By George Shamiyeh, Skyler Minke, and Knowles Adkisson, Forward Risk and Intelligence
The trend is unmistakable. Investments in professional sports, long the province of high-net-worth individuals motivated by a mix of passion and prestige, are increasingly catching the eye of institutional investors in search of value creation and lucrative returns. Professional sports franchises and leagues who once shunned private equity overtures are now spreading their arms wide, spurred by greater liquidity needs to sustain growth and manage pandemic-related losses.
Together these factors create an environment that offers promising new investment opportunities not only in North America and Europe, but in regions as far-flung as India and New Zealand. But these opportunities do not come without inherent challenges and risks—fan passion and exposure to corruption and organized crime, for instance—that are almost entirely unique to the sports industry. The successful private equity investor will require a nuanced understanding of this sector to navigate the risks associated with acquisition and marketing opportunities, including efforts such as investigative research into potential equity partners and club leaders, as well as a strong understanding of geopolitical risks.
From the early days of professional sports until relatively recently, ownership in franchises was limited to high-net-worth individuals, or sometimes as in the case of European soccer, collective fan ownership. Leagues feared that corporate ownership would lead to a loss of control by virtue of being accountable to stockholders and having to submit proprietary information to financial regulators. As a result, leagues such as the NFL, NBA, and MLB in North America instituted rules limiting, for example, majority ownership stakes to individuals who can afford to pay cash.
But starting in the last several years and accelerating during the coronavirus pandemic, those leagues have started to amend their bylaws to relax those restrictions, for several reasons. For one, sports franchise values have exploded. In 2001, for example, Forbes estimated that the average NBA franchise was worth $207 million. In 2021, Forbes pegged the average NBA team’s worth at $2.2 billion. This upward explosion in valuations has made the prospect of summoning the liquidity to purchase a franchise outright increasingly daunting for the individual investor.
A key driver of these increased valuations is an exponential growth in media rights deals. The rise of digital technology and streaming have enabled sports entities—such as European soccer clubs, a popular recent investment target for institutional investors—to grow their brands beyond national and continental borders to reach truly global audiences. Recent developments such as the 2018 U.S. Supreme Court decision striking down a federal prohibition on sports betting are supercharging this trend, with the number of Americans betting on sports in 2021 expected to increase by more than a third over the previous year. Ongoing competition between clubs to maximize these new opportunities has required them to transition into truly international businesses, or else be left behind.
In March 2020, these trends collided with the coronavirus pandemic to create a perfect storm for private equity investment in sports. Even as league and franchise valuations continued to rise, revenue across sports plummeted with the cancellation of games and drastically reduced fan attendance. The disruption almost prompted the collapse of Italian soccer’s premier league, Serie A, while Germany’s top league, the Bundesliga, sought to stem revenue losses with a proposed sale of its overseas broadcasting rights to private equity bidders.
Each of these developments—a need to professionalize their business operations, sustain growth, and compensate for pandemic-related losses—has led sports leagues and franchises to seek outside investment from private equity investors, who had record amounts of unspent cash on hand at the onset of the pandemic. And attracted by consistent returns and the prospect of future growth, private equity has returned the interest.
“Clubs and leagues are looking for investors who can support their growth through strategies like international expansion, broadcast rights partnerships, new streaming distribution opportunities, betting and digital,” Franziska Kayser, a Managing Director at KKR, recently told Private Equity News.
So, with inexorable revenue and valuation growth and an urgent demand for liquidity, sports investments should be a, well, “slam dunk” for private equity investors, right? As in other sectors, the most realistic answer is, “not always.” An investment in sports brings with it a set of unique costs and challenges that are ignored at great peril.
For starters, the sports industry in general has long suffered from exposure to corruption—including match-fixing, bribery, and money-laundering—and the sector offers numerous entry and exit points for illicit finance. Any potential equity transaction should begin with due diligence—including executive background screening, extensive public records review, and independent source interviews—to arm potential investors with all available information before making a major commitment. Having thoroughly examined and analyzed public records and news sources in countless jurisdictions across the globe, Forward Risk’s team of investigators is well-positioned to help private equity investors identify and mitigate risks arising from bribery and corruption. Leveraging our multilingual research capabilities and subject matter expertise in major world regions, we piece together open-source information to provide our clients with actionable intelligence.
Depending on context, investments in this sector can also be volatile to an investor’s bottom line. In English soccer’s Premier League, where each season the three worst clubs are sent to a lower division with dramatically reduced broadcast revenue, poor on-field performance can have immense financial consequences. American PE firm ALK Capital’s recent purchase of English club Burnley F.C. could, according to some estimates, see the team’s television revenue drop from about $130 million per year to $4 million per year if the club doesn’t win enough this season to stay in the Premier League. Without a proper deep-dive review of open sources, or interviews with well-placed individuals—focused on gathering a concrete understanding of a league’s relegation practices or a management team’s track record—prospective investors might find themselves behind the curve from the get-go.
Finally, any investor must also understand that the high-visibility nature of sports carries with it the potential for widespread reputational damage that can happen quickly and with little opportunity for damage control. The recent takeover of Newcastle United by the private equity firm PCP Capital Partners and the Saudi Public Investment Fund has brought with it a spate of media coverage surrounding human rights abuses by the Saudi government. Unlike in, for example, the real estate sector, investments in sports require stakeholders to maintain a strong relationship with fans and players. In April 2021, a proposal for the largest European soccer teams to form their own, transcontinental “European Super League” fell apart almost immediately after it was made public in the face of immense backlash from fans, players, and politicians. JPMorgan Chase & Co., which had pledged nearly $5 billion to underwrite the new league, suffered what the New York Times described as “an immense reputational hit” when the proposal collapsed.
“Investors need to appreciate the community and country dynamics in which they are investing,” Gerry Cardinale, the Founder and Managing Partner of sports-focused private equity firm RedBird Capital Partners, recently told Private Equity International. “Teams at the most fundamental level are emotional assets and brands that ultimately belong to the fans and their larger community.”
Institutional investors seeking entry into the global sports industry will require a seasoned business intelligence and due diligence partner, as investments in this space should be made with a full picture in hand. That includes not only an in-depth review of the track records of potential equity partners and club leaders, but also a clear outline of the geopolitical risks that may bring blowback to a deal.
Forward Risk’s dedicated investigations team comprises industry experts who have years of combined experience in supporting hedge funds and private equity firms to navigate the risks associated with acquisition and market-entry opportunities. We invite you to find out more about how Forward Risk can help.