Headlined by Arctos Sports Partners acquiring a 5% stake in the Golden State Warriors in April, private equity has pushed further into the sports investing space over the past few years. PitchBook analyst Wylie Fernyhough joins the "In Visible Capital" podcast to discuss his recent analyst note about what's driving the trend, including less restrictive ownership rules within leagues, skyrocketing valuations, the chance for new investors to achieve lofty returns and the clout that comes with owning some of the most scarce, high-profile assets available. Listen now wherever you get your podcasts.

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Download Wylie Fernyhough's analyst note, "Sports Teams and Private Equity Pair Up" here.


Adam: Hello, and welcome back to PitchBook's "In Visible Capital" podcast. I'm Adam Lewis, a reporter for PitchBook News.

Alexander: I'm Alexander Davis, Editor in Chief of PitchBook News. In today's show, we'll take a closer look at private equity's recent push into sports team ownership.

Over the past couple of years, the NBA, Major League Baseball, and MLS have loosened ownership rules to allow investors to purchase minority stakes in teams. PE firms have taken advantage, with Arctos Sports Partners recently buying a 5% stake in the Golden State Warriors, and RedBird Capital Partners acquiring a 10% stake in Fenway Sports Group, which owns the Boston Red Sox and Liverpool FC.

Alexander: Adam, we have today joining us on the pod PitchBook senior analyst Wylie Fernyhough. Wylie recently laid out in a great research note that is a must-read on this subject, how private equity firms are breaking into the sports industry. It's an industry that used to be really reserved for just wealthy individuals. He's here with us today, Wylie, thanks for joining us.

Wylie: Hey, thanks for having me, very excited to discuss this.

Adam: I touched on it a little bit in the intro, but why are investors now suddenly taking an interest in buying up stakes in the Warriors and the Red Sox? There's a few other rumored deals out there right now, too.

Wylie: I think the biggest thing is just that it's now possible in a way that it wasn't a couple of years ago. Following exactly to your point, those three leagues changing and loosening up some of their ownership rules and regulations, there's been a number of private equity firms that have either gone out and done deals, or are raising capital around doing deals and deploying them directly into sports teams.

Adam: What's their investment thesis to get into these? The possibility of getting in the league is now there, but private equity firms usually hold companies for three to five years. This is a different type of investment.

Wylie: Yes, absolutely. I will definitely hit on quite a few points. Maybe it's the latter point of this. In terms of holding period, it's going to be dramatically different. Expect these deals to go up to 10-plus years. Some of the funds that are being raised are perpetual or like evergreen-style vehicles, so they never have to sell. One interesting anecdote is that for the NBA, if any private equity firm wants to be approved, and they have to be approved by the league to buy a stake in an NBA team, they have to have at least 10 years left on the fund life, not including extensions. They really do expect this to be very long-term holds.

I think that's going to be something that's just very different from other private equity-style investments. In terms of, what's the investment thesis, I would say, the biggest things are going to be the stability of the cash flows. When looking at this in terms of the return profile, it looks more like infrastructure or real estate than it does the typical growth equity style, private equity investment that many people might assume just because it's a minority stake investment.

Then, the other thing is just diversification. It's a very different return and risk driver to add to these portfolios for the LPs, so all the returns in general have been fantastic. I show in there looking at average team values, in terms of appreciation versus the S&P 500, and it's a pretty lucrative return in the past. I think there's a decent chance that that could continue at least for the next 10, 15 years going forward.

Alexander: Wylie, what role or what value do the investors see in media rights and potential access to media rights in these deals? I think of the Seattle Mariners, for instance. They have a network called Root Sports; other franchises have that. Where does that fit into the overall scheme?

Wylie: Media rights are really the most important aspect when it comes to driving value for these sports teams. Not only today but especially in the future. Looking at a couple of leagues, it ranges from maybe 40% to 60% of their income that comes from media rights. In a world where there's so much streaming and everything is on-demand, live content just has increased in value and is likely to continue to do so going forward. It's really the main driver for returns and revenues for these sports teams. Looking at the MLS as one example, or the NBA, which are coming up on some renegotiations of their media rights, and the NBA could very well nearly triple their deal, whereas the MLS might see a tenfold depending on what can be negotiated in terms of their media rights. It's a very substantial driving force behind these returns.

Adam: The NHL too is negotiating their media rights deal right now, and they haven't loosened their rules recently about private equity ownership, but from my understanding they don't have any rules forbidding private equity ownership. It'll be interesting to see if they try to maybe dive in here over the next few years to get a piece of the pie.

Wylie: It's my understanding that private equity firms can currently buy minority stakes in NHL teams as well as European soccer leagues. They don't have those same rules. It's really just the NFL that has not joined the other major leagues in the US, and we'll see if that happens. I think it's probably likely owners want additional sources of capital, and I think we're going to see it perform pretty well for the NBA and MLB.

Adam: This isn't something that's totally new. The Ontario Teachers' Pension Plan owned a stake in an NHL team a long time ago, and Platinum Equity, they owned a stake, or maybe a majority stake, in the Pistons. This has happened before, correct?

Wylie: Yes, correct. Definitely one thing to highlight is those previous deals that you mentioned have all been majority stake deals, whereas the ownership changes now, and some of these funds are only targeting minority stake deals across multiple teams within the same league. Whether it's Arctos raising a fund to potentially buy stakes in baseball, basketball and more, Dyal raising their basketball NBA fund that can invest into all of the NBA teams or GSP's Baseball Fund. It's all minority stakes, which is a very different value proposition in that you don't actually have any access to, or basically influence over, the club. Very different, but you are correct, there's been some overlap in terms of private equity in the past.

Alexander: Let me ask about leverage, is leverage actually being used in these deals widely, and if so, how does private equity really survive if there's a leverage play?

Wylie: There is no leverage in these deals. They're going to be pretty much all equity. A lot of these leagues limit the amount of leverage that you can use either buying majority or minority stakes, just to avoid bankruptcy courts and some other things that can get pretty hairy, if a situation ever came up. That is avoided, but the return profiles are still pretty attractive.

Going back to that whole infrastructure or real estate, the value in terms of appreciation plus the cash flow yield on these assets, can still get in 15% to 20% IRR range over a 10 or more-year period. LPs go into this knowing that it might not have the same return profile as a tech buyout fund, for instance, which is likely going to achieve much higher returns. It's just going to slot into a different piece of the portfolio. In general, looking at some of the returns and the overall profile, it's still relatively attractive even without the leverage.

Adam: Is part of this kind of a marketing play too for private equity firms? There is a certain cool aspect to owning a stake in the Warriors; you think it would lift the overall profile of your firm by doing it. Most people haven't heard of Arctos Sports Partners or Redbird Capital Partners. But from an attractive standpoint to LPs, having that increased profile of being part of the NBA or part of Major League Baseball, it's got to be beneficial. Not just on the investment front, but raising the overall profile.

Wylie: I think that is something that does attract some of the LP capital into the space. There is definitely an attractive aspect about, exactly to your point, owning a stake in the Warriors even if you are representing a pension plan or a family office. That's a cool thing to be able to say that you have. Not to mention, again, the return profile is pretty attractive. Yes, I agree. It's some of those scarce assets that are highly visible in the public domain, and to say you own a piece of that is definitely something that a lot of people want to say they can. Not everyone is a Steve Ballmer that can go out and drop $2 billion on a team. This is another way into very much on the minority side of ownership.

Alexander: Yes, and it literally puts you in the big leagues to be out there in a glamorous slice of the business world. There's a ton of networking these days that goes on around sports teams, especially when you throw in the fact that there are media interests involved. It is a form of marketing, I would say.

Adam: There aren't very many investors really in the space at all. There's Arctos Sports Partners, our friends, Dyal Capital Partners, and maybe GSP might be raising a fund, but it's still an asset class, it's very much in its infancy.

Wylie: I would say so. I agree that there's not a ton of players in the space and it seems to be a pretty large addressable market, although it's notoriously difficult to not just be approved by the league, but then to be able to actually go out and raise capital, structure these deals, deploy it. It's extremely difficult, and for that reason, I can see maybe one other firm joining the space, but I think it's going to be pretty difficult.

Not to mention, a lot of the larger firms like Blackstone or Ares or Apollo are barred from getting into it, just because of the potential conflicts of interest around having certain executives at those firms own teams. It prevents some of the more well-known large firms from getting into it. It's some of these other shops. To that point, several of them are first-time funds. Arctos and GSP are new entities when it comes to raising capital, although they've been around the block in terms of sports and deploying capital.

Alexander: Speaking of it being in its infancy, at least in the US, it's a little different situation in the European sports industry. Can you talk about some of the differences between the two? I know that there are some different approaches that have been going on for some time in Europe and some of their very big teams and leagues.

Wylie: There's a couple of teams in Europe that are publicly traded. There are some different investment styles that you can do. CVC Capital Partners is famous for looking to invest just in media rights, whether it's the Italian soccer leagues or the German Bundesliga. Pretty interesting ways of structuring some of these investments to maybe not necessarily even be in the teams, but to be just directly in those media rights, which might be the most lucrative aspect of owning a stake in the team.

Really interesting ways of deploying capital, and we'll see if that translates here as well. I know one other interesting deal that happened was MLS sold a piece of their equivalent of the media rights to Providence back in the day. Providence made a healthy return on that before the MLS bought that stake back.

Alexander: Quick follow-up about both sides of the Atlantic: Any thoughts on how the pandemic has affected the industry and whether there's some sign that the investing trend might've been affected by the really hard times that the sports leagues just came out of and actually continue to struggle with?

Wylie: I think it's done two things. I think it came at a good time, so I'm sure certain owners out there where a large proportion of their wealth is leveraged to these sports teams might see this as a pretty attractive way to raise some capital in a year, that maybe income was less than they had been anticipating from some of these teams. I think that's one piece. I think the other piece is that it showed how resilient these teams are.

Quite a few of these teams still increased in value despite the pandemic and not having ticket sales, et cetera. It really shows how recession-proof some of these assets are. I think that made a lot of LPs really take a second look at investing in sports and maybe say, "Hey, if this is what happens during the pandemic, I think that bodes well for the future."

Adam: If you can survive a pandemic as a business, then you're in pretty good shape, right?

Wylie: Not just survive, but a lot of these businesses now are thriving.

Adam: What are some of the risks that you dove into in your analyst note that come with investing in a sports team? I think of fan pushback. Honestly, after the Super League debacle, a private equity firm tried to invest in the All Blacks famous rugby team in New Zealand, and their fans freaked out. We were like, "What is going on? We do not want this." What are maybe other than that some of the risks associated with—

Wylie: In some of those ones, I think it's a slightly different story but I would say for me at least looking into it, really the biggest risk is around longer-term fan engagement. Whether it's the MLB, which has been losing fans over time and then, your fans equal lower media rights. Then, there's this cycle that happens all of a sudden. I think a lot of these leagues are looking to avoid that downward spiral in terms of declining value, fewer fans, worse quality of a product, and just self-perpetuating. I think to me, it's really the longer-term risks. I think when certain leagues were able to be renegotiating with their leagues in terms of the players, even during the pandemic, it really showed how resilient a lot of these leagues are.

The commissioner, the owners, and the players all have to be on the same page, and if you're able to get through that in this pandemic, I think that was, to me at least, one of the bigger risks and all these leagues seem to have done a pretty good job.

Alexander: I want to jump in for a second with a slightly different angle, which is what to expect from the teams, the leagues, as private equity over time gets larger and larger stakes or control of teams. Adam, you're such a fierce skeptic of the private equity effect on industry after industry. I'm surprised you didn't jump on this one.

Adam: [laughs] Our producer says I have to be more optimistic, so I'm trying that out. It doesn't always fit though.

Alexander: Well, we'll do a little role reversal here maybe. But private equity—getting back to Adam's point earlier about pushback from fans. Private equity has been known to come into a lot of deals and really shake things up. They put pressure on the assets they own to perform at a higher level. Have you thought about or seen some indication of what kinds of things they might be looking to accomplish and do differently in running these businesses, how that might actually translate into the fan experience?

Wylie: Great question. I would say the leagues probably share some of that maybe skepticism, which is why I think—I believe it's the NBA, for example, that limits outside ownership to 30% and that these stakes have to be very hands-off. You don't get to—

Alexander: No control.

Wylie: No ability of control and no ability really to vote those shares either. These are very much hands-off stakes to do exactly that is, to keep private equity away from the actual running of the business and use it more as a capital solution for certain owners in some circumstances. I think that's the way that private equity, at least some of these firms that I've talked to, they're very comfortable with basically saying, "This is a totally hands-off minority stake," and they don't really plan to try to assert any other control.

The leagues and owners know that some of these firms are there if they need advice, whether it's running a club more like a business, and I'm sure they would be happy to help. In a lot of ways, just the way that they're structured there's a lot of things that have to be very hands-off.

Alexander: Do you envision a future, Wylie, where they are more hands-on, where the leagues, if they're really in need of capital, would open it up?

Wylie: It's hard for me to see that happening. I think you might see them reach out to some of these firms, and again just try to figure out better ways to run them as businesses whether it's the league or individual entities. I think you're pretty much always going to have them stay as minority owners rather than majority.

Adam: Well, we will have to have you back on in a few years in case that changes when Blackstone buys the New York Yankees, or [...] from Steve Cohen. When Steve Cohen flips the Mets for a tidy little profit, then, we can have you back on for another show.

Wylie: I would definitely come back if that happens.

Adam: Okay. Well, that does it for this season of PitchBook's "In Visible Capital" podcast. We'll be back after a short break with new episodes unpacking the private markets. Until then, you can find more in-depth news and analysis from me and my colleagues at Pitchbook.com. Thanks for listening.

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