Around the world, sports organising bodies, teams, and leagues have been hugely impacted financially by the pandemic, suspended for a period of time and deprived of vital ticket revenues. In 2020, it’s estimated that the three big US sports leagues (NBA, NFL, MLB) lost $13bn in revenue, the English Premier League £500m, and New Zealand Rugby NZ$120m. The need for capital to address short-term financial difficulties is matched by private equity’s increasing allure to the financial returns’ sports can offer, forcing sports to consider this new source of capital. However, unlike other private equity buyouts, sports deals are complicated by the involvement of a force of passion that investors must account for: the fans.
The playing field
In 2006, CVC Capital bought a majority stake in Formula One, the business in charge of grand-prix racing, for $2bn. By 2016, following the sale of its stake to Liberty Media, CVC had earned around $4.4bn from this investment. In 2012, Manchester United was the only professional sports franchise worth $2bn. Today, there are 57 such teams worldwide. These cases exemplify the lucrative financial returns sports increasingly offers, explaining rising deal activity year-on-year in the sector.
The value of private equity deal-making in sport has increased considerably since 2010, as firms hunt these returns. Private capital’s opportunity to invest in sport has expanded as a result of the liquidity pressures that the pandemic has forced upon organisations. The rise in sports franchise values and need for capital has coincided with record levels of capital available to private equity. Fundraising by private equity continues to hit new levels and in 2020 the industry claimed to be sitting on $1.5tn of ‘dry powder’. Private equity deals in 2020 reached their highest total value since 2007, worth $559bn over more than 8000 deals.
The scale of deal-making in the sport industry certainly matched this trend in 2020 and continues to do so: Silver Lake Management acquired a $500m stake in Manchester City; CVC and Advent International are in talks over a €1.6bn investment in the Italian Serie A; Silver Lake is seeking a 15% stake in a New Zealand rugby entity; CVC is looking to add to its stakes in rugby’s English Premiership and Pro14, with a £300m share of the Six Nations; over 20 private equity groups have expressed interest in a €200m to €300m share of a Bundesliga internet subscription service. RedBird Capital has even formed a SPAC with the purpose of taking a professional sports franchise public.
The scale and plethora of investments in various sporting leagues and bodies around the world therefore begs the question: what makes sport such an attractive investment?
Why is private equity drawn to sport?
The value of broadcasting rights
In-game advertising has proven to be a highly valuable source of revenue for owners of sporting broadcasting rights as an increasing number of fans are drawn to live sport. Between 2012 and 2018, annual spending on sporting broadcast rights nearly doubled to $50bn worldwide, with Premier League rights rising dramatically from £600,000 per game in the early 1990s to £10m a match in 2015. The global figure is expected to rise to $85bn in the next four years’ time, according to Rethink TV, as other streaming services, like Amazon Prime, YouTube, and overseas broadcasters bid for broadcasting rights, together with the rising popularity of behind-the-scenes documentaries on Amazon Prime and Netflix.
Private equity firms believe they can leverage their expertise to run leagues, clubs, and governing bodies better financially. A representative of Certus Capital Partners, Adam Sommerfeld, believes many sporting investments in the past were bought as “trophy assets” by owners seeking to show off wealth, when what’s needed is an “ownership group that understands media, broadcasting deals and commercial opportunities in America and China”. This transformative ambition of private equity in sport is perhaps best highlighted by the plans CVC have to leverage its equity stakes in various rugby bodies to propose a Global Nations Championship, uniting the Six Nations with the Southern Hemisphere Rugby Championship. Cross-industry ventures such as esports partnerships may provide other sources of growth and revenue.
The high-profile nature of the sporting industry, attracting the attention of the media and fans, can provide, in the words of David Dellea of PwC, “the kudos and the network” that can enable further investments. CVC’s increasing influence throughout the world of rugby serves as an example.
In the US, loosening regulations has enabled teams and leagues to establish relationships with betting companies that were previously banned. The US’s top four sports leagues could earn more than $4.2bn per year through such betting partnerships, according to the American Gaming Association.
However, despite the benefits and returns private investment in the sporting world may offer, there are potential constraints that may hinder returns and prevent investments in the first place.
Buyout groups’ traditional model relies on its control of a majority stake in its investment, to enable control of operating decisions. However, with owners of sporting governing bodies reluctant to give up majority stakes, private equity groups may be put off. For example, of the initial 20+ private equity groups interested in investing in Germany’s Bundesliga, two have said that they have withdrawn from discussions as a minority stake would not provide the influence over the league that they want. Furthermore, investment in US sports clubs is regulated by the relevant league who ultimately decides who can be a club owner.
Perhaps more importantly, fans may watch in despair as private capital takes control of the sports, leagues, and clubs that hold a special place in their hearts. If these sporting bodies are overcome by commercial concerns, they risk alienating the very fans that made the investment so attractive in the first place. Following CVC’s sale of its majority stake in Formula One, Bernie Ecclestone, chief executive of Formula One under CVC, remarked how “embarrassed” he was by the “sh*tty product” he had created. Between 2010 and 2018, the sport’s viewing numbers fell by 137 million as rights were sold to pay-per-view companies. One Formula One team’s deputy principal described that CVC’s “actions have been taken to extract as much money from the sport as possible and put as little in as possible”. Fans, if frustrated by ownership, can impede investor plans. FSG, the owner of Liverpool FC, was forced into U-turns by angered fans following ticket price rises in 2016 and the use of the British Government furlough scheme in 2020 to pay staff not working.
Current and future private investments in sport, as they continue to expand, must therefore seek to accommodate fans where possible. Private capital certainly does not have to be bad for the ‘sporting experience’. Injections of capital can positively transform experiences as stadiums are upgraded, budgets expanded, and new tournaments and experiences are created whilst generating significant returns for the owners. Time will tell whether the influx of capital into the sporting world will be able to align private capital’s commercial goals and fans’ passion for the sport.