Austin F1 race benefits California
Although Austin's 2012 Formula One race is being touted as a potential revenue boon locally, the sure money to be made goes to the Formula One Group, which owns the international racing series.
And the $25 million that Texas pledged for the race could ultimately benefit taxpayers across the country, in California.
The ownership structure of F1 is complex and shadowy, but this much is known: In 2006, the Formula One Group was sold for $1.7 billion to CVC Capital Partners , a private equity firm based in offshore tax havens where it does not have to file financial statements.
Pension funds and high-net worth individuals deposit billions of dollars in CVC's investment funds . Official records show that the California Public Employees' Retirement System invested $343.3 million in the $7 billion CVC fund that purchased Formula One.
With a reported operating profit margin of 17 percent, Formula One has been an attractive investment.
The retirement system — the biggest public pension fund in the U.S. — has already made a 13.8 percent internal rate of return on the CVC fund, with its cash out and remaining value standing at $438.4 million as of Dec. 31, 2009.
About a third of the Formula One 's annual revenue of $1.3 billion comes from race sanctioning fees with payments from TV broadcasters, circuit advertisers and corporate hospitality clients providing the remainder. The company's biggest expense is paying prize money to the top 10 Formula One teams.
Formula One sanctioning fees average $31.2 million, and the race contracts stipulate that the fees increase by 10 percent annually. Applying the same escalator, an initial $25 million sanction fee in Texas would increase to $58 million over the 10-year span of the proposed F1 arrangement.
The high hosting price is driven by a bidding war between emerging countries such as Abu Dhabi, Singapore and South Korea, which use the races to get exposure to Formula One's 520 million annual viewers.
With little to naturally attract visitors to their countries, the governments pay whatever it takes to host the races to promote tourism.
Time will tell whether Formula One is worth the price to Texas. The Statesman
Christian Sylt, a journalist based in London, specializes in writing about the business of Formula One racing and authors F1's annual trade guide, Formula Money.