Hard-hit sports world finds new fans: private equity firms

July 20, 2020 View comment (1)
Samuel Di Carmine of Hellas Verona celebrates after scoring the opening goal during his team's first Serie A match since lockdown. (Alessandro Sabattini/Getty Images)

CVC Capital Partners, Bain Capital, and Cinven are among the private equity investors circling Serie A, Italy's top-flight soccer league, for a possible stake. Should a deal close, an influx of new capital couldn't arrive at a better time. 

Serie A, like other sports leagues around the world, has canceled months worth of matches during the pandemic and is now feeling the pinch. Serie A's revenue for the season is expected to drop to €2.1 billion (around $2.4 billion) from €2.5 billion the previous year, according to a forecast by analysts at Deloitte. Even larger declines are expected across other top leagues in Europe, including England's Premier League, which expects to see revenue plummet from €5.9 billion to €4.9 billion. 

Serie A is just one of the world's many pandemic-plagued sports leagues that are forging new links to private equity backers. After playing out most noticeably in Europe, the trend has also taken hold globally as the coronavirus ravages finances of teams and leagues everywhere. 

"COVID-19 has left leagues across the world—and their stakeholders—with significant revenue shortfalls and working capital needs, and third-party capital can fill this gap," said Andrew Umbers, a partner with UK sports-focused consultancy Oakwell, which advised Luxembourg-based CVC on its bid to buy a 14.5% stake in the Six Nations Rugby tournament. 

In the US, after decades of barring PE firms from taking stakes or owning franchises in many top leagues, the field is starting to open up. Major League Baseball got things rolling in October by ruling that funds would be allowed to hold positions in multiple teams. And last week, in a breakthrough for investors, Major League Soccer said it's planning to allow private equity to invest in teams, many of which have lost money during the pandemic.

The shift is significant because traditionally many commercial sports have been closed to institutional investors. Those old restrictions reflect fears that third-party providers of capital could have undue influence on a sport. 

Those rules may not have mattered for many years because investments in pro sports generally weren't as lucrative as they are today. Team ownership was typically the preserve of high-net-worth individuals drawn more to the prestige of the asset than its profitability. 

Changing state of play

Today, the sports industry is finding new areas of growth. Digital innovation has spurred owners to tap new revenue streams. Broadcasters, generally the top source of sports income, have been upended by the arrival of streaming platform providers like Amazon and YouTube. And fans, who increasingly consume media on mobile devices, are changing the way they engage with sports teams. New capital is needed to take advantage of these opportunities.  

"Sports bodies and clubs in every sport are beginning to understand that they need to be much more commercially concentrated and savvy," added Umbers. "Especially when looking ahead over the next few years or so."

In terms of total deal value, PitchBook data shows that 2019 was a record year for PE investment in Europe's sports market, with around $911 million injected across 10 deals—more than half of that representing Silicon Valley-based Silver Lake's $500 million purchase of a 10% stake in the vaunted English soccer club Manchester City. The US saw $1.2 billion invested across eight deals last year.

Post-pandemic, some observers believe inflated valuations are unlikely now, but so are the steep discounts.  

"It's an opportune time to find a well-priced deal," said Adam Sommerfeld, managing partner at Certus Capital Partners, which advises clients in the Premier League.

Sommerfeld said the fact that several established funds are now investing in pro sports is more likely to attract new investors than the promise of a bargain. He points to investors like CVC, who helped set the trend as early as 2006, when it bought a stake in motorsports league Formula One. More recently the firm is expanding its influence in rugby, augmenting its Six Nations deal with the purchase of a stake in the Pro14 league in May. That same month CVC and Silver Lake were said to be in talks with New Zealand Rugby, a rugby union governing body.   

"You're seeing a base that is very well-regarded, with respected investors making a statement of intent that others are looking to circle behind," Sommerfeld said. "It provides a comfort blanket."

There are still risks associated with sport investment and each investment can vary from deal to deal. Soccer club investments, for example, aren't only tied to long-term team performance and entry into international competitions—which can offer additional sponsorship deals—but are also potentially exposed to decisions by governing sports bodies. 

In one recent case, Silver Lake-backed Manchester City faced a €10 million fine and was hit with a two-year ban from European club competitions after it was accused of masking equity funds as sponsorship revenue. This would make it in breach of financial fair-play rules barring clubs from spending more than they earn, and thereby getting into financial problems. The decision was later overturned by the Court of Arbitration for Sport.

Currently, investments can also face the additional risk of a COVID-19 resurgence and therefore a second lockdown. The concern is significant enough that CVC is said to have added a coronavirus clause to its Six Nations deal, allowing the firm to withhold the investment—a series of installments—should further disruption occur. 

On the other hand, many aspects of pro sports remain appealing to traditional private equity investors. Sports leagues, for example, make most of their money from broadcasting rights, and many are locked in to two- to five-year contracts, roughly corresponding to portfolio company holding periods. In addition, there are income streams from sponsorship, match day revenue such as ticket sales and increasing digital revenue from things like advertising on online content. 

Oakwell's Umbers said more institutional investors, like PE firms, are interested in backing sports. However, he stresses the importance of finding the right investor that both understands the sport it is investing in and is able to align its interests with other stakeholders. 

"Sports needs to be very careful who it chooses as its financial partner. There are multiple sources of capital and private equity is just one of them," he said. "There are significant differences in culture sometimes, which won't always fit a particular sport to third party capital."

Nevertheless, PE investment in sport is only expected to grow. In April, Oakwell issued a report advising that the English Cricket Board consider opening the sport up to funds. Certus' Sommerfeld, meanwhile, said investors are now expressing interest in even more diverse categories of sport—including swimming.   

"I think people are realizing that the commercial, major opportunities around sports are growing far more than they ever have," he said. "Even COVID-19 has shown just how reliant people are on live content and having live sports to watch." 

Related content