Singapore’s F1 Grand Prix in 2022. 2022.
Bryn Lennon – Formula 1 | Formula 1 | Getty Images
Take an elite field of world-class racing experts. Ask them to spend fewer dollars toward beating their bitter rivals. The result, it seems, is a slate of newly investable assets.
That is how the heads of Formula 1 racing see it, crediting a league-wide budget cap with making the team businesses more sustainable and boosting valuations.
“Once we got involved, literally, the underside teams were being traded for zero. Today I do not think you may buy a team for lower than $750 million, and the highest teams are valued [around] $3 billion,” Liberty Media CEO Greg Maffei told CNBC’s Sara Eisen within the documentary “The Inside Track: The Business of Formula 1.”
The budget cap — set at $135 million per team in 2023 — limits how much teams can spend on developing and constructing their race cars. Before it was introduced in 2021, the highest teams within the league could spend multiples of that in a given 12 months.
It is a model much like U.S. sports leagues, several of which limit what teams can spend on player salaries (though F1 driver salaries are excluded) — and it is the work of F1-owner Liberty Media, which bought the league in 2017.
“We understood that among the things that, for instance the NFL, has done about creating more revenue parity, creating a value cap, those allow for a far more competitive and more compelling sport,” Maffei said.
F1’s 10 teams each get a share of league revenue, brought in through sponsorships and media deals. In addition they collect individual revenue through team-specific partnerships, hospitality and engineering efforts.
Higher performance on the track makes it easier to earn money, nevertheless it takes significant spending to get there.
“Before, someone investing in a race team didn’t know if you happen to would spend $200 million a 12 months or half a billion a 12 months. There was every little thing in between,” said Guenther Steiner, team principal at Haas F1 Team.
Haas has seen a very aggressive revolving door of investors lately, affected by poor performance on the grid and a few poor luck: In March 2021, the team announced a title partnership with Russian fertilizer company Uralkali only to drop the investment a 12 months later after Russia invaded Ukraine.
Haas now counts MoneyGram and Chipotle amongst its sponsors. The budget cap, Steiner said, has made the team’s balance sheet more predictable and made it easier to bring latest partners on board.
“Due to testing restrictions, it’s now difficult to take a driver out of America who perhaps hasn’t been around these tracks,” McLaren’s CEO Zak Brown said.
Dan Mullan | Getty Images Sport | Getty Images
F1 teams expend huge amounts of capital throughout the race season to troubleshoot, repair and improve the cars. Major upgrades mid-season could be costly, but critical to a team’s success.
“It’s an R&D game,” Zak Brown, CEO of McLaren Racing, told CNBC in June from the sidelines of the Canadian Grand Prix weekend in Montreal. “We’re within the prototype business. We now have latest stuff on our automotive this weekend, we’ll have latest stuff on our automotive next weekend, and depending on what your challenges are with the automotive is where you are selecting where to speculate your money.”
Before Brown took over the helm at McLaren in 2018, the team was losing money on an annual basis — as much as “nine figures,” he told CNBC.
“Now we’re a profitable sports team,” he said. “A variety of that’s performance-based, and quite a lot of credit to Liberty that after they got here in they established a value cap.”
Find replay times of “The Inside Track: The Business of Formula 1” on CNBC.
Disclosure: CNBC is a sponsor of McLaren Racing.