While sports leagues and teams are not the most traditional investment avenues, of late a number of factors have drawn considerable interest from Private Equity. In this article we do a deep dive into the current state of sports ownership, factors attracting PE to sports, and the pushback from fans.
PRESENT STATE
Traditionally, sports leagues around the world have been wary of allowing Institutional Investors into team ownership. This has especially been true for American sports leagues, which up until now restricted Institutional Investments. But things have changed of late and Leagues have embraced Private Equity. PE firms can invest in sports in two ways- by investing in individual teams or by investing in the league itself.
In North America, barring the National Football League, all other pro leagues have opened their gates to PE investment. This includes the National Basketball Association (NBA), Major League Baseball (MLB), National Hockey League (NHL), and Major League Soccer (MLS). Combined, these leagues represent over $175 billion in market value. Owing to the leagues warming up to the PE ownership of teams, in the last 20 months, Arctos Sports Partners has taken stakes in 12 U.S. teams, including MLB’s Boston Red Sox and NBA’s Golden State Warriors. Blue Owl Capital’s Dyal Capital has purchased portions of the NBA’s Phoenix Suns and Sacramento Kings. Amid these developments, American Leagues have yet not been open to the idea of PE investing in the entire league.
The story has been a little different in Europe, where in addition to investing in teams, PE has also been successful in investing in entire sports leagues. The most significant such investment was made by CVC Capital, who in many ways are the pioneers of PE investments in sports, when they acquired a minority stake in the Spanish top-tier football league La Liga. They also secured a minority stake in the rugby competition the Six Nations Championship. In addition, PE firms have also made bids for minority stakes in the Italian Serie A and the German Bundesliga. It has not been an easy path though, since PE firms have received a lot of pushback from various stakeholders. More on that later.
Closer home, CVC made their first foray into Indian sports with their successful bid for the Ahmedabad Indian Premier League (IPL) team in the auction concluded in October 2021. This comes as no surprise as owning IPL teams has become very lucrative over the past few years.
DEAL STRUCTURE
Contrary to most traditional PE deals, sports ownership deals are set up with an evergreen structure. Most of the deals so far have only allowed PE firms to have a say in the economic and commercial aspects, leaving the sports-related aspects to the managers and teams. It is also important to note that all the deals so far have only been minority stake deals.
WHAT MAKES SPORTS SO LUCRATIVE?
There are numerous factors that make sports a very lucrative investment option. Perhaps the most eye-catching factor is the growth in valuations. From 2010-20, the average valuations of NBA, NFL, and MLB teams have jumped 275 percent, far outstripping the 199 percent climb by the S&P 500, according to data firm Knoema. In fact, these high valuations have rendered it very difficult for individuals to buy teams alone, often requiring help from other institutional partners as well. Major U.S. teams and top European soccer clubs grew their revenue more than 7 percent annualized over the last 20 years, a performance matched only by the healthcare and education services sectors, according to the U.S. Bureau of Economic Analysis. A 15%-20% return on an American or European team is considered reasonable, according to Wylie Fernyhough, senior analyst of private equity at PitchBook. At this rate of return, these investments would easily top the historical return on the S&P500 index- 7% annualized for 2000-2020. Coupled with the fact that unlike companies, sports teams are not affected by business cycles, investment in sports teams seems like the perfect bet. Sports also offers a great avenue for diversification to PE as the financial performance of sports teams isn’t correlated to stocks and bonds. With sports teams, PE firms also get a brand loyalty unrivaled by other businesses.
As with most businesses, sports teams and leagues were also hit hard by the COVID-19 pandemic. Many teams had to incur huge losses due to closed leagues and restrictions on having audiences after the leagues reopened. This is where PE firms swooped in and provided the much-needed liquidity to teams.
PUSHBACK FROM FANS
While on the surface the involvement of PE in sports might seem like a no-brainer, these deals have received a lot of pushback from various stakeholders. The most prominent opposition has been from the fans. The kind of reputation PE has garnered over the years makes it very difficult for fans to trust these firms with their beloved teams. The fans’ attachment with their teams is non-monetary and that is something that PE firms have found difficult to navigate around. Then there is the growing concern of the role money is playing in the success of teams with the backlash that teams such as Manchester City, Chelsea, and Paris Saint Germain receive because of their ownership by oligarchs and sovereign funds. The fans’ opposition to the proposed European Super League, which was to be bankrolled by JP Morgan, is another example of the kind of opposition institutional investors will continue to face.
With all this said, it has become increasingly clear that Private Equity will continue its foray into sports. As sports fans, we certainly hope that these investments have a positive effect on sports.