What is the difference between investing in a sports club and investing in a sports league or competition?
The economic performance of a sports club is more uncertain than the performance of a league or a sports competition because a club's revenue depends on its sports results. This is especially true in Europe, where relegation is the norm in most sports leagues. In contrast, in the United States, closed leagues prevent relegation and reduce the risk associated with sports performance.
The economic models of leagues and competitions are more profitable than those of clubs. Such investments are more media focused than sports oriented, because sports contingencies have little or no impact on their financial performance. For leagues, it is about improving the value of the product and the monetization of the content. For clubs, it is more uncertain and difficult to make profit based on improving the value of their assets, mainly the players and the infrastructure. The deals’ return on investment with clubs is yet to be proven. However, the clubs’ model is also changing. Player trading or good scouting and training policies can create value.
Historically, debt funds lent money to allow clubs to pay receivables due to player transfers or to advance earnings to be received for TV rights. This is what has led some funds to own sports clubs, as it was the case of Elliott Management, a fund specialized in debt buyouts, with AC Milan.
The -very fluctuating- earnings generated each year depend on hospitality revenues, TV rights, sponsoring, merchandising, and sports performances. With the COVID crisis, the clubs no longer receive some of these revenues and lack liquidity. This could lead to some capitalistic changes.
The model is based on BtoB relationships between clubs, sponsors, and rights holders. It could evolve to BtoBtoC relationships with a focus on the fan. Some clubs have already taken this step by becoming high-value franchises (like Disney). Helping clubs to create value and changing their business model is an opportunity for PE funds.