PE rethinks sports investing strategy after fans and teams cry foul

Private equity's push into professional sports investing initially appeared to be a slam dunk. But investors have recently faced increasing pushback as they attempt to establish themselves in the elite world of pro sports team and league ownership.

Over the past 18 months, PE firms have taken on passive stakes in professional sports franchises and in leagues after the NBA, MLB and Major League Soccer loosened ownership rules to include institutional investors.

Some deals have drawn scant attention, but a few notable ones lately have sparked ire in several quarters. Critics have ranged from fans upset by increased involvement from major financial players to club executives wary of signing away profits.

But PE investors say they're aiming to drive revenue growth through passive, non-controlling investments—not the cost-cutting measures that critics have panned in past forays by PE firms into other industries.

The controversy has at times shined a harsh light on the challenges of operating within an ecosystem where enough outrage from either fans or players can create a formidable hurdle to get a deal completed. And investors have taken notice.

"I think it's made financial investors reevaluate," said Joseph DaGrosa, founder of Kapital Football Group, which has plans to acquire three top-flight clubs in Brazil, Portugal and Belgium and invest in soccer academies focused on developing players. 

"I'm not so sure it's made it more difficult to buy from the perspective of there's plenty of willing sellers out there right now," he added. "But I think it was a wake-up call to potential buyers, particularly financial buyers, who perhaps didn't acknowledge the importance of making sure you have the support of the fans."

PE sports deals a mixed bag globally

The headlines haven't deterred PE dealmaking. In 2020, the number of PE investments in US sports teams more than doubled from the previous year, according to PitchBook data. And PE deals involving the NBA and MLB have gone through with minimal pushback. Deals in Europe have been tougher to seal. One of the starkest episodes played out in August, when Real Madrid announced it would sue Spain's La Liga and CVC Capital Partners after CVC agreed to acquire a 10% ownership stake in the soccer league's commercial activities for €2.7 billion (about $3.2 billion).

In hopes of undoing the deal, Real Madrid said it would pursue civil and criminal complaints against La Liga President Javier Tebas and CVC managing partner Javier de Jaime Guijarro, who oversees the firm's private equity portfolio in Spain and Italy.

But CVC's stake appears safe for now, as 38 of the 42 clubs in the first and second divisions voted to approve the transaction, which would give CVC partial ownership of La Liga's broadcast rights for the next 50 years. Individual clubs are allowed to opt out.

DaGrosa said that investing directly in leagues in particular will always be challenging.

"Everyone else is going to run into similar problems and probably more problems," he said of backing leagues. "(CVC Capital) are very smart guys and they thought through these issues. But the way we look at it, it's like herding cats. It's a very tough road to go down."

In another sports showdown for PE, Silver Lake agreed earlier this year to acquire a 12.5% stake in New Zealand's All Blacks rugby team, investing up to $273 million. But the New Zealand Rugby Players Association has yet to agree to the terms, citing doubts about Silver Lake's financial projections and worries it would be distasteful to commercialize the All Blacks' pregame haka, a choreographed dance that pays tribute to New Zealand's Indigenous tribes.

In April, JP Morgan was forced to abandon $4 billion in financing to form an elite soccer league, which would have combined top clubs from across Europe and served as a rival to the UEFA Champions League. The so-called Super League crumbled before it got off the ground, following widespread condemnation from fans, players and even UK Prime Minister Boris Johnson.

Benefits, risks in pro sports investing

For a PE industry becoming more active at fighting a negative public perception, executives must now ask whether pursuing professional sports investments is worth the possible backlash.

In a report on sports deals earlier this year, PitchBook analyst Wylie Fernyhough detailed some of the risks involved with sports-specific investments.

There are some significant risk factors to taking ownership stakes in professional leagues and teams. In the US, that includes possible lockouts when players unions and owners fail to reach a collective bargaining agreement. In Europe, risk of a lockout is less prevalent, but investors in a soccer team do have to weigh the threat of relegation, where a team is demoted to a lower division if it finishes in the bottom three in the standings.

RedBird Capital Partners partner Robert Klein said in a recent podcast his firm focuses on opportunities for steady returns over a period of four to six years. At worst, RedBird plans to make its money back but aims to either double or triple its original investment. 

"We don't like taking binary risks," Klein said. "We don't like taking tech risks. We don't like taking team-specific risk or market-specific risk. And that's, I think, ultimately, where people get in trouble."

In March, RedBird acquired a 10% stake in Fenway Sports Group, which owns the Boston Red Sox, Liverpool FC and media outlets, in a deal that values the group at $7.4 billion. RedBird had originally planned to acquire a stake in FSG through a SPAC it backed alongside Oakland Athletics executive Billy Beane, but the firm instead used its private equity arm to complete the transaction. 

For RedBird, the goal isn't to go in and reap profits from a struggling franchise with cost-cutting measures and then sell a few years later, Klein said. And capital for many of the PE sports deals will come via evergreen funds, which don't put as much pressure on teams to hit investor's return-on-investment targets. 

That deals squarely with one of the main gripes among fans and players who have spoken out against the increasing influence of institutional investors within the sports industry. Also, league ownership rules forbid investors from piling debt onto portfolio companies, which could limit player payroll.

"This is a case of some of the best assets in sports with some of the best operators in sports," Klein said of RedBird's deal with FSG. "This is not the case of a mismanaged business or an under-managed business. This is the case of something that's already really great."

As private funds accumulate ever more capital to deploy, the PE industry seems poised to continue hunting for deals across the pro sports world.

Earlier this month, Commissioner Don Garber of US-based Major League Soccer said he expects PE firms to start investing in MLS teams by the end of the year. Dyal Capital Partners, which already has agreed to back the NBA's Phoenix Suns and Sacramento Kings, has said it plans to invest in five to six NBA teams with its own passive stakes fund. And in June, Sixth Street Partners agreed to buy a minority stake in the San Antonio Spurs.