Private Equity & Sport:
Opportunities and questions
During this webinar, panelists were invited to discuss a major trend in sports business: private equity. Private equity funds are increasingly interested in sport ecosystem stakeholders such as clubs, leagues, and rights holders.
Jean-Philippe Bescond: Associé Gérant et Managing Director – Lazard
Edouard Conques: Managing Director – CVC Capital Partners
Mickael Betito: Principal – Novalpina
Arthur Bernard: Founder & General Partner – Athletico Ventures
What are the motivations of PE funds to invest in sport business?
PE funds are looking at sports as a source of premium content with a significant value. Interest in sports is growing as the sector is acyclical. Furthermore, the COVID-19 pandemic may represent an opportunity for PE funds, since it has consequences on the business models of the stakeholders in the world of sports, leading to an evolution of the modes of governance. PE funds can play a role in accompanying these transitions. It should be noted that despite the crisis, the sports sector is relatively resilient. For example, audiences for the 6 Nations Tournament are growing this year.
Sport is a growing sector in which consumer habits are changing. It is difficult today to capture the attention of the consumer for 90 minutes. Nevertheless, it is the only entertainment that can assemble a large live audience at a fixed time. The current situation in the sports sector may have similarities with the music industry 10 years ago, before streaming platforms revolutionized an industry that was losing momentum.
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.
What is the role of PE funds in these investments?
The investment model is a partnership model: for example, in the deal with the 6 Nations Tournament, CVC becomes a minority shareholder alongside the stakeholders (the 6 Federations). The fund is involved exclusively in the economic and commercial aspects, not in the sports ones. The political aspect is an important element, as governance is often complex because there are many stakeholders whose interests may diverge.
Sport is a different kind of investment because of the preponderance of the emotional dimension carried by the fans who remain reluctant to an over-financialized sport. Moreover, the arrival of players from the PE world is quite recent, so this raises questions. The objective of the funds is to accompany the entities around a project.
The health crisis may have acted as a catalyst. It has led to an awareness of the need to ensure that all actors have the same vision and objectives. Having a new and neutral partner can act as a governance facilitator.
Investment in sport should be based on a common project and not only on financial elements. The objectives could be diverse: developing digital, renovating infrastructures, creating new commercial structures... Strategic decisions must be taken by mutual agreement between the investors and the different stakeholders.
Beyond the financial contribution, what can a deal with a PE fund bring to a league/sports competition?
How to justify this added value?
Concerning the expertise of the right holders, there is a real need for transformation at the level of the business/management teams. The investor must bring a unifying dimension. The objective of the funds is not to revolutionize everything. They are not industry experts but investors. They give their opinion as advisors but do not impose their ideas. The objective is to identify and build on the skills of the people in place. Finally, each evolution is the result of a consensus.
A double reflection is taking place in most European leagues. On the one hand, the economic crisis has created a need for liquidity among certain sport industry actors. On the other hand, they are aware of the rapid evolution of business models in sport, and are looking to increase their international/global impact. Sports ecosystem stakeholders have developed a willingness to work with PE funds because of their ability to provide financing for short-term issues but also strategic support over longer term. Some less powerful leagues, such as the Belgian and Dutch ones, are wondering whether joining forces would not make their product more attractive. A neutral investor –like PE funds– can help to structure the governance and to accompany these evolutions.
Is the only interest about increasing the number of games to increase revenues and –thus- the financial performance?
We may assume that the more games there are, the more revenue there is. This reasoning is not necessarily correct because value can result from rarity. The more games there are in a league, the more points are at stake and the more the suspense is reduced. For example, the presidents of the L1 clubs and the LFP (French Professional League) are currently debating whether to keep 20 clubs in L1 or reduce it to 18 or 16.
It is difficult to find a balance between actions that would add value to the rights, and therefore create value for the product, and the political blockages and reticence of the sports ecosystem actors. While reducing the size of a league or creating a new competition may seem to be a solution that adds value to the product, clubs that are not involved in will be in opposition to that. All these evolutions are not instantaneous and time is needed to raise awareness about them. Finally, it is important to have a clear narrative for a competition so that it becomes attractive to fans.
Recent events that have shaken the world of European soccer, such as the aborted European Super League (ESL) project or the decision of the American fund Kings Street to stop financing the Girondins de Bordeaux club, highlight this trend of private equity funds investing in sports. JP Morgan was ready to invest between 4 and 6 billion Euro in ESL. These two operations reflect some of the issues debated during the webinar: the difficulty of investing in a club because it is too dependent on its sports results, the mistrust of sports fans towards investment funds, the need to review governance methods, the need to find solutions to make a competition and its media product more attractive, etc.