I find the entire financial side of Formula 1 to be an very interesting study in investment, promotion and distribution. If you consider the teams are effectively in F1 to break even with some teams owning different for-profit divisions, the racing arm of most teams is there to establish budgets (including salaries) and effectively break even at the end of the year.
Earning prize money, of which the teams split 63% of the total take in F1, the teams have become ecosystems unto themselves to participate and live off the earnings of the sport. The sport itself is a for-profit entity in the form of distributions to shareholders and while in the US they would typically distribute retained earnings at the end of the year, F1 has a different approach as revealed by our friend Christian Sylt.
According to a Telegraph article, the sport likes to refinance itself with new loans to recapitalize the sport and raise funds for big distributions to shareholders:
“Last year, F1’s bank borrowings accelerated by $2bn (£1.3bn), half of which went to investors. CVC, the private equity firm, received $350m in line with its 35pc stake.
The payout followed a strong year for the sport, with pre-tax profits up more than a third from $284.6m to $394.1m, and revenue clocking up a 3.2pc rise to a record $1.8bn, according to its latest accounts.”
It does reveal how well the owners are paid but it also seems the retained earnings are used to pay teams and the shareholders are paid via refinancing and leveraging the value of the entity over time. Perhaps I am reading or interpreting this strategy incorrectly and apologies if that’s the case.
This process doesn’t imply anything nefarious or untoward, it’s just the way the shareholders distribute profit from the series for dividends.
I do think it is important to understand who is taking distributions and how they take them. The talk for some time now has been about the lack of equity in how the prize money is distributed and the rising costs of F1. It’s a lot more complicated than that and finding a harmony for teams to run break-even from the earnings of a for-profit series who also has shareholders to compensate is an act of keeping more than one plate spinning at a time.
Hat Tip: Telegraph