The good, the bad, and the rugby: The legal and commercial challenges of private equity investment in sport in Australia and New Zealand

Co-authored by Damien Vickovich and James Dainton

Private investment and ownership in sport has been controversial in Australia since Kerry Packer’s World Series Cricket in 1977.

In recent years, private equity (PE) investment in sport has enjoyed a renaissance, with Cricket Australia considering a number of PE bids and the shareholders in the controlling body for the All Blacks, New Zealand Rugby (NZR), approving a $180m investment in the commercial arm of NZR¹.

Drawing on some of the recent PE moves in Australia and New Zealand, this article will explore:

1. the benefits of investment for both sporting entities and private equity firms;
2. the potential concerns or limitations of PE investment, both commercial and legal; and
3. how best to structure deals to achieve mutually beneficial outcomes for parties involved.

PE refers to financing, usually structured as a non-listed, purpose-built corporate investment entity or fund, used to acquire the whole or part of a sporting league or franchise. The recent influx of PE money can be explained by: 

• the value of investments means large corporate entities are a more apposite vehicle than wealthy individual investors or government entities;
• opportunities for investment due to the growth of women’s sport and esports; 
• franchises or business models struggling with the liquidity challenges resulting from the pandemic; andbroader favourable market conditions in Australia, particularly domestic bank interest rates, the relatively low Australian dollar and perceptions of financial stability.

PE investment is a team effort

For a sporting organisation, the benefits of PE investment can include:

• providing an injection of liquidity or cash flow. Alternatively, it may provide necessary capital for projects with high initial fixed costs, such as the construction of stadiums and training facilities;
• allowing sporting entities to diversify their cash flow from a dependence on broadcasting rights, government or sponsorship funding and gate receipts which improves bargaining power in commercial negotiations; 
• bringing the commercial acumen, industry expertise, business connections and financial rigour of the PE firm; and
• presenting an attractive solution for minority stakeholders looking to exit their investment.

For PE firms, the benefits materialise through acquiring an ownership stake in the sporting entity, including: 

• the ability to realise their investment at an increased value after only a few years;
• the ability to extract value from a sporting entity’s revenue generating assets. These include revenues from licensing (such as media/broadcasting rights and IP/brand rights through merchandising), commercial arrangements (sponsorship and advertising partnerships), and ticketing and hospitality revenue (Revenue Generating Assets); and
• the ability to diversify their investment pool into a scarce and stable asset. 

Overcoming the hurdles

Commercial issues

Unparalleled brand loyalty and fandom ensures ongoing interest in sport generally – and the level of market demand, particularly in Australia, provides a degree of certainty. However, this loyalty can also work against the PE firm if fans consider that the investment is changing the core identity of the brand.

PE firms often have shorter-term commercial motives that may not always align with the interests of fans, players, teams and leagues. For example, despite an overwhelming 89 to 1 vote of confidence by NZR shareholders, the Silver Lake proposal was met with resistance by fans and players².  

Other commercial challenges include:

• the potential impact on long-term sustainability due to under-investment in grassroots activities, women’s competitions, engaging diverse populations including Indigenous athletes and other underdeveloped formats. This may result in reduced long-term value of the PE investment; and
• the nature of a PE investment means that sporting teams will need to be aware that  a PE firm will inevitably exit their investment. PE firms will need to sell their stake, which may be particularly challenging where the value of the holding has significantly increased and willing buyers may be scarce.

Legal issues

There are a number of legal, regulatory and taxation issues that need to be considered as part of the due diligence process. 

Corporate due diligence in relation to a share purchase requires specialist advice regarding any real estate or intellectual property owned by the sporting organisation or any employment-related issues. An inspection of all the records, including company constitutions, shareholder agreements and records and documents lodged with the Australian Securities and Investments Commission will need to take place. Any material contracts entered into by the sporting organisation will need to be reviewed for material clauses such as change in control or assignment clauses which may affect the acquisition.

Australia has a foreign investment approval regime that regulates certain types of acquisitions by ‘foreign persons’ of equity interests in Australian companies. Investors may also need to liaise with the Australian Competition and Consumer Commission directly to ensure they address any potential competition law risks.

Typically, in Australia, sporting organisations are structured as a company limited by guarantee, as they are operated on a not-for-profit basis (with any surplus profit being reinvested towards the organisation’s purpose). In addition, some sporting organisations benefit from certain tax exemptions that are tied to their not-for-profit status. If PE investment causes a change to the company structure and the organisation begins operating on a profit-making basis, these exemptions will typically no longer be available.

How can PE firms stick the landing?

The most effective structure for a given transaction depends on the sport and its fan base. For sporting organisations, a hybrid solution in which only the Revenue Generating Assets are sold rather than full commercial control or managerial direction can present an enticing option. An example of the hybrid model is the arrangement between NZR and Silver Lake. Silver Lake will initially invest approximately AUD$180m for a stake of 5.71 per cent in a new commercial entity that will house all Revenue Generating Assets of NZR. Approximately AUD$6m will be invested in grassroots rugby, AUD$2m into Maori rugby and AUD$18m into the provincial clubs. New Zealand-based institutional investors will have the opportunity to also participate in the investment and Silver Lake will underwrite this investment up to an additional AUD$90m. NZR will retain full control over rugby as well as the commercial strategy.

Conclusion

A greater number of sporting teams and leagues will inevitably explore and take up opportunities in the private equity space. It is important that sporting organisations thoughtfully balance investor interests with those of fans and players. Practically speaking, this can be achieved by: 

• sensitively considering the public character of a sporting team or league to ensure a variety of commercial and non-commercial objectives are met which ultimately ensure the longevity and success of the team;
• ensuring careful analysis of legal challenges at each stage of the transaction; and
• structuring transactions in a way that best overcomes commercial and legal concerns.

The Silver Lake investment in NZR appears to address the commercial challenges of a PE investment in sport and a decision by Cricket Australia may follow in coming months. The decisions of these two sporting organisations may provide useful lessons to all in the sector.

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^{1. New Zealand Rugby Press Release, ‘New Zealand Rugby members give majority approval for partnership with Silver Lake at Special General Meeting’ 2 June 2022, https://www.nzrugby.co.nz/news-and-events/latest-news/new-zealand-rugby-nzr-members-give-majority-approval-for-partnership-with-silver-lake/.} 

^{2. Marc Hinton, ‘Silver Lake deal passed 89 votes to 1 as New Zealand Rugby provincial unions vote in Auckland’, Flipboard 2 June 2022. Accessed from https://flipboard.com/@nzstuff/new-zealand-sport-news-stuff-ffka7hsbz/silver-lake-deal-passed-89-votes-to-1-as-new-zealand-rugby-provincial-unions-vot/a-TTNVS7s2Toy6e6JpvFlgRg%3Aa%3A3006369987-c9f65320ad%2Fco.nz}