Private equity investment in sports rights-holders – clubs, leagues, federations, promoters – has been exploding since 2020 and seems certain to continue to grow dramatically in the coming years.
This article focuses on six private equity companies with live investments in sports rightsholders: Bridgepoint, CVC, Silver Lake, Clearlake, Arctos and Dyal. The first three are among the longest and most established investors in sport and stand alongside investment companies like Fenway Sports as having a track record of success. Clearlake is making its first such investment. Arctos Sports Partners and Dyal HomeCourt are newly created sports-specific investment vehicles.
These companies represent a small part of a burgeoning investment universe which includes other private equity firms, investment firms using their own pools of capital, high net worth individuals (often former athletes), and consortiums containing all the above.
Other Companies which have become major players in the sector, and which have currently active investments in sports clubs, leagues or federations, include: 777 Partners, ALK Capital, Ares Management, BlueCrow Capital, Blum Capital Partners, Dorilton Capital, Eagle Holdings, Global Football Holdings, Elliott Management, Grupo Orlegi, Harris Blitzer Sports & Entertainment, MSP Sports Capital, Merlyn Partners (Callisto Sporting), NewCity Capital, Oaktree Capital Management, Orkila Capital, Quantum Pacific Capital, RedBird Capital Partners, Sixth Street Partners, TCG (The Chernin Group) and The Common Group.
Private equity investment in sports rights-holders remains, however, an immature sector of business.
SportBusiness is aware of only six sports properties where private equity deals have reached maturity, with the initial private equity investor selling its stake. In each case, the investment was a successful one for the private equity company. These are:
- CVC’s deal with Formula One motor racing;
- the sale of Dorna, owner of the commercial rights to motorcycling’s MotoGP, first by CVC, then by successive Bridgepoint funds;
- the investment by Providence Equity Partners of a stake in Soccer United Marketing (SUM), the commercial rights-holder of Major League Soccer;
- the investment by Dyal HomeCourt in the Phoenix Suns NBA team;
- the investment in Bundesliga club Hertha Berlin by KKR;
- the sale of AC Milan by Elliott Management to RedBird Capital Partners.
CVC made $8.2bn from its ownership of F1, buying in at $2bn in 2006 and cashing out stakes at various times before its final sale to Liberty Media for $4.6bn in January 2017.
CVC acquired a stake in Dorna in 1998 from Spanish bank Banesto for somewhere between £45m and £78m. In 2006, when CVC was required by the European Commission to divest itself of MotoGP as a condition of buying F1, it sold its stake to Bridgepoint for €550m. The stake has subsequently changed hands between successive Bridgepoint funds on four occasions. Given the internal nature of the transactions, information on the profit made by each fund is scant.
In January 2012, Providence Equity Partners bought a 25-per-cent stake in SUM for $150m. It sold the stake back to SUM in June 2017 for $450m.
The multiple investment strategy in US sports franchises being pioneered by Dyal and Arctos reaped its first dividends in February 2023, with Dyal’s sale of its stake in the NBA’s Phoenix Suns in a deal which valued the franchise at $4bn. Dyal acquired a minority stake in the franchise in July 2021, in a deal which valued the Suns at $1.55bn.
In January 2014, KKR acquired an initial stake of 9.7 per cent of Hertha Berlin for €61m. Over the next three years, it increased the size of its stake to 36.3 per cent. In 2018, the club bought back KKR’s stake, reportedly netting the private equity company a profit on its investment of €75m.
In 2018, Elliott took control of AC Milan after owner, Chinese entrepreneur Li Yonghong, missed a repayment of a €300m loan from Elliott. In August 2022, RedBird bought the club from Elliott for €1.2bn.
Optimism and challenges
The rights-holders who responded to questions were overwhelmingly positive about the private equity investment they have taken on, talking of an “alignment” between their ambitions and those of the private equity company. The levers for growth identified by the private equity companies and the rights-holders tend to be broadly similar.
However, all sports rights-holders are facing macroeconomic headwinds that are likely to remain strong for several years, including high inflation, high interest rates and the energy crisis triggered by the Russian invasion of Ukraine. In April 2023, the International Monetary Fund warned that global economic activity was experiencing a “broad-based and sharper-than-expected slowdown”.
Those advising private equity funds on their sports investments tend to see these issues as ‘bumps in the road’ which will not radically alter the underlying growth trajectory of sport, and, as such, not a reason to discontinue investing in rights-holders. The cost of capital may be rising, the argument goes, but it is going from very small numbers to slightly larger, but still small, numbers in terms of the overall interest rates that banks are charged by central banks and which banks are charging their clients.
For rights-holders, it will concentrate thinking on the relative merits of debt vs equity but is not expected to be a hard brake on rights-holders taking the latter route. The fundamentals remain broadly the same. The effective cost to a rights-holder of selling equity – depending on the size of the stake sold – could be 20 to 25 per cent. Those who chose this option at a time borrowing from a bank cost two to three per cent are not likely to take a different view if the cost of bank debt stays at six, seven or eight per cent. If the differential closes further, and the cost of debt rises higher, this may only spur further rights-holder interest in private equity. However, growth in the sector may be tempered by the amount of debt that private equity companies want to load on to their investments in sport to help improve their returns.
Private equity investment in sports rights-holders is an immature sector, with few deals having reached maturity
The pools of capital available to invest in assets more broadly can still be measured in the trillions. Tech start-ups and businesses which run at huge losses may find venture capital and private equity money more difficult to come by, but sport – especially US sport – is still seen by many funds as a licence to print money.
Arctos founder Ian Charles said in one interview that sport in North America was “one of the only ways you can get a legal monopoly in the United States. There are only three industries in this country that have grown revenues at least six per cent for 25 years in a row, and all of them have monopolistic pricing power: education, healthcare and sports”.
Many, though not all of the new crop of private equity investments are heavily indexed against the future value of media rights. Certain underlying socio-cultural trends support the bull stance on sport and media. In a society that becomes increasingly fragmented and divided, moments of human communion and congregation – such as concerts and sporting events – will become increasingly valuable. It’s the attention economy, stupid. And few assets perform in that economy the way sport does.
As William Paul, a partner at Bridgepoint and board member of Dorna, has pointed out, sport is unique in guaranteeing a large audience of a guaranteed demographic at a fixed place and time. “No other programme in the entertainment world works that way,” he says. “That’s why the value of these rights grows over the very long term.”
Fragmentation, cord-cutting, the shrinking attention spans of Gen Z consumers and declining audience figures for linear television coverage all represent challenges for sport. Doug Harmer, a partner in Oakwell Sports Advisory, which advises CVC, among others, believes that this evolution is one of the reasons sports bodies are turning to private equity. He told SportBusiness in February 2021: “We’ve seen these ever-increasing media cycles in terms of value, and it’s been very easy for sports rights owners and governing bodies just to go back to their agents and say: ‘go get me another 25 per cent on my media value and sponsorship value’. And what’s happened is that a lot of the underlying business models have been neglected.
“On top of that, the landscape for sports media is changing, the way people consume media is changing. Your pay-TV, linear TV, free-to-air model is changing, cord-cutting, all of that sort of stuff, is impacting what consumers do and [the ways] they will continue to consume sport in the future. Bringing in capital not only brings capital but also brings expertise – that capital can invest in the underlying business model of the future.”
The emergence of the Three As – Apple, Alphabet and Amazon – as competitors for sports rights, alongside traditional media groups like Disney and NBC, has super-heated the US sports rights market, despite the falling audiences on linear TV for many sports events. Several private equity fund managers view the coming decade in the US as one which will be characterised by platform wars which will drive up rights prices to the benefit of sports franchises, which they see primarily as content businesses. And if the decade after that is characterised by consolidation which flattens or reverses rights inflation, that will be someone else’s problem: the deals being done now will have already matured.
US v Europe
There is a widespread view that US investors in European sport often fail to understand the risks inherent in the European pyramid model of sport. US sports franchises enjoy what is often referred to as a ‘protection from competition’ in that they do not live with the threat of relegation from their closed leagues. The US leagues also have their costs under control through mechanisms like a salary cap. Teams enjoy financial support from their local authorities.
And the virtual exemption from antitrust laws enjoyed by the leagues means they can agree broadcast deals for durations of 10 years or more, meaning that the single most important source of income for their members can be predicted with a high degree of accuracy for a decade or more. The NFL, NHL and MLB are all sitting on long-term broadcast deals. The NBA is shortly expected to begin a new cycle, almost certain to last a decade or more, and probably worth at least 50 per cent more than the current cycle.
The next three to five years will tell whether US investors in European sport use their increasing influence to attempt to pull down the pyramid and push for closed leagues. In this respect, the ruling of the European Court of Justice on the failed European Super League later in 2023 will be critical in establishing the ground rules. Those who fear that lobbying for a franchise model is the hidden agenda of US investors point out that the US owners of two major English Premier League clubs – Manchester United and Liverpool – put part or all their club up for sale within weeks of the collapse of the Super League venture, which each had initially supported.
Despite all the pitfalls and risks, owning assets in European sport – especially top football clubs – offers investors something that a franchise in the NHL, MLB or even NFL doesn’t: a global shop window for their asset. And despite the structural flaws in European football, particularly its inability to control costs, valuations are rising. The aggregate enterprise value of continent’s 32 biggest clubs rose by 51 per cent, or €13.4bn, in the last four years, according to KPMG.
The emergence of Apple, Alphabet and Amazon has super-heated the US sports-rights market
Exit or IPO?
In five to seven years’ time, the funds who have been investing in the recent wave of deals will look to get out, either to another private equity company, another fund in the same firm, a trade buyer or a consortium of high net worth individuals. They will have already posited the exit routes. Every private equity investor will have produced a review when they went into the investment of what the exit routes are. Investment committees overseeing private equity funds insist upon it: you can get the best investment in the world, but if you can’t sell it, you’re in trouble.
Companies like CVC, Arctos, Dyal and others – who are actively building a large portfolio of sports investments – will benefit from certain first-mover advantages. However, they are also creating an enormous challenge for themselves: how to exit from so many similar assets at around the same time and secure maximum value.
One potential solution to this problem which is now being discussed in private equity firms is to merge all of their sports assets into a single company which they IPO. Instead of trying to find individual buyers for 10 or 20 stakes, they can float their aggregate sports investments, creating a retail offering with a listed company just for sport that anyone can invest in. For a company like CVC, with investments across multiple sports, this could either be for all its properties or those in a particular sport, such as rugby, football or tennis. This would arguably be a logical extension of the bundling of the commercial rights of multiple properties in the same sport, which is already under way.
Governance and transparency
In 2000, following an investigation into abuses of a dominant position in motor sport by Formula One, carried out by the European Commission, an agreement was reached to separate the commercial activities of the sport’s global governing body, the Fédération Internationale de l’Automobile (FIA), from its commercial activities, which were hived off into a separate company and sold to Bernie Ecclestone for 100 years for $360m.
Although the separation of powers – governance from commercial – was a solution to a specific problem, it was quickly identified as the way forward for all professional sport. The FIA, together with its law firm, Herbert Smith, even championed a campaign for an overhaul of governance in sport, with this separation of powers at its heart. A similar separation of powers took place a few years later in snooker, also following an investigation. But in general, the idea was met with little enthusiasm in sport. The real power in professional sport lies with whoever controls the commercial rights which finance it. Few people in power voluntarily vote to make themselves less powerful.
Sport’s need or desire to take private equity money has changed all this. The creation of a new commercial entity within a federation or global governing body is a de facto separation of sporting and commercial powers. In such cases, a sport’s commercial destiny – once firmly under the control of elected officials – increasingly exists in a grey area, where the line between the sporting and the commercial is not always clear. For many private equity companies, the sport’s calendar and formats are commercial issues. For many governing bodies these are sporting issues, albeit with commercial implications. Complex negotiations take place around these issues.
There is little transparency around these issues. And no transparency around the identity of the investors who make up the funds operated by private equity companies. As the noise around sovereign wealth funds – some of the biggest investors in private equity – increases, it is likely that sport will come under pressure to find out more and be more open about the ultimate sources of its money.
This analysis was taken from our report, Selling the Future? Private Equity’s Role in Sport. The report provides an overview of the market characteristics that have led to the huge growth in investments in sport, with an analysis of how this market will evolve in the future. It also takes a data-led look at a breakdown of investments in clubs, leagues, and federations, by private equity company – as well as in-depth case studies on the most prominent deals. Secure your copy now.
