RedBird on the biggest risk in sports investing

The sports and media-focused investor held a $2.6bn final close on its latest flagship vehicle this month.

The idea that the valuations of sports teams, federations and leagues will continue to rise over a sustained period of time is a risky bet for sports ownership, according to the founder and managing partner of sports-focused PE firm RedBird Capital Partners.

RedBird - Gerry Cardinale
Cardinale: investors must embrace the partnership between the fans and their teams

“The biggest risk investing in sports today is to get lulled into believing that values will always go up,” RedBird’s Gerry Cardinale told Private Equity International.

Cardinale noted that the industry has gone through a “tremendous period of asset value escalation over the last 20 years, largely driven by the economics embedded in the subscription pay television ecosystem”.

He added: “Sports as an asset class has outperformed most public stock indices over this period. This has resulted in more passive, asset management-oriented capital jumping in to capitalise on this seemingly always upwards trajectory. Yet if you look at some of the last private sales of sports teams in the US, they have fallen short of the initial price talk.”

According to a report from PitchBook, the owners of sports franchises including the National Hockey League, the National Football League, Major League Baseball and the National Basketball Association in the US have seen their fortunes rise as average team valuations have outpaced the S&P 500 over the past two decades.

NBA teams saw valuations grow 852 percent from 2002 to end-June 2020. That compares with 548 percent for MLB teams and 472 percent for NFL teams, while the S&P 500 grew 334 percent over the period, data from PitchBook, Sportico and Forbes shows. The data  tracked the average team value each year and the year-end price of the S&P 500, accounting for dividends.

Cardinale noted that investing in sports in the future is going to “require a level of precision and conviction that was not a prerequisite over the last 20 years”.

“The prevailing instincts are that these will continue to be valuable IP-based assets with the most optimal resiliency in a fragmented marketplace – but the ability to support those instincts with more tangible analytics and underwritings is much less certain and bankable,” he said.

RedBird held the final close on $2.6 billion this month for its latest flagship vehicle RedBird Series 2019. The fund had a target of $1.7 billion. Investors in the fund include Ontario Teachers’ Pension Plan and Los Angeles County Employees’ Retirement Association, according to PEI data.

In March, RedBird invested in Boston Red Sox and Liverpool Football Club owner Fenway Sports Group at a $7.35 billion valuation. RedBird also picked up a 15 percent stake in Indian cricket team Rajasthan Royals in June, in a deal valuing the franchise at between $250 million and $300 million, according to the Financial Times. The New York-headquartered firm is also the majority owner of Toulouse Football Club.

Asked about what sports-focused PE firms can do better to improve their image among sports fans, athletes and teams, Cardinale noted that how PE firms are perceived within sports is going to be a function of how they invest. To the firm, this means approaching ownership  “embracing the partnership between the fans and their teams, as well as between athletes and their teams and leagues”.

“Investors need to appreciate the community and country dynamics in which they are investing – teams at the most fundamental level are emotional assets and brands that ultimately belong to the fans and their larger community.”