Private equity in sport: A growing opportunity
As sports franchises grow into global companies, private equity investors are increasingly targeting the sector, with sports teams and franchises offering new opportunities to generate revenue – often using digital media – through broadcast and marketing rights.
According to PitchBook, private equity firms spent $51 billion on sports investing globally in 2021, including $22 billion in Europe alone. Activities go beyond the biggest names in European football or US basketball to include tennis, motor sports and equestrian events, among others. Private equity investors’ interest was sparked by the Covid-19 pandemic. Although gathering restrictions impacted major events and eroded revenues for sports and leagues, the pandemic highlighted the global appetite for remote sports coverage and demonstrated the sector’s relative resilience.
A prime example of private equity making its mark in sport is New Zealand Rugby (NZR). Following an Extraordinary General Meeting in Auckland, the sports governing body voted in favor of a NZ$200 million private equity investment from US firm Silver Lake. Despite previous opposition from the influential NZR Players’ Association, the transaction has valued NZR’s commercial assets at NZD$3.5 billion and Silver Lake will take a 5.7% to 8.6% stake in a new company, NZR CommercialCo . In a country where commercial sponsorship of the All Blacks national jersey was once viewed with great suspicion, this was a significant moment.
Opportunities after the pandemic
According to Research and Markets, the global sports market is expected to grow from nearly $355 billion in 2021 to just over $501 billion in 2022. However, the number of investors able to capitalize on this growth is relatively small. Competition among broadcasters for broadcasting rights often limits the potential investor pool to those who can deploy capital at an institutional level.
To counter this, many high-profile deals of late have focused on acquiring minority economic ownership of new companies to control media rights, rather than purely club ownership models that involve decisions about hiring talent, coaches, managers and investors in Conflict could bring fan bases.
Rights: a key pull factor
Media and broadcast rights to sporting events are particularly attractive to private equity investors. In fact, the Premier League told clubs in February 2022 that it expects broadcasting rights revenue to top £10bn over the next three seasons. Corresponding The timeswould this mean international rights deals will be worth more than their domestic counterparts for the first time – fetching £5.3bn compared to £5.1bn.
Additionally, private equity’s growing interest in esports is consistent with the growth of digital platforms and “over-the-top” models that bypass traditional broadcasters and allow viewers to stream sports online.
For example, Silver Lake has developed a portfolio of investments that capitalize on the convergence of sports with digital media, expanding audiences for online content and increasing revenues. One of the company’s earliest sporting moves was its $4 billion investment in the Ultimate Fighting Championship (UFC), a mixed martial arts league that generated around 2,000 hours of viewership, mostly through its Fight Pass streaming service. Private equity investments in this case helped restructure the company’s ownership while bringing mixed martial arts and cage fighting to a wider audience – not only professionalizing the sport’s image, but paving the way for UFC’s parent company to go public Endeavor in April 2021 by a leveled valuation of $10.3 billion.
tackle challenges
However, private equity investing in the sports sector has also faced setbacks and challenges.
Often the leagues negotiate media rights and distribute proceeds among clubs, but these clubs also have the power to influence and even block deals – giving weight to the views of players and fans alongside the interests of individual clubs. For example, European football leagues such as the Bundesliga turned down plans for a capital injection in return for a stake in a new rights management company.
The human component of sport is also difficult to anticipate. Potential underperformance by a sports team following the departure of a manager or injury to a player can damage a franchise and its value. Likewise, potential scandals involving players or managers can affect a team’s reputation and therefore its bottom line. Therefore, any investment must be preceded by specific due diligence to understand PR and “crisis management” strategies.
Private equity is fast becoming a major player in sport as sponsors capitalize on opportunities at the institutional level. Investors have the potential to provide commercial and technological know-how to teams and leagues seeking post-pandemic capital. Deals can be structured to benefit sponsors by developing revenue streams from sports-loving fans while avoiding the day-to-day pressures of sporting decisions. However, private equity firms must be prepared for the test and setbacks that come with investing in esports.
Mike Preston is a partner at Cleary Gottlieb