Editor's Note: A version of this article was published in the Sports Business Journal on November 11, 2020.
Ownership of sports franchises has long been the domain of wealthy individuals, and on the rare occasion, corporate entities. In recent years, these lucky few have seen the value of their investments increase exponentially, largely due to increasing broadcast revenues resulting from disruption in the industry and changing consumer preferences. Meanwhile, private equity funds and other institutional investors have amassed record amounts of capital that is waiting to be deployed in search of returns for their limited partners and other investors. As the valuation of sports teams and leagues both domestically and internationally continues to increase, these properties have become an attractive yet elusive investment for professional money managers, while at the same time remaining an increasingly valuable yet illiquid asset in the hands of current owners. However, the landscape appears to be changing, as illustrated by numerous acquisitions of controlling and non-controlling interests in sports teams and leagues by institutional investors in recent years, coupled with recent changes to ownership rules in domestic leagues that could pave the way for further investment. In the wake of the financial fallout caused by the COVID-19 pandemic, cash-strapped franchises and leagues will likely welcome infusions of capital with open arms. What this portends for the future of sports ownership both domestically and abroad, as well as for the institutional investors themselves, remains to be seen, but at the very least, this is a trend that only seems to be accelerating.
Once considered the vanity projects of the wealthy and civic-minded, ownership of professional sports entities is now a certifiable blue chip form of investment that soundly outperforms leading index funds. In 2012, the English Premier League’s Manchester United was the only professional sports franchise valued at $2 billion. Eight years later, more than 57 teams have reached that valuation worldwide. While professional sports entities have long been considered tidy profit engines given their multivariable revenue streams and predictable (read, collectively bargained) liabilities, it is exponential growth in sports broadcast and gaming revenues that has turned heads in the investor community.
Streaming and over-the-top (OTT) services like Amazon, Hulu, and YouTube have disrupted a half-century status quo of “appointment” television, leaving live sport as the best bet for advertisers to reach viewers consistently. These same digital disruptors also represent new, deep-pocketed bidders for these precious sports broadcast rights, resulting in ballooning media rights values. Annual spending on sports broadcast rights nearly doubled between 2012 and 2018; currently standing at almost $50 billion worldwide. This figure is expected to rise to $85 billion in the next four years, as digital newcomers compete with established broadcasters; causing teams and leagues to increasingly view themselves as diversified entertainment companies, with a majority of income derived from ever-expanding league and local broadcast revenues, while ticketing and other gameday-related income comprise a less dynamic (though still important) piece of the economic pie.
Other ancillary forces have also contributed to franchise value growth. In the United States, loosening restrictions on sports betting have allowed teams and leagues to seek out relationships with gaming companies that were previously prohibited. By some estimates, North America’s four major sports leagues could stand to generate more than $4.2 billion per year as a result of a legalized, national betting market. Owners of domestic franchises have also sought to leverage their brand equity and sports-business expertise in cross-industry ventures such as esports and international soccer, seeking new efficiencies and growth.
These factors, combined with the inherent scarcity of professional sports ownership opportunities, have taken professional sports ownership from a solid investment with fringe benefits to hyper-valuable vehicles with almost unheard of returns.
The rapid rise of sports franchise values has coincided with an unprecedented increase in available capital for private equity firms and other institutional investors. In the last decade alone annual fundraising by private equity firms increased from around $60 billion in 2010 to upwards of $300 billion by 2019. Over a slightly longer time horizon, the private equity industry has grown from approximately $1 trillion in assets in 2004, to an astounding $4.5 trillion. The causes of this trend are varied and complex, but a confluence of factors, including historically low interest rates, underperformance of hedge funds, and general outperformance by private equity funds as compared to public markets have each played their part.
However, even while growing significantly in size, private equity funds and other institutional investors have significantly reduced the proportion of capital they are deploying. According to Institutional Investor, private equity funds called 16.3% of committed capital in 2006 and 19.1% in 2007, compared to a mere 4.1% percent in 2018 and 3.3% in 2019. The result: record amounts of capital available for investment but not yet deployed, referred to in industry parlance as “dry powder.” Estimates suggest that dry powder reached a record $1.45 trillion at the end of 2019, more than double what it was merely five years prior. While the reasons for these figures are varied and complex, the reluctance to invest actually may stem from the presence of the additional capital itself—increased competition for a finite number of viable investment opportunities has almost certainly driven up valuations, compromising potential returns and causing investment managers to hold onto excess capital for other better potential opportunities. So what to do with all of that dry powder now burning a hole in the pockets of institutional investors around the world? The answer may lie in an asset class that has witnessed phenomenal returns, but historically has been largely inaccessible to professional money managers: professional sports teams and leagues.
Rising franchise values have made investment in sports a winning play, but multibillion-dollar valuations have also limited the potential pool of principal investors. Simply put, there are not enough individual billionaires in the world to support a dynamic franchise investment market. Absent fundamental changes in how sports entities are acquired and owned, such demand-side scarcity would give way to a stagnant investment market. Recently, sports leagues have shown creativity in adapting their rules to invite a new kind of investment.
Previously, prospective sports investors dealt with the issue of runaway franchise values by utilizing leveraged buyouts (LBOs), where a franchise’s acquisition is financed using debt collateralized by its own assets. However, LBOs are typically disfavored by fans and leagues alike, who worry that servicing the revolving debt involved might serve as a destabilizing market force, representing capital that could be better allocated to direct investment into team performance. Increasingly, stakeholders are finding that minority investment by private equity firms might be the ideal solution for continuing franchise valuation growth without the risk of an LBO or similar financing scheme.
Minority investment in sports ventures is not a new practice, but it is an increasingly important one that benefits both new investors and existing owners alike. The sale of non-controlling stakes in sports franchises provides existing owners access to liquidity, allowing them to cash out on a portion of the unrealized appreciation of their investment while preserving their control over management and day-to-day decisions. In exchange, minority investors are given the opportunity to invest in a high-growth, yet uncorrelated asset class, with steady revenue streams all-but-guaranteed over the mid-to-long term. Those cash flows are typically underpinned by lucrative broadcast rights agreements, which guarantee hundreds of millions of dollars in secured revenue over contract lengths that roughly correspond to typical investment fund holding periods.
Major sports leagues in the United States have adapted to these market forces by loosening restrictions on minority ownership in an effort to encourage investment both in individual clubs and the leagues themselves. In 2019, Major League Baseball revised its bylaws to allow investors to purchase minority interests in multiple teams. In April 2020, the NBA tapped Dyal Capital Partners to create an investment vehicle that would provide investors the opportunity to invest across multiple franchises or even the entire league. In July 2020, MLS Commissioner Don Garber announced that the league was close to finalizing a plan to allow private equity investment in clubs for the first time. While the NFL has not yet gone to such lengths to directly attract institutional investment, it has taken smaller steps—including raising its acquisition debt limit from $350 million to $1 billion, as well as its operating debt limit from $350 million to $500 million.
Professional sports in Europe—where league control is generally less centralized and ownership restrictions are fewer—have already witnessed notable institutional investment activity. Italy’s top-flight soccer league, Serie A, has recently entered exclusive discussions with a group led by private equity giant CVC Capital Partners, which is seeking a minority stake in a new special purpose entity created to manage the league’s broadcasting rights. An active player in the space, CVC previously held a controlling interest in Formula One auto racing and has more recently acquired a minority stake in the Guinness Six Nations Championship international rugby event. Private equity money has also begun flowing into French soccer at the club level, with RedBird Capital’s acquisition of a controlling interest in F.C. Toulouse, following GACP Sport’s acquisition and sale of F.C. Bordeaux.
Private equity and institutional investment in sports could escalate in the financial throes and aftermath of the COVID-19 pandemic. The sports industry has been among the hardest hit by pandemic-related shutdowns and restrictions, as most game day-related revenues (e.g., tickets, concessions, parking) have come to a halt even as teams have returned to play. Given the uncertainty surrounding when and if fans will return at pre-pandemic levels, any measurement of losses at this point is still merely an estimate. However, these estimates help illustrate the magnitude of what leagues and teams are facing. The NFL, arguably the domestic league with the most solid financial footing, may experience a decrease in revenue approaching $4 billion. Across the pond, projected revenues for top-flight European soccer clubs are projected to fall by almost $2 billion compared to 2018-19, according to a report from Deloitte.
Along with operating losses, teams also face cash flow concerns. While most owners do not rely on their franchises to generate cash, other sources of liquidity that may have smoothed over reductions in cash flow (e.g., borrowings under credit facilities) may only be available on less attractive terms or, worse yet, not at all. However, losses today don’t necessarily mean lower valuations tomorrow. Even with the continued uncertainty of the pandemic, sports franchises are among the most stable and uncorrelated asset classes and will almost certainly remain an attractive investment in the long term. Financial headwinds and liquidity concerns in the short term, combined with the growth and resilience of sports team valuations in the long term, may create the perfect storm for an influx of capital from willing suitors. Owners who had a need or desire to liquidate a portion of their investment prior to the pandemic will likely be even more eager to do so in the face of decreasing revenues and continued uncertainty, while even owners that don’t have an immediate need for capital may be more open to accepting a minority investment from institutional investors to help establish adequate reserves and foster a relationship with a reliable source of readily-available capital in the future.
The changing face of professional sports ownership is a reflection of long-term market trends and regulatory adjustments made by teams and leagues to meet the demands and challenges of those trends. Whether all of this represents a new, lasting status quo or a temporary flux is yet unclear, but certain downstream effects are already visible.
Sports leagues in the United States have already liberalized prerequisites for team ownership and operational debt tolerance in order to allow investors to keep pace with franchise valuations. Common-sense reforms like the NFL raising its debt limit have allowed a fiscally conservative industry to take advantage of its solid asset base and encourage a continued rise in valuations. Taken to extremes, leagues might worry about the instability brought on by revolving debt, but no such crisis appears imminent among the major sports in the United States.
Securitization of both sports teams and league assets is another foreseeable consequence of these trends. A favorable investment environment for limited partners has led to demand for increased cross-league investment opportunities, like the type being developed by the NBA. One can foresee a system where private investors regularly buy and sell stakes in more complex vehicles tied directly to media rights or licensing agreements, similar to the investment on offer in the bidding for Italy’s Serie A. Where media rights are concerned, increased securitization and/or syndication may incentivize sports leagues to build “in-house” media broadcasting companies backed by institutional capital. This would also present an opportunity to take advantage of streaming technology and cord-cutting cultural trends to offer direct-to-consumer “over-the-top” content to fans on a subscription basis, bypassing traditional broadcast network middlemen.
Public ownership of sports entities is also seemingly on the horizon. Institutional investors are testing the waters of sport, but they are driven by profit, which often requires seeking public exits of private investments. This could lead to public listings of sports entities, as private investors seek an off-ramp via the public markets. European soccer giants Manchester United and Juventus are already publicly-traded entities, but such arrangements are foreign to domestic leagues and teams in more ways than one. Leagues in the United States have generally prioritized the privacy and centralized control afforded by private ownership over the fundraising potential of an IPO—which brings with it the disclosure requirements and associated costs of complying with SEC and listing exchange rules. This attitude could rapidly change, however, as institutional investors more accustomed to bringing companies public continue to flood into sports. It will be increasingly difficult for leagues to argue that entities valued in the billions of dollars lack the cash or bandwidth to undertake regulatory compliance, and even more difficult to deny the wishes of investors that helped drive such valuations.
The sports industry isn’t missing out on the Special Purpose Acquisition Company (SPAC) glow-up either. Firms such as RedBird Capital Partners have taken advantage of the rising popularity of SPACs by raising hundreds of millions from investors in a blind pool organized for the express purpose of acquiring and taking public a professional sports franchise. Recent rumors suggest that the preferred target of RedBall Acquisition Corp., the SPAC formed by Redbird Capital Partners, is Fenway Sports Group, whose assets include the MLB’s Boston Red Sox and reigning English Premier League champion, Liverpool F.C., signaling that a future with preeminent sports franchises trading on the NYSE may be right around the corner.
Sports have long held a special place in the hearts and minds of fans across the world. As professional sports franchises and leagues continue to witness unfettered growth, even in the face of unforeseen challenges like the COVID-19 pandemic, they may also attract a new set of admirers: institutional investors seeking a piece of a rapidly growing pie. While an investment in a sports franchise or league comes with its own unique set of considerations, it seems to be only a matter of time until private equity and other institutional investors stake their claim to a number of America’s favorite pastimes.