When the UK went into lockdown in March and there were no football matches to watch for two months, Tottenham Hotspur fan Drew Spencer found himself with nothing to talk to his family about.

The 37-year-old software developer from Cambridgeshire has been an avid Spurs supporter since his father took him to his first game when he was eight years old. Born into what he calls “a Tottenham family”, Spencer watches almost every Spurs game, including in person with his family on their season ticket.

“Covid’s ruined everything,” Spencer says. The lack of games at the height of the pandemic created a “weird hole” in society. “It sounds really dramatic saying it, but it’s very upsetting, to be honest. Upsetting and worrying.”

Spencer’s experience mirrors that of hundreds of millions of viewers of live sports who have had to come to terms with a pause in sporting activity not seen since the second world war. Across the world, from Major League Soccer to Wimbledon, Australian Football League matches to the Tokyo Olympic and Paralympic Games, the sports industry is suffering from lower or non-existent ticket sales and cancelled or rescheduled games due to restrictions related to the covid-19 pandemic.

In Europe, the impact on football is estimated to cost between €4 billion and €7 billion over the next 18 months, according to KPMG. As of May, it was estimated that the US sports industry could lose more than $8 billion of revenues due to the impact on fan spending, sports-related tourism and national TV revenue, according to analysis from Statista.

For private equity sponsors who either have exposure to or appetite for sports investments, the coronavirus crisis presents both a serious threat and a potential buying opportunity.

“Covid has, for the time being, changed everything,” says Nick Clarry, managing partner at CVC Capital Partners who leads the firm’s sports, media and entertainment business. “Sports ecosystems are under enormous pressure. There’s a real prospect that many teams could go bankrupt and the sports landscape could be changed forever. It’s desperately serious.”

High stakes

Exactly what’s at stake is a multibillion-dollar global industry comprising federations, leagues, teams, players, media rights deals, sponsorships and advertising contracts, gambling platforms, data providers, sports nutrition and sports tech companies, and yes, ticketing revenue and hotdog sales.

According to estimates by PwC, the global live sports industry generated $144 billion in revenue last year with North America accounting for just over half of that total. For private equity sponsors, a combination of rising valuations of sports teams and leagues, a need for liquidity on behalf of original owners and stakeholders, and a highly fragmented industry that could benefit from greater operational improvement and efficiencies, has turned investing in sports into an attractive bet.

“These are not vanity investments, they are very valuable media assets,” says Michael Rees, head of Neuberger Berman’s Dyal Capital Partners unit, which was selected by the National Basketball Association in April to launch a fund backed by institutional capital to take minority positions in NBA teams. “You have very long-dated, sticky assets, unique assets. It’s not like there’s going to be another [Los Angeles] Lakers.”

Recurring revenues stemming from fanatical fan bases, high-quality contracts around sponsorship and advertising, and multi-year broadcasting deals has led brand-name buyout firms including CVC, KKR, Silver Lake, Bain Capital and PEI Media owner Bridgepoint to invest in sports in some way, shape or form.

What’s driving heightened interest in the sector? Returns can be enormous, as demonstrated by CVC’s legendary investment in motorsports racing championship Formula 1. In that deal, the firm turned a $952 million investment in 2006 from its CVC European Equity Partners IV fund into a more than $6.7 billion return by exit in 2016, marking at least a 7x money-on-money return, according to a source familiar with the transaction.

There is just no other industry like live sports, says William Paul, a partner who leads Bridgepoint’s sports investment practice and sits on the board of Dorna, the sports management business that holds the global rights to MotoGP and the World Superbike Championship.

“There is no other programme that delivers a guaranteed audience of a guaranteed demographic at a fixed time and place,” he says. “If you are a football fan, you have to watch the Champions League match, live, at 8pm on a Tuesday night. A recorded replay later just won’t have the same appeal. This has tremendous value for broadcasters and sponsors alike. No other programme in the entertainment world works that way.”

Sports’ live nature makes it especially appealing to broadcasters who know exactly the demographic of an audience at a specific point in time. Advertisers know, for example, that viewers of NBA games tend to be younger and more tech-savvy than those watching National Hockey League matches and can market accordingly.

“That’s why the value of these rights grows over the very long term,” says Paul. “Like all of these things you’ve got an industry that’s grown up around it.”

Formula 1

Revenue was driven by four primary sources:

Race promotion

Race promotion was F1’s largest source of income in 2016, accounting for $653 million, or 36 percent, of revenue. This is more than double the $300 million recorded at the time of CVC’s acquisition in 2006.

Promotion income is driven by fees paid to host, stage and promote F1 events, which, in turn, generates tourism for the destination country. Azerbaijan, India and South Korea have each hosted F1 events for the first time within the past decade. Contracts for race promotion typically last five to seven years and feature annual escalators.

Broadcasting

F1 had broadcasting partnerships in more than 200 territories as of 2016, contributing $587 million, or 33 percent, towards its annual revenue – up from $400 million in 2006. These contracts included a mix of free-to-air and paid TV and, as in race promotion, featured annual escalators over a three to five-year period.

Advertising/sponsorship

Advertising and sponsorship deals were responsible for $262 million, or 15 percent, of F1’s 2016 revenues, compared with $190 million in 2006. These contracts, which can include race-title sponsorship and track-side advertising, typically span three to five years. F1’s key partnerships include Pirelli, which has been its exclusive official tyre partner since 2011, and shipping business DHL, its longest-serving partner at 15 years, according to the championship’s website.

Other

The remaining 16 percent of F1’s 2016 revenue was generated by offerings such as the F1 Paddock Club, a luxury hospitality package that includes trackside dining and experiences; TV production and post-production; and freight and shipping services for teams.

A tricky game

For a multibillion-dollar global industry, private equity fund investments into the live sports industry number just a handful. According to data provider Refinitiv, private equity firms have backed just 40 deals involving sports clubs or sports management companies over the past decade.

Deal volume tends to be small in comparison with other sectors such as tech or industrials. In 2019, the biggest year for sports teams and clubs investing by PE houses in the past decade, just $546 million was invested, according to Refinitiv. The bulk of this was Silver Lake’s $500 million investment for a 10 percent stake in City Football Group, a holding company that owns Manchester City and other city-based teams around the world.

Why more private equity firms haven’t invested in sports teams and leagues so far appears due to a combination of scarce dealflow and a lack of expertise within buyout firms themselves.

“There’s a lot of money chasing deals, but there aren’t that many deals,” says Antonin Baladi, a partner in PJT Partners’ strategic advisory group, which has advised on sports deals including Dwayne ‘The Rock’ Johnson’s partnership with RedBird Capital to acquire XFL, an alternative American football league. Not all private equity firms can understand sports and the various risks, such as relegation in Europe or player welfare or injuries, he adds. Yet for firms with the relevant expertise, the sector has plenty of opportunities for investment.

“The sports ecosystem is in many ways a fragmented one – lots of stakeholders, lots of different building blocks. With this state of affairs comes, in some contexts, discussion of consolidation or change away from the existing status quos,” says Patrick Mitchell, a partner in the global entertainment, sports and media team at law firm Latham & Watkins. He adds the “pause” created and questions posed by the pandemic have given some stakeholders an opportunity to consider these issues, and his firm is actively working on some of these matters.

“These new opportunities are exactly the sort of thing that some sponsors are looking at in terms of ability to change and accelerate that change. There are plenty of places at which to shoot an arrow.”

For CVC’s Clarry, investing in live sports is about more than just operational change and efficiencies.

“It’s about highly responsible, highly sensitive, operational improvement and premiumisation of sport,” he says. This results in more revenue that can be reinvested back into grassroots and growing the number of active players across all levels. “If you grow a sport it generates more money for reinvestment back into the game.”

Emotional equity

Franchise or club investments carry a unique form of reputational risk. Sports fans hold emotional equity in their teams, and in competitions such as the Premier League – one of the most-watched globally – mismanagement is often met with a vehement public backlash.

Mike Ashley, the UK retail magnate who owns Premier League side Newcastle United, knows this only too well. Since acquiring the club in 2007, he has faced numerous protests against what fans perceive to be underspending, poor decision-making and a lack of ambition.

The club has been subject to multiple failed takeover bids over the years, most recently by a consortium that included Saudi Arabia’s Public Investment Fund. Many fans welcomed this potential change of ownership, not least because it would have made Newcastle one of the world’s richest clubs.

“Football fans don’t want financial prudence,” Kieran Maguire, a lecturer in football finance at the University of Liverpool and author, tells PEI. “Roman Abramovich [a Russian oligarch who owns Chelsea FC] is loved because he signs cheques; Mike Ashley is hated because he doesn’t spend, but his club is financially stable.”

Promotion to a higher division is the ultimate prize and, in the Premier League’s case, worth around £200 million in prize money and commercial deals for the club in question. “You could probably buy a club in the Championship [second tier of English football] for £20 million to £30 million and – if you know how to run a club, hire the right coaching staff and sign the right players – earn promotion to the Premier League,” Maguire says. “You could then sell it for around £150 million.”

However, relegation to lower divisions as a result of poor management or a lack of investment can lead to dire financial straits.

Wigan Athletic – an English football club formed in 1932 – entered administration in July after its new owner, Hong Kong-based Next Leader Fund, reportedly declined to invest promised capital. Meanwhile, Bury FC, formed in 1885, was expelled from the English Football League in 2019 for unpaid debts, the first club to be removed since 1992.

Private equity has fallen under intense public scrutiny in recent years, and sports is one of the world’s highest-profile sectors. Private equity firms must approach team investments with due caution and ambition or be prepared to face the wrath of potentially millions of fans and all the negative publicity that’s likely to bring.

Winds of change

For all the opportunities it offers, just a handful of private equity firms have sprung up to try their hand at the world of live sports. Several firms have launched this year to focus on taking stakes in sports franchises and leagues, including Dyal’s NBA unit, Beautiful Game Group and Arctos Sports Partners, a Dallas-based firm founded by former secondaries industry executive Ian Charles.

Many of these firms are keen to take advantage of changes in ownership rules for major league teams in North America. With the exception of the NHL, private equity funds had been prevented from acquiring stakes in North American sports franchises until a few made changes last year. Major League Baseball was the first to modify its bylaws, followed by the NBA which paved the way for Dyal’s vehicle in April. The National Football League still does not permit private equity investments, while MLS said in July it was considering a rule that would allow PE ownership.

For Arctos, which has assembled a team of secondaries, special situations and sports professionals – including the former president and chief executive of the Madison Square Garden Company – acquiring minority stakes in teams appears to have parallels with the world of secondaries investing and growth capital.

“The leagues and their partners don’t want partners who want or expect significant control or influence, partners who use leverage or partners that have a forced exit horizon”
Source

“The leagues have a natural pushback to traditional elements of private equity,” says a source familiar with Arctos’s strategy. “The leagues and their partners don’t want partners who want or expect significant control or influence, partners who use leverage or partners that have a forced exit horizon. What leagues want is long-term, passive, financial partners – the opposite of the strategy executed by most private equity firms.”

The source adds: “When people want out of these ownership interests, it’s like trying to get out of an illiquid private equity fund position. As the buyer, you’re stepping into the rights of that investor, at a price you have negotiated directly with them, and you have to be prepared to be a long-term passive owner. It’s a secondaries market.”

Arctos and Charles declined to comment for this article, but a press release about the firm’s launch notes the firm aims to acquire diversified portfolios of minority stakes in sports teams around the world and has received backing from Goldman Sachs’ Petershill unit.

The firm is understood to be seeking as much as $1.5 billion for its debut fund and aims to write equity cheques of between $20 million and $400 million for stakes in North American and European sports leagues, PEI reported in April. It is understood the firm will target private equity-like returns.

HomeCourt Partners, Dyal’s NBA unit, is understood to be seeking between $1 billion and $2 billion to invest in around five to eight teams and is the league’s sole pre-approved institutional buyer. Documents seen by PEI show the fund is the only entity permitted to own multiple teams and is exempt from a rule that limits franchises from having no more than 25 beneficial owners. It’s aiming to deliver a net internal rate of return in the mid-teens.

Good timing

Arctos, Dyal and a handful of others have arrived at an opportune time for PE investments in sports. Rising valuations – the aggregate enterprise value of the 32 most prominent European football clubs, for example, has grown by 51 percent, or €13.4 billion, over the past four years, according to KPMG data – have led to an unusual set of circumstances. A high-net-worth individual who may have invested a few million as a trophy asset a decade ago now needs a buyer with very deep pockets who is willing to invest in an entity over which he or she has almost no control.

“There haven’t been any institutional buyers until now, so the only thing you can do is go and find another rich person,” says a source familiar with sports investing. The process is cumbersome, there is not a very developed banking industry to support it, and any ultimate buyer is subject to the team and league’s approval.

A major difference that Arctos and Dyal bring to the world of sports investing appears to be in their approach to generating liquidity for their investors. Both firms are understood to invest either out of permanent capital vehicles or are able to hold assets for longer periods.

Both Charles and Rees declined to comment on the structure of their vehicles, but PEI understands secondaries market technology will be at least one way LPs can gain liquidity. In Dyal’s case, HomeCourt’s limited partners will be subject to a seven-year lock-up period, after which they will have the option to redeem on a semi-annual basis. Liquidity will come primarily from offerings of interest, GP-led secondaries processes and/or asset sales.

Such a structure gives target sports teams confidence these firms are long-term partners and are not investing to make a quick buck.

“Not having private equity ownership in the past was to, in essence, know who your owners are so that you could understand how long they are in their vision for participating in our league,” Don Garber, MLS commissioner, told CNBC in July. The league was “pretty close” to overhauling this to allow private equity investments, he added.

The need to be a long-term partner in the live sports sector means the traditional private equity model in which exits are expected after three-to-five-years of ownership, can unsettle team owners and leagues.

“That’s the challenge,” says Christopher Schelling, a long-time LP who set up Texas Municipal Retirement System’s private equity portfolio and who joined boutique investment firm Windmuehle Companies in April. “There isn’t a real clear way to do that. If you’re a minority owner, you can’t force a sale or transaction, you have to avail yourself of other secondary liquidity providers.”

Another way to do this is to hold on to assets via multiple funds, as Bridgepoint has done twice with Dorna, moving the company between its 2005-vintage third flagship, its 2008-vintage fourth flagship and its 2017-vintage sixth flagship and generating a roughly 3x net return each time. The firm continues to own Dorna after 14 years.

CVC, which says sports has been among its best performing investments, held Formula 1 for 11 years.

“We are fully committed to these being longer holds and our LPs know that,” says CVC’s Clarry.

“Investing in and around that ecosystem necessitates a long-term approach to maximising returns. If you enter into this space with a sell-by date, you can wind up making decisions that will ultimately stunt your gains”
George Pyne
Bruin Sports Capital

Value creation in the sports industry has historically been achieved through systematic increases in the value of media rights which are typically secured in long-term, complex agreements, says George Pyne, founder of private investment firm Bruin Sports Capital. A single entity could have dozens of deals worldwide, which encompass multiple distribution channels, he adds.

“Investing in and around that ecosystem necessitates a long-term approach to maximising returns,” Pyne says. “If you enter into this space with a sell-by date, you can wind up making decisions that will ultimately stunt your gains.”

A beautiful business

Revenue from live sports can be broken down into four main streams. Taking North America as a case study, ticketing and gate revenue, including season ticket sales, was the second-biggest source of revenue last year at $20 billion, followed by sponsorship – fees paid by a corporation to associate their brand with anything from a team to a league, venue or event – at around $18 billion, according to PwC. Merchandising – revenue from selling physical products such as t-shirts and jerseys – came in next at $15 billion.

The holy grail is media rights – worth $21 billion in North America last year. In European football, the average broadcasting revenue among the top 32 clubs increased by 65 percent over the past four years, compared with 39 percent and 22 percent for the average commercial and matchday revenues respectively, according to KPMG. Media deals are particularly lucrative in the English Premier League, which distributed €3.3 billion to clubs per year between the 2016-17 and 2018-19 seasons.

The closer investors are to controlling this “intellectual property” of live sports, the better. “When you own the championship, the outcome from a sports perspective doesn’t really matter,” PJT’s Baladi says. “You get the advertising and sponsorship income, you get the TV rights income, and you get the circuit income. It’s a beautiful business to own.”

LP hesitations

PEI contacted more than a dozen LPs around the world for this report from some of the most prominent public pension funds to family offices and insurance companies, including those that had committed to funds that have invested in live sports entities. Most either said they would not consider committing to a dedicated sports fund or had no strong feelings about sports exposure via private equity vehicles.

“We would be a bit hesitant in investing in a sports focused fund today,” says Daniel Winther, head of private equity and infrastructure at Sweden’s Skandia Asset Management. “We would prefer to see how the segment develops,” he adds, referring to sports as a “new” type of asset.

Indeed, the relative novelty of the sector means some investors are hesitant to take the plunge until they have greater visibility into how dedicated sports funds or sports investments have performed. The head of private equity at a global corporate pension fund tells PEI his team relies heavily on data and past performance and would have to see a track record first before considering an investment.

Others say they’re concerned sports plays are not serious financial investments.

“Sometimes sports teams are purchased for the ‘trophy’ image [more] than the money,” says Kevin Schimelfenig, founder and managing partner of North Carolina’s McGeever Family Office, while Jos van Gisbergen, senior manager at Dutch Asset Manager Achmea, says he fears some of the large, rich and famous GPs buy sports clubs as a status symbol.

“We see this more as investing in art, which over time might go up, but are extremely illiquid,” van Gisbergen says.

The coronavirus effect

As this article went to press, many major sporting tournaments were either still on hold or had returned at a reduced rate. In European football, the immediate impact of coronavirus on club valuations “cannot yet be quantified”, KPMG wrote in a May report.

Still, private equity firms appear to be ploughing ahead. At the time of writing, CVC and Advent International had won support from Italian clubs to exclusively negotiate a deal to take a 10 percent stake in the broadcasting rights for Serie A, the country’s top football league.

In May – while much of Europe was under lockdown at the height of the coronavirus crisis – CVC said it had completed a deal to acquire a 28 percent stake in Pro14 Rugby and was seeking to get a £300 million ($391 million; €331 million) process with the Six Nations rugby tournament back on track.

Dyal, Arctos and others are also understood to have either closed or be near to closing deals involving stakes in sports teams since the pandemic began.

For these firms, investing in live sports amid a pandemic represents a deep-seated conviction that not only will the sports industry survive the crisis, the need for live entertainment while viewers are stuck at home due to government restrictions is stronger than it has ever been.

“Sports is quickly getting back up to speed again,” says Bridgepoint’s Paul. “Broadcasters are desperately wanting product back out on their networks again and sponsors want to get back out in front of their audiences and their demographic again. In a sense, sport is a great platform to kick start a lot of that activity.”

Does the coronavirus crisis pose a fundamental shift to revenue streams from live sports? The GPs and intermediaries PEI spoke to all appeared convinced that while the pandemic poses one of the biggest threats the industry has ever experienced, the need for live sports will continue, and private equity has a role to play in providing patient and responsible capital to an industry that needs it now more than ever.

“There was a great deal of waste in sport, pre-covid,” says Oliver Finlay, chief executive at Beautiful Game Group. Prior to the crisis many organisations were too dependent on match day revenue or on a narrow number of revenue streams, which increases risk.

The NFL would have lost an estimated $4.5 billion of revenue – around 28 percent of its total 2019 revenues – from gate receipts and other stadium-related income if it played the 2020 season without fans, according to a July report from investment bank Needham. At the time of writing, NFL teams were taking a mixed approach to fan attendance, including either a blanket ban or partial occupancy.

“I think now this is also tightening a focus,” Finlay adds. “Companies are now having to work a little harder and are having to be even more innovative.”

For Tottenham fan Spencer, a return to normality and being able to watch his beloved Spurs in person can’t come soon enough – a sentiment private equity firms with exposure to the live sports sector will be echoing.

“You do feel like there’s something missing,” Spencer says. “It’s a big part of who you are.”