Financial Services Company Use Risk Adjusted Business Case to Value a Potential Investment in Sports Venue

Overview and Problem Summary

A global investment bank was considering an investment in a large urban sports and entertainment venue in the northeast.  The investment decision was contingent on the projected five year earnings of the venue.  The earnings were driven by several factors with a high degree of uncertainty such as the performance of the team, the sales of suites and tickets etc.  In addition, there was uncertainty about the potential for changes in economic conditions over the five year investment window which could affect revenue.

The Solution

The Enabled Concept used the Risk Adjusted Business Case to develop a model which could factor in the risks associated with the key revenue drivers to produce probabilistic five year pro forma.  The pro forma was focused on the venue’s ability to generate revenue sufficient to cover the debt service for the investment the firm was making – a metric known as coverage ratio.

The team built a model which included a risk-impact table for each of the revenue drivers.  Each identified the risk was given an estimate of occurrence and impact for each year of the pro forma. and more specifically the coverage ratio.  That model was then run through a Monte Carlo analysis which simulated the running of the venue thousands of times to produce a distribution of probable outcomes.

Key Features

The probability distribution allowed the investment firm to understand the risk associated with the base case coverage ratio.  In addition, it allowed the firm to determine the coverage ratio which would be associated with their risk tolerance – which was the 80% confidence interval.

Results

Using Enabled Concept model, the investment firm determined the coverage ratio would not exceed their minimum requirement of a 1.9 coverage ratio at the 80% confidence interval, so the investment was not approved.

Find out how we can contribute to your success ...