coming back and having some checks and balances around that. Always be wrestling around that. Is that, and what causes that? Is that a lot of loss making work normally, because they're desperate to get the deal in, not thinking about what the deal looks like underneath. Other trigger points. If, if you ask anyone in the organization, what's the strategy of the organization? They don't have a clue. Or how their role relates to the business as a whole. And they can't really answer that. That's flying too fast and the tires are going to come off the space rocket, in my view.

Richard Gillis UP: 11:30

That's quite an exciting story, isn't it? The rocket, the space rocket. That's quite, that's part of that. That's part of the sort of why people get into the business. Why sport is full of rockets that have gone off. Yeah. Some of which, some of which have succeeded. Others have crashed and burned. But it's quite, you know, it makes it quite a dynamic, interesting place to work. And I do think that sort

Matt Rogan: 11:50

of, there are various proof points. Yeah. I think in terms of numbers of people, at least in the sports agency space. So, you know, you come to sort of 15 and Karen Earl, who used to run Karen Earl consultancy with Synergy, she used to say to me, the most fun I had was about 15. 15 people. Because it's one for one, all for all. We all know how the business is doing. It's really easy to build strategy and cost, off you go. 30, you need the next bump of 65 ish. We found that. You know, we needed an office we could fit everyone in. We needed job specs that sat in teams. We needed functions. And then 120 odd was definitely the next level of terror. So that's absolutely a COO who can handle people and a CFO. Not sort of putting it all together, and I'm trying to manage all that as well. There's definitely like clear staging posts from an agency perspective. And I think from a sport team and league perspective as well. We maybe come onto that.

Richard Gillis UP: 12:49

Yeah. Tim, what about your red flags and when you walk in the door, what are you what are you looking for?

Tim Dunn: 12:55

I mean, the top, top of the list for us is team and culture, always. Links to a lot of what, what Matt's talked about. The reason that 15 person organizations are so fun. It's because everyone knows each other. There's a brilliant culture and you're by definition a challenger then. And it's lovely to be a challenger because if you don't win, it's fine because the big guy won. And if you do win, you feel like a God. Yeah. So we on average are talking to companies for three years, first meeting to deal. And if over that time they, we don't speak to anyone other than the CEO, And he talks about, or he or she talks about his or her views and no one else's. That's a, that's a big red flag. We like to meet a broader team. We like to know there's one vision, a strong culture. The other thing,

Richard Gillis UP: 13:47

so people being when you go past, they're shoved into into rooms that you're not allowed to see that

Tim Dunn: 13:52

it has happened before, or even when you open the door to a room for a supposedly key manager, they're asleep at the desk, which has literally happened. We've all done it. The other, the other thing I think is critical is that there's a lot, I've talked about strategy and transformation and so on, all of which is possible once you've got the right mindset and you've got the basics in place, but execution is critical. And I do think when you know a team or you observe a business over a period of time, you really get to know what they're like. And. A team who promises the moon on day one and six months later and a year later and two years later hasn't delivered very much, gives a certain view and teams who generally the more open minded ones and the teams who are more focused on their own culture and delivery We'll make increasingly rapid progress over time, and those are the teams that we really focus on, I'd say.

Richard Gillis UP: 14:55

Okay, right, so we're into good stuff here. So we're now, we've let Tim in the door. Okay, so this is in our sort of imaginary sports agency. We've cleared the apples away for the day, we've got, we've woken Sean up, he's asleep at his desk. And then we're trotting along and there's two things. One, my projection on to you, what's going to happen? Am I, am I worried about you being in the, the office? Is that, is that something that I'm scared of, particularly if I'm the boss? Am I going to get the chop? Or have you bought into me? Or have you bought, seen something and I'm going to get removed? So there's a, there's a sort of personal bit, which I'm always interested in, but we'll part that. And then you get a few years in, or however long in, and you say, right, okay, this ain't working. And what the sanctions are, or what it is that you can do to change. And when do you start to say, right, we need to make changes, and how do you do that? Because that, I imagine, is the critical bit, which takes you from a, I think, in my head, again, put me right, that's the difference between a sort of venture capital investor and a private equity is the. organization bit, yeah, operation, I would

Tim Dunn: 16:03

say I think that's a good characterization behaviorally. If, if you characterize most venture capital investors as minority and passive and most private equity investors as collaborative until you hit significant issues, at which point, They have a lot of rights to do what they want on the basis that we're generally investing mum's pension. Our investors are pension holders generally and institutional shareholders will require quite a few protections through the docks, as you say. I think the good management teams are the ones who are open to, strong minded, but open to external advice and expertise. We do not, and I would suggest that most, if not all, private equity firms should not go in and assume they can run the business any better than the experts in their field. And we are certainly non execs, typically knowledgeable about the sectors we invest in, but do not assume to be executives or able to be execs. So is it a sort of 80 20 thing?

Richard Gillis UP: 17:11

So you're, is it the difference between buying Tottenham and buying, Sainsbury's is, or it's bad, bad examples, but they've got the specific, sector specific stuff is the bit at the top which. You don't have, I'm just trying to work out how you work that out.

Tim Dunn: 17:30

Yeah, whether it's 80 doesn't matter either does it for the purposes of this, but we don't have the sector expertise, but what we perhaps do have is, A long history of underlying business expertise, and we've seen a lot of different situations where there are interesting read acrosses.

Richard Gillis UP: 17:48

And are you the 80 or the 20?

Tim Dunn: 17:50

I would say we would be the 20 not the 80. Only because I think, I think where we would be particularly expert, being common across all sectors I think there's a hell of a lot that goes on in each individual sector where we wouldn't have anything like as much deep expertise as someone who's spent 20 years in it, which most of our founders have. I do think there's an

Matt Rogan: 18:13

interesting distinction there between the examples of external investment that we're confronted with in the sports industry. We often are very activist owners of sports teams in North America at the moment come across, to Europe, say, take over ownership of the team and are very visible in terms of striding across a pitch after a game. Yeah, and, and Ineos as well at Manchester United is a very visible owner now and operator investors. And I do think that's the 20 percent of the investments happening at the moment, not the 80 percent where it sort of is a slightly more additive relationship as opposed to a controlling relationship. The one thing I think that sports, certainly a couple of the projects I'm helping out on at the moment go wrong is to Tim's point earlier on and making more money down the road that there's a total focus and obsession on putting really exciting, swanky numbers in that are really hard to deliver.

sean: 19:16

Mm.

Matt Rogan: 19:16

And even if financial due diligence doesn't pick that up, you're on the hook for those. That's not your exit ticket. You're on the hook for those. And what that means is More often than not, you're missing numbers after six months. And what that means is Tim's got to take a call as to at what point he says, sort of knocks the chief exec or the CFO on the shoulder and says, look, we've got to have a chat about the fact that you haven't hit a number since we were, we were involved here. So where sport can do itself to service is to inflating numbers that it, It just doesn't deliver them. And traditionally the culture of doing deals in sport, like sponsorship deals, has been we'll sell it high and if we don't deliver we'll find another sponsor. That's not how this world works.

Tim Dunn: 19:58

It's a much longer term marriage than a sponsorship deal, typically. And you've got to think like a partner, a future partner, I think, in order to avoid some of the pitfalls which are the ones that make the press. Probably 90 percent of deals have no issues. They go well. People do their best. They deliver. The relationship's great. But the ones that go wrong I think are the ones where you have misaligned interests earlier on or the private equity fund is looking for a partnership and the exiting shareholder or the shareholder who's selling part is looking to optimize, to polish the apple too much.

Richard Gillis UP: 20:36

So, The question then becomes, I guess, or one of the questions is, without the specialist knowledge, can you influence the success of the business enough? So if you're dependent on that specialist knowledge, if that's the, that's the difference between this company and the next company, this club and the next club, is that not the 20 percent but the other, the bit that you haven't got? Yeah. I can't, you know.

Tim Dunn: 20:59

Yeah.

Richard Gillis UP: 21:00

That feels like a frustrating position for you because you haven't got the, you can't get to the real value proposition of an in sport, you know, the sport bit.

Tim Dunn: 21:11

Yeah, I think the sport, I think, and on a conscious side, I'm very happy to come back to the more, to the more difficult question in a way that you posed earlier on, around what happens when it gets difficult, but it can get quite difficult. Sometimes the steely edge of private equity is, is exhibited and quite at what point that's exhibited depends on generally the openness of the management team to take some advice. But but this question is linked, I think, which is if I go back to the example of logic, I am not a cyber security expert, but I do know a lot about M and A. They are a small business who've never done any M and A, but God, There's three or four areas which they know are going to explode into life over the next five years and they'd love to bring that stuff into the business. I can run an M& A program on behalf of the company and take them a long way down the path with those conversations after a strategy day where we discuss which of the three or four areas we want to go into. And that's quite a valuable thing for them. And I know a lot about M& A and I can get that to a certain point and at that point hand over the Is this actually going to work with Logic to the management team? Just to give an example. And there's probably four or five areas. Sales and marketing might be another one. Advice on AI might be another one. Sort of commonly things that people need help with, which are quite common across companies. And those are the areas that we focus on. I think the real skill is not to try to pretend. That you are knowledgeable in areas that you're not. And that's important for the, for the team as, as, as well as for the PE backer. Can

Matt Rogan: 22:47

I just make that real in the, in the sports space. So I'm helping out a team at the moment, which is looking at bringing investment in, and they've got six things that they think might be drivers of sort of material value, and one of those is just sharper financial re engineering because they've been owned and managed. Second of which is. driving international fan growth, the whole moving from a B2B business to a B2C business. Third one is just being sharper on player trading. And fourth one is redeveloping the stadium, just property play basically, to become a multi use facility. Fifth one is should we go into other sports? Notice the fast track development of rugby and netball and things. And the sixth one is multi club. Ownership. Yeah. You know, is there a chance for us to be the catalyst for buy and build? And if you think about all those six I'm trying to say to them, be clear on which the two or three are, right? Because that helps you understand what skills you, where you would lead on skills perspective and where you absolutely wouldn't. Because it might be the financial engineering, the property play or the buy and build. You need specific skills in the person who's going to invest. Yeah. Yeah.

Richard Gillis UP: 23:58

We were at we went to Madrid. A couple of weeks ago, the European Club Association, so that's all the, that's the big clubs, you know, it's all, a lot of the clubs, 600 odd European football clubs, and just a slight sort of build on that is, the question was, well, what is a football club now, because there is a lobby, that wants it to be a sort of version of Amazon. They want to turn the fan relationship into much more of a customer relationship. There's that route. There is a sort of lobby that wants, or an industry that is saying, no, you're an entertainment company. This is the football club as Netflix. Just create content. Be like Ryan Reynolds. Take a lowly club and blow it up and make it famous and sell rights in America. And that's one route. And then the The other one was Football Club as Football Club, as in, I live in Brighton, they found a defensive midfielder for five million and sold him for a hundred two seasons ago, you know, and we were going to do, I've said this before, we had, we were doing a podcast with Paul Barber at Brighton and he cancelled because that, that evening he got the call from Todd Boley and you know, I think the only truth in football is if Todd Boley's name comes up on your mobile, take, take the call. So there's a So he cancelled the podcast outrageously. But you can sort of see that that gets to strategy, but it also gets, you know, to, well, what are we now? What is you know, every business in the world of AI tech, there are lots of different strategic options. Do you like to keep a firm grip of strategy? Is that the bit within the organization that you want to really

Tim Dunn: 25:42

We like to have a clear plan. I'm guessing the real question that you, that you've just posed could be in the world of long term investment. What's the world going to look like in 20 years? Are football clubs in some form still going to exist? Yes. Is there more money going to be spent in that overall sector? Yes. And therefore let's have a short term plan. By which I mean three to five year plan to do our best job in exploiting that. By the way, I think, I suspect you ask a hundred different fans, they'd all have a different answer to the question as well, which is hard because a lot of money comes from them. Well the answer is always all of that and win on Saturday. Yeah, yeah, yeah. Secondly Are we confident that we're investing into a space that's going to be here in 20 years and it's going to be more valuable? And are we confident in our own ability to react to that changing environment? Because no plan survives contact with the enemy more than five minutes anyway. As a, if you're, if you're investing behind a good team, there's a good partnership around the board table and you're in a good sector. Yeah. You're going to build value over the long term, which is what our industry is all about. You don't necessarily have to know day one quite what you're selling, as long as everything is stacking up with the team, with the relationship, and with the sector you're investing in. All other things being equal, you're going to be fine.

Richard Gillis UP: 27:09

So I'm interested in your three to five year windows and 20 year windows because I think this is a conversation within sport but I'm sure it's common across things, is the accusation of private equity and external capital generally is short termist, you know, the fans are in it for the long term, the club is a heritage product, it has to exist and we've let the barbarians in the gate and there is a short, you know, they're short termist, they're going to. Make short term decisions that will turn the money taps on, but longer term, they will leave and will be left picking up the pieces. So that's not, you know, an uncommon framing of, under the banner heading of sport and private equity, you know, and there are now conference panels on this and white papers and whatever, but you know the shtick. How do you balance those things? Because really, I guess there's a bit of truth in that, and I'm talking private equity generally, there is an out, you need, there is a, a window.

Tim Dunn: 28:05

There is a requirement to have an exit that everyone is working towards at some point. Although the discretion is extraordinary in the industry around What's commonly perceived as a sort of job debt date, which candidly really doesn't exist. We're generally investing 12 year funds and can extend on top of that. And therefore it's, it's actually quite rare that you're forced to exit. It's one of the advantages of the model. Nonetheless, I think the there's a lot going on in your question there. My perception is that, Maybe we'll come on later to sort of segments of the market which perhaps are a little bit more in my view at least, appropriate for institutional, long term patient institutional capital, which is how I'd characterize us, versus perhaps shorter term, more sort of celebrity type capital, if I can, if I can characterize some of the American investments like that where there may be a desire for a long term return, but actually there's also a desire for lots of other things, like TV time and so on. I think We have, versus the classic other form of large scale capital raising, which is the public markets, an incredibly long term time horizon. And when we're thinking about an investment opportunity, and when our management partners are, we're generally thinking, Five years, let's say, I mean, actually the range is huge, two to 12 for us over the last 20 years, but let's say on average five five years for us, and then very critically what's going to happen in the five years after that? Because we need to have another investor who's thinking, Okay. This is great for the next five, and then we've got to sell it to someone, i. e. for the next ten. So, the in our world, and, and to come back to Matt's point, we generally know who and why is gonna, who we think and why we think they might buy something five years out. Not, we're normally wrong, by the way, but that's the way that we think about it. I think where Where stories get into the press around, and don't get me wrong, I'm sure there are lots of examples of private equity funds doing things which perhaps with the benefit of hindsight they would have done differently, and perhaps to the, in the viewpoint of their other shareholders, would have been viewed as very aggressive. However, generally speaking, Private equity funds are managing other people's money and they want to get the best return they can on it. And it is where there's misalignment between your management team, your other shareholders, and the private equity fund about what the ultimate goal is, that you end up with private equity firms being a bit heavy handed about selling assets to raise cash, for example, would be the obvious thing. Yeah and those. points of view. Those actions get very emotive. Nonetheless, they're rooted in something which I think can be forecast and should be avoided when you're entering into these partnerships in the same way that marriages can get incredibly vitriolic when they break down because the stakes are so high. Visibly, occasionally that happens in the private equity world as well. And my suspicion is that because sport is so emotive, When it does go wrong, as I'm sure it will, it probably goes wrong with a big explosion and a very public one.

Richard Gillis UP: 31:30

Yeah, the public thing is interesting because, I mean, you know, we've seen CVC, Clearlake, these are names that are now on the back page of the Daily Mail, you know, on a regular basis, and I don't know whether, just for that reason alone, whether it's a good fit sometimes, I thought, from the private equity side. I get that, you know, just in terms of that, the reputation angle, is that something that private equity businesses take very seriously?

Tim Dunn: 31:56

I certainly can't speak for any of the other big private equity funds, and I'm sure you will be speaking to them separately, but from our perspective, as I thought about the areas which were more and less perhaps relevant for us for investment in sport I think you have to. Avoid areas where there is potentially big volatility depending on results, which are completely unpredictable or largely unpredictable. And therefore there's a whole realm in this enormous market, which is, you know, developing very rapidly. There's a whole realm of B to B technology enabled services and institutions which will deliver. definitely continue to prosper, even though the various members of them may go up and down with their fortunes. And those are long term, wonderful investment opportunities in my view. I think where you're particularly in the public eye, you have to be very careful. And we've seen this across lots of different sectors, healthcare, care homes consumer products as well. And where there is. Volatility in your fortunes. And my own personal sense is that investing in individual teams, for example would be for Phoenix beyond the sort of scale of attractive volatility. Whereas investing, investing in a lot of these B2B services companies particularly the tech enabled ones, which are, which are blossoming every week. Seemingly there's another feature to look at in the sector. Those are much more attractive.

Richard Gillis UP: 33:26

I like attractive volatility as a, as a phrase. So, Matt, where has this gone well, this story? So I'm trying to think, quite often people, in terms of sport, private equities entry into sport, people land on CVC and Formula One as the sort of case study. Bridgepoint and MotoGP. So that's, that feels different to, to the, Tim's point about volatility, there's something different there that you're buying compared to Chelsea or Man United or the Washington NFL team or whatever.

Matt Rogan: 33:57

Well, there's a lot of businesses of that nature where I'd argue principally it's been them taking a position on, you know, rising tide, lifting all boats. So broadcast market's been up, sponsorship market's been up, they've taken a share of an asset. I've ridden that wave, that asset's been towards the larger ends and we know what digital's driven, a bit of a polarisation in terms of fortunes. And that's worked extremely successfully. I mean, I spend a bit of time in the performance sports space, so looking at, you know, widgets you put on your arms for when you're in the gyms and things like that and the fitness tech you know, widgets we put in balls. The sports tech space, insofar as it impacts on performance technology, has gone really well, fused by a blend of VC and private equity money. Which kind of blends then into the health tech space. That's been, that's been booming along. For performance sport, sorry, from a commercial sport perspective, I agree with Tim. I think some of the investments in the, in the sports tech space, You know, in the club space can be challenging, in particular when you're putting in large swathes of debt, at the moment, 12 15%. There aren't a lot of clubs that I've noticed making a lot of money at the moment, so large debt tranches can be challenging. Even those that have hired large amounts of debt in, you know, paying the dividends out has come to the debtors. detriment of some other infrastructure. If you think about someone like Manchester United, being to the stadium recently, it doesn't feel like Tottenham's. That's for sure. And look at Two Circles, we um, through the Bruin era, although I wasn't closely involved, you know, being at the beginning of a fund as Two Circles was, Bruin that really allowed the opportunity for them to demonstrate the value of sort of different types of partnerships and rights holders, rather than just being timer materials to buy smart businesses and blend them together really well to drive the value, not just in terms of adding profit, bottom line, but driving the multiple by virtually being a bigger business. Like it's all examples of where Bruin did a cracking job with Two Circles and Gareth and the team there. So there are plenty of success stories, but to both of your points, You know, they're not the ones that necessarily meet the FT or meet the back page of the Daily Mail.

Richard Gillis UP: 36:09

Tim, I interrupted you when you were about to say, so we were talking about the sanctions that you've got when you go into, when things aren't going, the story's going wrong in some way. nice Tim turns to nasty Tim, what's that, what does that look like?

Tim Dunn: 36:23

I mean, for for everybody's sakes. The longer, as is the case in every situation really, business or personal, the longer you can keep a level head and a sensible level of dialogue and the better. And doing that all the way through is sometimes possible. However, again, mum's pension ultimately, if a business has got itself into difficulty, either by virtue of As we might see at Mish Management or as the market might see it, a dramatic change in market conditions. There is definitely there are definitely circumstances in which different skills are needed around the board table. Generally speaking, I'd say we and other private equity funds would be very inclusive in that environment. In other words, let's add to the team what becomes very different, difficult, and candidly where Private equity funds will take very directive action is where we are being actively obstructed in something that I think in everybody's view is very critical. A course of actions required to be taken, but cannot be done. So because of some obstruction and that's and in those examples, you know, certainly in the end, it can lead to the removal of some of the key individuals, including most sensitively those individuals who built the business and always in our negotiations and discussions coming into companies. Those are the most sensitive parts of the negotiations because we will normally have the ability at the end of the day if things are really going wrong to bring in a team with different skills if we feel it's necessary.

Matt Rogan: 38:00

And that's really difficult if you're the organization being invested in to spend the right amount of time and energy. You're knackered, right? You've been through six months of doing the deal. You know, especially when you're married to the CFO, you've both been through six months of doing the deal you've got over all the hurdles, due diligence conversations happening your whole way there, then you get to the sale and purchase agreement, which is the place where more often than not, you would go, what happens if this? What happens if that? And when it gets to the difficult conversations, every bit of the back of your head is saying, sod it, just, it'll be alright, just get it done. So, Get the beers out and move on, but actually having the time and the effort and the good conscience to go through that detail, sort of all the things that could go wrong and how you would handle them and getting a much agreement up front, coming to terms yourself with the fact that, you know, that might mean at some point you lose control is, is super important. And that's where great advisors come in. Management team side actually can really help because they don't let you skip that last bit of the process. They do force you to have those conversations.

Tim Dunn: 39:05

And, and I would say increasingly they're forcing you to have them at the start. Yeah, exactly, exactly right. So we are in a process at the moment where we are going through those difficult, and they are pre nut discussions. Yeah. I mean, there are so many parallels between buying a house and getting married. I mean, there Those are the simple way to think about it. The equity docs are pre nuptial agreements. And getting the principles of those down on paper gives everyone a chance to have time to be on the same page before you've sunk half a million quid in cost. And to get used to the concepts. And then during the deal period, Every week you're saying, I'm under stress. I'm working with these guys. Do I think given the conditions that I've agreed to, do I think they're still a good partner? And if you get to the end of three months and they still are, you're probably going to be okay.

Richard Gillis UP: 39:55

Let's look back then from sport on to the private equity sector. And then there's a sort of, you mentioned at the beginning there, which I just wanted to pick up on, which was so the difference between private equity groups. And, you know, so if, if. I'm looking at this as an option. If I'm a, again, whatever, I am an agency, a club, a league, a sport, what is the difference? How do you differentiate? So is it size big and small? Or is it specialism? Is it, and you mentioned methodology, which sounded interesting.

Tim Dunn: 40:24

Yeah. I would say SS size and specialism are almost self-selecting. So yeah. We do deals up to 150 million of EV. If you need a billion quid, then go to CVC or Bridgepoint. And that's fairly easy, and knowing who's in the space and who's not generally is also fairly easy. You get that from the first couple of meetings. I'd say there is a, there are a range of different approaches when You're working on the board. We, and I would say many of the names you've mentioned, would be fundamentally non execs. I. e. working through on a non executive basis and working, speaking to the management team every week but not every day is probably how I'd describe it. And when invited in, as we've used the example of Logic a few times, but when invited in, able to add some much more hands on day to day expertise in areas that we know We know where we know particularly what we're doing. I think there are a number of, I would characterize them as US funds, but that's so general and actually very crass of me. But there are a number of large US style funds where there is much more of a formulaic playbook. And I think it's Caveat emptor slightly. If you are, if you're clear that you're going to get two execs on your ex co after the deal and they're going to monitor the hundred day plan and they're going to follow, they're going to put up your prices, they're going to cut your costs, they're going to sell your stadium and refinance it out and they're going to add more leverage in year one to get their money back. You know what you're getting and there's not much you can do about that approach if you're not really on board with it.

Matt Rogan: 42:07

Which comes back around to what we were saying in the last part of knowing what you need and interviewing. If you've got a good plan, you've got good people, you know where you're going, you need to be interviewing the people, respective investors, as much as they're interviewing you.

Richard Gillis UP: 42:23

What's the difference between, so the option would be, is the line between what you do and what McKinsey does, is it just the investment bit? Is that the difference, or are they, so if I say, right, I need all this stuff done, I also need money to be able to do it, you're offering both, what are the pros and cons of that, why not do it, keep it separate, and

Tim Dunn: 42:50

I would say we would often use the advice of a McKinsey like firm What? I mean, Matt and I started our careers together in consulting. I think we both left pretty quickly because we were frustrated about the lack of hands on and operational seeing things through, I guess I would describe it as. We are there. Both for listening to advice and helping to and supporting the execution of it and bearing the consequences of that, which most consulting firms are not. And certainly the reason I love my job so much is because you get the chance to consider and then discuss with a group of people who you work very closely with. and then bear the consequences of your actions. So, I would there's definitely a big role for consultants and they provide a huge amount of advice through any process. I think it's very diff, you're in a very different seat when you're running a business and taking actual operational decisions.

Matt Rogan: 43:49

Totally, I remember that we had a lot of consultants in two circles and you know you find for the six month, first six months that really bright people come to conclusions quickly and say okay so what needs to happen is this and this and this and then you just look at them. Oh, I need to do that. That shit takes really quite a long time. You just kind of wink at them and leave the room and they get the message.

Richard Gillis UP: 44:15

So it's a skin in the game argument, basically. Is that right? Is that part of it? Just as in No, I think it's skill set. It's all very well to write PowerPoint.

Tim Dunn: 44:23

And the risk reward of the execution. I mean, it's a wonderful plan in theory to do a global consolidation of whatever industry in practice, if it doesn't work because you can't speak to the guy in Australia enough, so you're not coordinated or you can't integrate the business in Eastern Europe or whatever it is, then it's not going to work because it's not executable. And I think the difference between what can work in theory and what is practicable is critical. And, and I'd say advice. Relying too much on theoretical advice, I think most operators would say is dangerous.

Richard Gillis UP: 45:01

Again, I'm just trying to sort of run our initial conversation back through. And there was a question about what happens at the end. And it's something, again, which you hear quite a bit about in terms of, well, and it's confused, a bit blurred by the COVID. Issue in terms of, well, you know, sports, lots of sports hit COVID. They needed money. They needed everything. And sport and private equity is the big title. It felt like that was, that was, it was a sort of misnaming of what was going on quite a lot of the time. It's just they needed money and that was almost like privately acting as a bank. So, and then they're sort of working out what to do afterwards. And that's where we are now in a lot of cases. And that's, you know, in terms of that's big and famous, but also on a the mid market as well. So I guess the question is What the hopes are, what sport projects on to private equity? It's almost like I can see you coming in the door and say, right, thank God he's here, right? Sort, sort it out.

Tim Dunn: 46:01

Yeah, you are, you, one of the, one of the questions Matt said we might talk about is, what, under what situations is private equity not appropriate? And I think it's not appropriate, either if, You have undisclosed concerns and worries which you think private equity will solve. Or you have misaligned expectations with your private equity partner around what the future should bring. And both of those can be solved by all the things we've talked about. Long relationship beforehand, being open and honest and being clear about what the downsides are. I think COVID was an extraordinary period. I looked at some stats beforehand. As in many markets, you have a sort of 20, 30 percent drop in revenues for a short period, which put a lot of stress on a lot of companies. And There will be, therefore, a lot of recovery capital out there which perhaps was taken in haste under conditions which now appear to be slightly egregious. And three years on, people are looking to exercise rights and get some liquidity back. And I can see that that can provide quite a bit of tension in the market. I would say that, just like in any industry Take your time before signing up to your marriage agreement.

Matt Rogan: 47:19

This sort of series is about editing. It's about just trying to come in from that standpoint and just trying to provide a little bit more shades of grey, where she was saying in terms of neither is it the white knight, nor is it, you know, an evil fiefdom that we should never go near again as an industry. But we're only going to understand what and where it is appropriate by,

Richard Gillis UP: 47:41

And in the sort of real world, there is that, and we mentioned it last time, which is about the assumption that who you're dealing with is a good actor, the external sort of group coming in. And again, you then get to the cliches and categorization private equity is bad, money is, you know, capital is bad. And it's coming in and it's going to exploit. And I'm betting that sport is not the only industry that looks in that way or has that, I

Tim Dunn: 48:07

think you're exactly right. I, and I, I know that this came up in the last episode as well. I'd say 95 percent of private equity deals leave the table at the end of the Five years, ten years, however long it goes on, with everyone feeling that they've delivered something they're very proud of and left a real legacy. I think I also think the NHS generally provides brilliant service, but that's not what you might conclude if you read the front page of the newspapers. And I think it's, it's the front page stories of bad news, which make the headlines. And in sport, because you've got fan bases involved as well you have emotions very high. I think certainly if I look to our, Most recent fund, a quarter of it comes from founders who we've worked with, had a brilliant partnership with, and now want to reinvest in other founder stories. You can never set, private equity definitely doesn't get everything right. And there are definitely some reputations out there which would be at the more commercial end than others. Nonetheless, I certainly don't think there is anything to be afraid of. And in fact, I think in most circumstances it's a wonderful way to unlock the potential in a growth market like sport. As long as you come at it in the right way.

Matt Rogan: 49:21

I think the reality is, Tim doesn't sell it at a good exit for Tim and for founders in his scenario. Where it's not a really good business. Just come back to what my wife tells me in the kitchen every morning. Good businesses get investment. Good businesses need future potential from other areas of growth. And if you strip an asset in sport, strip the costs, strip the asset base, piss off the customers, piss off the employees, that ain't a good business. So I think the challenges we have with sport and investment are where it's short termists and somehow involves running away at the end with a quick buck and leaving a shell of a business. And that, a bird is on criminal sometimes when that happens, especially in lower league football clubs and things. That's where I think we need to be careful and there needs to be more governance. But I struggle to believe personally that investment in Sport is a bad thing as long as you go in with aligned objectives and you both have an objective of creating a better business.

Tim Dunn: 50:29

Spot on. Good businesses also get bought by other good investors who treat them properly.

Richard Gillis UP: 50:33

Okay, I'm loving the insight we're getting into the Rogood family household, so we'll continue that one as a theme. It's a new series.

Matt Rogan: 50:40

So when I was, I was, she was a charity circles player was. FD and CFO, the sort of rule used to be, I'm in charge in one room in the house, right? Which is our shared office. And once we'd signed the deal memo, both times around, I wasn't even in charge there. CFO led the whole thing. But she'd been there before, right? She knew her onions. Welcome my

Richard Gillis UP: 51:06

world. Rogan's world. Tim, last, last question. What do you think, when, what do you think the conversation's about? And, and sport is too big a term, really. And, and quite often, you know, it's not helpful. But when you look at, again, the framing of when private equity looks at sport, it sees complacency, it sees out of date ways of working, it sees a sort of governance and all of those things. What do you see when you look at that? Are those all sort of tropes that are familiar across other sectors? I guess the question is sports special is at the heart of that.

Tim Dunn: 51:43

No, absolutely right. I mean, sorry, sorry. So I would say that those traits are common in lots and lots of sectors. And over the course of decades external Influence exerted in the right way can have a very positive influence. And I'd add ESG and diversity and inclusion to the list, actually. Becoming obviously increasingly important in all areas. And I, and I think that there's a very valuable role to be played by the industry, by private equity industry, in helping out. in many of those areas. I definitely put most of them in the 20 percent where we would probably consider ourselves expert rather than the 80 percent which is purely sport related. And I'm convinced that with pioneers such as the, you know, the teams you've mentioned, CVC and so on over the next 10 and 15 years, this will become a much bigger feature of, of the sports, of the enormous sports market.

Richard Gillis UP: 52:39

Okay. Thanks for your time. Really enjoyed it. Thank you. Thank you. Cheers, Matt.