Is private equity changing the face of sport?

In light of recent events and growing investment activity, we look at why sports assets represent a challenge for investors

The sports industry is estimated to be worth $500-600 billion, with many teams and brands transcending borders and nationalities. However, with big investors already backing iconic brands such as the All Blacks and UFC, will private equity investment continue to rise in this space?

Sport is said to be one of the true unifiers across the world. Several Olympics are associated with special moments, such as North and South Korea competing together in some 2018winter events, while recently football, basketball and other sports have been used to protest against social injustice. However, sports clubs and leagues are ultimately still businesses needing to record profit and avoid losses. They have also been hit particularly hard by the social distancing measures and the fall-out from the pandemic. In just one example, the reigning British and European rugby champions, Exeter Chiefs, saw a dramatic 20% fall in yearly revenue due to Covid.

Private equity: an industry lifeline?

Deloitte recently highlighted an increase in private equity investment as a key factor in overcoming these shortcomings. There are some well-established players in this niche; CVC Partners perhaps more so than any. They are currently looking to invest as part of a joint bid in the media rights for the Italian Serie A. They also invested over $200m in Premiership Rugby in 2018 and hold significant stakes in the Pro14 league as well as the international Six Nations competition. With the Serie A predicted to have lost €600 million as a direct result of the Covid pandemic, these investments come at a time when the industry is in desperate need of cash.

Other PE players also recognise the demand for cash in the sports industry, as well as the potential returns it represents. Examples include ALK Capital, who recently became the majority shareholder in Burnley football club, whilst Silver Lake are looking to take a stake in the All Blacks. They have also dipped their toes in these waters before - in 2019 they took a 10% stake in Manchester City for around $500 million.

More than just clubs

The recent European Super League fiasco can be seen as an example of how sport differs from more conventional investments though. Sports clubs are often seen as core elements of community identity and as having intangible value beyond their balance sheets. As a result any movements in this industry can create wide reaching scrutiny. The proposed breakaway from the Premier League and other European leagues was so controversial that it attracted comments from both the British Prime Minister and the President of France.

This could make life difficult for private equity firms. Silver Lake is seeing a similar push back around their potential investment into the All Blacks. Several of the most prominent players in New Zealand, including the national captain, cited their worries that “NZR was selling income-generating assets that relied, in part, upon cultural practices and understandings that they consider not for sale under any circumstances.” When passions are tied so closely to a cause, it is possible that we will see similar reactions to other bids.

The bottom-line...

Ultimately though, cash strapped clubs are going to need to raise funds as they look to recover from the Covid fallout. Private equity firms have weathered the coronavirus storm, and are becoming increasingly interested in the space. Nonetheless, they will need to tread carefully. As William Jackson, MD of Bridgepoint warned the FT recently, “investors may have the share certificates, but nobody feels ownership of a club like a fan”.

Will More

Will focuses on private equity and venture capital at Arbolus. A keen sports fan outside of work, he has run marathons on three different continents for charity.

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