The annual total revenue of the global sports market is expected to reach $600 billion per annum by 2025. Earlier this year, Forbes released a list of the world’s most valuable sports empires, citing a number of reasons for why prime sports properties are attractive to major investors.
In recent years, the industry has seen the emergence of a new key player in the sports investment market: private equity funds. Whilst investment in sport has historically been limited to ultra-high net worth individuals, private equity firms that for many years were forced to sit on the side-lines by high-yielding sports organisations now find themselves in a strong position to enter the field.
A New Opportunity for Investors
Over the last two years, propelled by the COVID-19 pandemic and a number of rule changes in the U.S. pertaining to league ownership, private equity fund investment in the world of sport has risen to unprecedented levels.
With the pandemic causing disruption to live events, a hiatus in many amateur sports, and a reduction in ticket and retail sales, the financial challenges experienced by organisations across the sector opened a new window of opportunity for private equity funds to access sporting assets. Many funds took the view that immediate cash-flow issues caused by the pandemic would likely be a momentary blip in an otherwise lucrative and reliable sector, in which ownership of sports rights provide predictable recurring revenue streams, low costs and high margins. As many sports organisations struggled for liquidity solutions during global lockdowns, some decided that private equity investment could provide welcome relief – providing that they could retain operational and regulatory control of their respective sports, which have traditionally been closely guarded by owners of teams, leagues, and governing bodies.
Many believe this trend towards private equity in the sport sector has been a long time coming. Traditional concerns over private equity funds have been somewhat alleviated in the last few years, a situation perhaps best exemplified by a number of major U.S. leagues softening their rules to allow investment in leagues, teams and franchises. The willingness of private equity funds to deviate from standard investment models and operate with a reduced level of autonomy to make allowances for sports organisations is a reflection of the confidence in the stability and growth of the sector. In the last few years alone, we have seen funds such as CVC Capital acquire minority shareholdings in Premiership Rugby (27%), The Six Nations (14.3%), La Liga (8.2%) and Serie A (10%), with individual clubs such as Atletico Madrid and Inter Milan also attracting private equity investment. These structures allow organisations to maintain a level of control over their respective businesses and governance, whilst simultaneously using the investment to benefit the clubs, players, and fans.
However, agreeing to minority-controlling stakes in the business is not the only way private equity funds have convinced sports organisations to open their doors to new avenues of investment…
New Sporting Fund Characteristics
Although the holding periods of private equity funds (being the time between the sale and purchase of an asset) are between 3-5 years on average, there has been a steady increase in the length of holding periods over the last few years. This short-term approach has been abandoned in recent years by funds investing in sport, in particular CVC, Blackstone, Bridgepoint, and BlackRock. In 2018, the International Tennis Federation announced that Kosmos (an investment group founded by Gerard Piqué) was going to invest $3 billion over a period of 25 years into the Davis Cup. Similarly, last year, CVC agreed to inject €1.994 billion into La Liga and its clubs in a rights deal due to run for 50 years. These unusually long holding periods represent a shift away from the traditional funding models associated with private equity, where short-term investors have often been accused of stripping out as much value from businesses as quickly as they could. Sports bodies have made it clear that they require a longer-term level of commitment from these private equity funds to allow them access to and utilisation of their highly valued assets.
Whilst the complex stakeholder structures seen within many sports may have previously deterred private equity funds from investing in the sector, recent examples of longer-term funds acquiring minority stakes have allowed sports organisations to protect the integrity of their sports whilst also realising the benefits of new investment in teams, athletes and stadia. This is not, however, to say that funds do not have any control at all. It is common that new holding companies and joint venture vehicles are incorporated to separate out management and commercial elements of the business. This allows the sports organisation to maintain autonomy over governance and disciplinary matters, in a way that safeguards the integrity and history of the sport.
Funds can also seek to retain control through the articles of association of a company or a shareholders’ agreement, which govern how an entity is run, and in respect of the latter, the relationship between the investors. Common provisions that funds may look to incorporate include: (i) “Information Rights” (the right to receive certain information in relation to the company, e.g. financial statements), (ii) “Appointment Rights” (the right to appoint a director to the board and/or nominate someone to attend meetings as an observer), (iii) “Veto Rights” (specifying certain ‘reserved matters’ that will require investor approval, e.g. the payment of dividends, issue of further shares, or expenditure over a certain threshold), and (iv) “Drag-along” rights (the ability to force minority shareholders to sell their shares to a third party, if a majority of shareholders have agreed to sell the company).
Getting over the line
Sporting assets – including media, broadcasting, sponsorship and other commercial rights – will continue to provide rights holders with consistent and high levels of cash returns. That is what is so appealing to private equity funds. CVC’s stake in Formula 1, which ran between 2006 and 2016, reaped a $4.4bn reward (giving it a return on investment of 351.8%) and serves as a good example of a fund looking to generate income over the life of an investment. Sports organisations are uniquely placed to provide consistent returns through their long-term partnerships (providing contracted revenue), ticket sales, match day revenue, broadcasting deals, season specific merchandise etc.
However, that is not to say that there aren’t risks involved for private equity funds and sports organisations looking to enter into an investment agreement. It is important that investors undertake appropriate due diligence to ensure they know exactly what the value of the business is and where that value sits (as well as the liabilities). They also need to ensure that any investment they make into the sporting assets of the business is well structured and complies with any merger control or tax provisions. Sports bodies will similarly want to be sure they are clear on regulatory frameworks, especially if operating on a multi-jurisdictional basis – as in the case of international sports federations. They will also need to ensure they outline clear provisions to allow for any teething issues over the course of the fund relating to factors such as governance, ownership of real estate and IP, employment issues, disciplinary matters – all with the ultimate aim of protecting the value of the investment but also the integrity of the sport.