As sporting franchises grow into global businesses, private equity investors are increasingly targeting the sector, with sports teams and franchises providing new opportunities to unlock sources of revenue – often using digital media – through broadcasting and marketing rights.
Private equity firms spent $51bn on sports investment globally in 2021, with $22bn spent in Europe alone, according to PitchBook. Activity goes beyond the best-known names in European football or US basketball and includes tennis, motor racing, and equestrian events, among others. Interest from private equity investors was ignited by the Covid-19 pandemic. Although restrictions on gatherings impacted major events and cut revenues for sports and leagues, the pandemic highlighted the global appetite for remote sports viewings, demonstrating the relative resilience of the sector.
A prime example of private equity making its claim in sport is with New Zealand Rugby (NZR). Following a special general meeting in Auckland, the sport’s governing body voted in favour of a NZD200m private equity investment from US firm Silver Lake. Despite previous opposition from the influential NZR Players’ Association, the deal valued NZR’s commercial assets at NZD3.5bn and will see Silver Lake take 5.7%-8.6% of a new entity, NZR CommercialCo. In a country where commercial sponsorship of the national All Blacks jersey was once viewed with great suspicion, this was a significant moment.
The global sports market is expected to grow from almost $355bn in 2021 to just over $501bn in 2022, according to Research and Markets. However, the number of investors capable of capitalising on such growth is relatively small. Competition amongst broadcasters for coverage rights often limits the potential investor pool to those who can deploy capital at an institutional scale.
To counter this, many recent high-profile deals have focused on taking minority economic ownership in new entities to control media rights, rather than outright club ownership models that involve making decisions about hiring talent, coaches and managers, and could bring investors into conflict with fanbases.
Rights: a major pull factor
Media and broadcasting rights to sporting events are particularly attractive for private equity investors. Indeed, the Premier League told clubs in February 2022 that it believes income from broadcast rights will top £10bn over the next three seasons. According to The Times, this would mean that international rights deals will be worth more than their domestic counterparts for the first time – bringing in £5.3bn compared to £5.1bn.
Additionally, the growth of private equity interest in sport aligns with the growth of digital platforms and ‘over the top’ models which bypass traditional broadcasters and allow viewers to stream sport online.
For example, Silver Lake has developed a portfolio of investments that capitalise on the convergence of sports with digital media, expanding their online content audience and driving revenues. One of the firm’s earliest sporting moves was its $4bn investment in the Ultimate Fighting Championship (UFC), a mixed martial arts league that generated some 2,000 hours of viewing, mainly through its Fight Pass streaming service. Private equity investment in this case helped restructure the ownership of the business, while taking mixed martial arts and cage fighting to a wider audience – not only professionalising the sport’s image, but also paving the way for UFC parent owner Endeavor’s IPO in April 2021 at a valuation of $10.3bn.
However, private equity investment in the sports sector has also had to tackle setbacks and challenges.
Often, leagues negotiate media rights and distribute proceeds among clubs, but those clubs also have the power to influence and even block deals – giving weight to players’ and supporters’ views alongside the interests of individual clubs. For example, European football leagues like the Bundesliga rejected plans for an injection of private equity in return for a share in a new rights management company.
Sport’s human element is also challenging to anticipate. Potential underperformance by a sports team following the exit of a manager or the injury of a player can damage a franchise and its value. Similarly, potential scandals involving players or managers can impact a team’s reputation and therefore affect the bottom line. As a result, specialised due diligence must precede any investment to understand public relations and ‘crisis management’ strategies.
Private equity is increasingly becoming a key stakeholder in sports, as sponsors home in on opportunities opening up at an institutional level. Investors have the potential to bring commercial and technological expertise to teams and leagues seeking capital in the wake of the pandemic. Deals can be structured to benefit sponsors through developing revenue streams from sports-hungry supporters, whilst avoiding the day-to-day pressures of sporting decisions. However, private equity firms must be prepared for the scrutiny and setbacks that come with investing in sport.
Mike Preston is a partner at Cleary Gottlieb