The NFL’s decision to allow private equity funds to invest in its franchises saw it become the latest professional sports league to embrace institutional investment. SportsPro examines what is driving the influx of external capital into the industry and how much impact it is having.
In recent years, sport has significantly relaxed its previously guarded attitude towards private equity investment for a multitude of reasons.
Covid-19 saw a flurry of deals as some sports properties sought to limit the financial impact of the pandemic and accelerate investment in transforming key areas of their business, while US leagues have opened the door for institutional investment to help team minority partners sell their stakes amid a period of soaring franchise valuations.
Whatever the reason, by the end of 2021, the National Basketball Association (NBA), the National Hockey League (NHL), Major League Baseball (MLB) and Major League Soccer (MLS) had all changed their ownership rules, allowing funds to make multiple minority investments in their franchises. In Europe, soccer’s ‘big five’ leagues saw investment from private dealmakers leap from €66.7 million (US$73.8 million) in 2018 to €4.9 billion (US$5.4 billion) in 2022.
Today, private equity firms hold stakes in sports ranging from rugby union and lacrosse to cricket and volleyball. Meanwhile in August, the National Football League (NFL), where teams rarely change hands, became the last of the North American men’s major leagues to embrace institutional investment when its owners voted to allow funds to acquire up to ten per cent in a franchise.
But what effect is private equity having on sport and is the influx of institutional investment set to continue?
Why is private equity so interested in sport?
Armed with lucrative broadcast deals and a vast audience, elite sport continues to represent an attractive investment proposition. Indeed, annual global investment in the professional sports industry reportedly rose from below US$10 billion in 2008 to more than US$30 billion last year.
And sport is particularly appealing to private equity firms for several reasons. It has guaranteed revenue streams spread over several years, high fan loyalty and at the very top level has proved to be recession proof on several occasions. Even considering those factors, funds believe opportunities in areas like digital media, technology and real estate mean sports properties still have plenty of room to grow and can therefore generate a return on their investment.
“Financially, if you’re looking at asset weights across multiple industries, sports franchise returns have outperformed most asset classes over five, ten, 20 years,” Andrew Umbers, partner at London-based corporate finance and strategic consultancy Oakwell Sports Advisory, tells SportsPro.
“If you take 20 years, the returns are 12 per cent per annum. Global equities are up 8.4 per cent, US equities are up 10.2 per cent. Sport has beaten inflation.
“When you look at leagues, investments typically come with an Ebitda margin of plus 70 per cent. Even pension funds would like that sort of return.”
According to Jesse Silvertown, principal at New York-headquartered The Ledge Company, which specialises in M&A fraud due diligence, forensic accounting and fraud investigations across multiple sectors, sport is attractive for three main reasons.
One is the “respect factor”, which Silvertown says comes from investors who “like to say that they’re in sports and have an ownership slice”. Essentially, owning a chunk of a sports team looks good in an investment portfolio.
Then, Silvertown continues, is “the return aspect”. Indeed, sport is largely untethered from wider market factors, which means that if things go south, like they did during global financial crisis from 2007 to 2008, investors with money in the industry are less likely to be in the mire.
“These people want to be able to park the money of their constituents in something that’s safe,” says Silvertown.
Replication, which is the last of Silvertown’s three Rs, refers to private equity firms responding to what their rivals are doing.
“It’s a little bit of follow the leader,” he explains. “If there’re private equity firms that are raising funds in sports, others are like, ‘wait a minute, why can’t we raise a fund in sports?’
“It’s not just an idea that spawns from a private equity firm or their fund manager. It also spawns from their clients, their limited partners, who come to them and say, ‘I want exposure in sports, [but] you don’t have any exposure in sports, you don’t have a fund dedicated to sports. I’m going to go put it somewhere else.’”
Why is sport so interested in private equity?
The sports landscape is changing. Notably, more organisations are shifting towards direct-to-consumer (DTC) strategies, technology is becoming more integral on and off the pitch, and teams are looking to enhance the matchday experience with major stadium infrastructure upgrades. The rise of women’s sport has also seen clubs invest in the development of their women’s teams.
All of that requires significant amounts of capital, which has ushered in a new wave of private equity investment.
Aside from money, private equity’s pitch to sports is that it can help with scale and governance at a time when leagues and teams need to be able to meet today’s commercial challenges. Given private equity firms work with multibillion-dollar corporations – Silver Lake’s portfolio, for example, includes Dell, Endeavor and Fanatics – sports organisations hope accrued expertise will take their business operations to new heights.
Of course, major league teams are hardly slouches when it comes to commercial performance. For instance, according to Forbes, the average NFL franchise is now worth US$5.7 billion, up 11 per cent on 2023, with the top-ranked Dallas Cowboys breaking the US$10 billion barrier for the first time.
However, with franchises becoming more expensive, the pool of investors in the US major leagues has shrunk, which prompted rule changes in order to create fresh liquidity.
While many funds have to settle for minority stakes in US franchises, private investment firms have been able to acquire majority control of soccer teams in Europe. In 2022, RedBird Capital Partners snapped up Italian soccer giants AC Milan at a €1.2 billion (US$1.3 billion) valuation, while Oaktree Capital Management took control of the Rossoneri’s city rivals Inter back in May. Elsewhere, Clearlake Capital was part of the consortium that bought Premier League outfit Chelsea for UK£2.5 billion (US$3.3 billion) more than two years ago.
Even some European clubs with the deepest of pockets are turning to private equity. Paris Saint-Germain, who are owned by Qatar Sports Investments (QSI), sold a reported 12.5 per cent stake to Arctos Partners back in December 2023 to help fuel the next phase of their global growth and boost business operations.