Beyond the pitch: The rise of private equity in sports

Co-authored by Anna Sykes, Trainee Solicitor

The number of private equity (PE) firms investing in the sports sector appears to be ever increasing, and there have been a number of recent transactions in the sector that are noteworthy. Whilst PE interest in this sector has been around for some time, with Luxembourg-based CVC Capital Partners’ (CVC) backing of the Formula 1 series in 2005 and their exit 10 years later (having reportedly reaped a 450 per cent return ) seen as one of the first forays into the industry. Prior to this, the sports space was largely the domain of high-net-worth individuals or, in the case of some examples in European football, collective fan ownership. In recent years, however, we’ve seen notable developments due to a number of factors as we consider further below. An unprecedented growth in media rights and sponsorship deals with the rise of digital technology is at the forefront of this change. Further, empty stadiums and cancelled tournaments contributed to the devaluation of sports assets and the creation of attractive buyout targets for funds during the pandemic when deal activity in this space rose to prominence. At a time when economic uncertainty is curtailing PE deal activity, evident in the fact that the amount of total capital raised by US PE firms is falling by around $20 billion each year according to PitchBook’s 2022 Annual US PE Breakdown , sports-focused capital investment, having peaked in 2021 when more than 100 deals worth a combined $18.5 million were undertaken, remains strong.

A remark from David Rubenstein, co-founder of the Carlyle Group, on CNBC in September 2022 about the nature of deals in the sports sector in the US is telling of the situation: ‘It’s very difficult to buy a sports team and lose money. Some people have done it, but it’s very rare…In the NFL, you make your money all the time, because it’s so profitable ’. According to estimates from PitchBook, between 2002 and 2021, the average price return for a National Basketball Association (NBA) team was 1,057 per cent, compared to 458 per cent returns on the S&P 500. Returns across the same period for Major League Baseball Clubs and the National Hockey League was 669 per cent and 467 per cent, respectively . Such figures alone are a testament to PE’s bullish attitude towards the sports market.

Regulatory changes driven from the inside have also contributed to and facilitated this development. Large US leagues such as the National Football League (NFL) and NBA, which historically only allowed individuals to own shares in teams, have come to embrace a wider range of investors, as was evident in the NBA’s decision, ratified in January 2021, to allow PE providers to acquire up to (but not exceed) 20 per cent of a single NBA franchise . The benefit of this is that it provided teams and leagues, whose net worth is largely tied up in their franchises, with a liquidity event, enabling them to accrue extra capital to enter into more lucrative deals and at a faster pace. The entrance of PE firms into this sphere has also come about as a result of practical necessity. The average franchise value across the NBA has soared to $2.86 billion, with the Golden State Warriors claiming the title of the most valuable NBA team (valued at $7 billion). With high valuations come big price-tags, many of which are not within the reach of ordinary investors (often even high-net-worth individuals or those looking to acquire just a minority stake), so allowing institutional and PE investors a slice of the pie has opened up avenues for minority owners to exit. Over time, this is likely to result in a greater number of private and institutional investors acting as co-investors with joint ownership rights in the same assets. Such an imbalance of bargaining power can have a marked impact on negotiation strategies when it comes to considering governing arrangements and drafting shareholders’ agreements, of which investors on both sides of the table should be aware.

PE sponsors globally have increasingly turned towards the commercial rights licensing and broadcasting opportunities which is largely attributable to the boom in streaming service technology and on demand content platforms. CVC, for example, recently invested $150 million in the Women’s Tennis Association in return for 20 per cent equity in a new commercial subsidiary, WTA Ventures, which will focus on generating revenue through the management of sponsorship sales, broadcasting and data rights. This bears some resemblance to CVC’s $2.2 billion media rights deal with Spain’s LaLiga in December 2021, as part of which they acquired an 8.2 per cent stake in a newly-created company to manage LaLiga’s broadcasting and sponsorship rights for 50 years. This deal led to a recent €915 million injection of capital into 38 of the top Spanish clubs which is structured to help increase their value by enabling them to reduce their debt, invest in club infrastructure and sign new players. One only has to scan a handful of the biggest PE sports deals of the past few years to appreciate that the linchpin of the PE and sports space is the growth and transformation of media and streaming; a factor which is so influential that it is even disrupting the format and framework of the sports themselves. Take, for example, the focus by the Professional Triathletes Organisation, which secured investment in 2022 from Warner Brothers as part of a multi-year broadcasting deal, on viewer-friendly, shorter-form race formats or the shorter form cricket format, The Hundred, which received a £400 million investment bid from Bridgepoint Group in return for 75 per cent equity in November 2022 . In a sector which traditionally placed greater value on customers (i.e. fans), rather than stakeholders, it seems as though the approach of many sports organisations, clubs and leagues could become increasingly driven by the need to attract capital from PE and therefore more investment-orientated and hyper-media focused. This has not come without criticism as both club managers who fear loss of control and governing power, as well as fans dismayed by the increased involvement of corporate financial institutions, have raised their concerns.

Critics can take some relief, however, in the unique way that many of the sports-based PE investments are structured. Firstly, whilst in more traditional sectors, a number of (but not all) funds have adopted a short-term approach to deals, often seeking to negotiate an exit within three to five years, many of the headline investments in sports have been for significantly longer time periods. Part of the reason for this is the consistent cash flows which broadcasting and sponsorship deals can return, making sports assets highly liquid and yield-producing. This means that general partners can return distributions to limited partners at a greater frequency than might be the case with more traditional asset classes. The stability and liquidity this gives to a limited partner’s wider investment portfolio makes a long-term investment approach attractive. Take the deal between CVC and LaLiga pursuant to which CVC acquired a stake in the league’s audiovisual rights for a 50-year period or CVC’s 10-year holding period in Formula 1, each mentioned above. These longer-term investments also represent a move away from the oft-critiqued short-term approach taken by PE firms who go in with cost-cutting measures and the intention to sell within a few years for maximum profits. This may provide some comfort to sports fans and executives with concerns that short-termism and a profit-only approach would jeopardize the success of both the club/league and sport more generally in the future.

The legal framework and terms governing many of these investments should also help alleviate such fears, especially for those who lament that changing regulations allowing PE firms to take ever-greater stakes will result in them dominating and dictating management against the wishes of loyal fan bases. In terms of deal structure, a PE firm will typically invest equity and/or debt in return for a stake in a newly incorporated holding company or joint venture vehicle of the relevant sports organisation which will go on to manage the commercial side of the business, primarily relating to broadcasting, sponsorship and other commercial matters. These organisations will then utilise this injected capital to explore various routes of monetization, such as purchasing players, investing in marketing and technology or establishing new events and infrastructure. The separation of the commercial side of the business allows sports organisations, their management teams and other shareholders to retain a level of control over the governance and disciplinary aspects of the business. Such division of responsibility and control will be negotiated and defined in the company’s shareholders’ agreement (governing the relationship between shareholders) and articles of association (governing how the company is run). It is the role of legal counsel to ensure that such documents accurately reflect the commercial desires of all parties. This includes close consideration of various key provisions such as exit mechanics, processes to resolve commercial disputes and decision deadlock, ‘drag-along’ and ‘tag-along’ rights, information, veto and appointment rights, and other general governing procedures of the company, all of which are usually heavily negotiated. Even where PE funds only take a minority stake in sports-related entities, in return for their investment, they will tend to demand strong veto rights and a ‘reserved matters’ list stating actions which the company can only take with approval by a requisite majority or specific persons, to combat the greater risks which come with this.

A shortened version of this article was first published in Sports Business Journal, available here.