Private Equity set to continue investment trend in Sport

As rugby's Six Nations Championship reaches its final stages the players will no doubt be feeling the increased levels of competition, the raised stakes and heightened pressure to win. Sport, as ever, is a microcosm of life and the pressures felt by Owen Farrell and his fellow professionals on the pitch are increasingly being felt by sports investors off it.

According to media reports, CVC Capital appear to be closing in on their own Six Nations "title" in the form of the reported £300m investment for a c.14% stake in the tournament. The swelling interest and activity across the sports sector by private equity houses, venture capital funds and other specialist investment institutions looks set to continue throughout 2020. Investor interest is particularly strong in light of the sector's links to other growth markets in media and technology.

The highlight reel

In 2019 the global sports industry reached an estimated value of between $600bn - $700bn, with no signs of slowing down – analysts predict a robust growth rate of 6.4% for the next 3-5 years. As the industry has developed, so too has investment into the sector by institutional investors. We’ve seen high-profile investments from sovereign wealth funds and traditional private equity houses with a wide portfolio of investments, as well as "boutique" funds and venture capitalists focused purely on the sports sector, such as Bruin Sports Capital and Inspiring Sport Capital.

Perhaps the pioneering private equity deal in the sports sector was CVC's acquisition of a controlling stake in Formula One Group, the group of companies organising and promoting Formula 1, in 2006 for around £1.4bn. Whatever the trigger, recent years have seen a proliferation of deals, both equity and credit, across a wide variety of sports. Some recent highlights include:

  • Football: Silver Lake's $500m investment for a c.10% stake in the City Football Group, owner of Manchester City FC (itself ultimately controlled by Abu Dhabi United Group, a private equity fund linked to the Abu Dhabi royal family), in November 2019;
  • Football: Elliott Management's €400m loan-to-own acquisition of A.C. Milan in July 2018, as well as its debt arrangement with French Ligue 1 club, Lille OSC;
  • Rugby: CVC has a long-running interest in investment into rugby union. This includes its completed £200m deal for a c.27% stake in Premiership Rugby in 2018, as well as widely reported ongoing deals worth £300m for a c.14% stake in the Six Nations and £120m for a c.27% stake in Celtic Rugby DAC – organiser of Pro 14 Rugby;
  • Tennis: Kosmos Holding, an investment company founded by FC Barcelona player Gerard Piqué, and its $3bn 25-year commitment to the redevelopment of the Davis Cup in 2018, with a promise of new innovative competitions to come;
  • Motorsport: In 2019, Bridgepoint sold its stake in MotoGP owner Dorna to another Bridgepoint fund which now owns it alongside the Canada Pension Plan Investment Board.
What's in a game? Key considerations for sports investments

The list of deals above is just a sample of the range and variety of investments into the sports sector in recent years. The steadily increasing deal flow has revealed characteristics specific to investment in the sector that will be of vital importance to determining the legal terms of any investment. We highlight two key considerations for potential investors:

  • The long game: Ed Woodward, Manchester United’s executive vice-chairman, famously stated that “playing performance doesn’t really have a meaningful impact on what we can do on the commercial side”. Whilst arguably true for the day-to-day commercial operation of clubs, investments into sports clubs are increasingly tied to longer-term plans dependent on improved team performance and potential entry into the most lucrative competitions. A number of other commercial and legal factors may lead to investors holding onto their sports investments for the long run. These include:
    • the conclusion of future tender processes for media rights, with an expectation that the recent entry of giants such as Amazon and Facebook into the broadcasting market will lead to increased revenues for clubs and competitions;
    • plans to develop and grow new-generation tournaments; and
    • expected reforms by competition organisers and regulatory bodies to allow for increased commercial involvement and profit opportunities within the sport.
    As investment into the sector grows, we expect the transition from the traditional leveraged buyout model tied to a sale or IPO within 3-5 years to longer-term commercial strategies for growing the profitability of sports investments will be crucial to the success of PE investment in sport.
  • Supporting cast: As the sector develops towards becoming an established market for PE businesses, it shall be particularly attractive to investors with a track record of joint ventures and minority-share investments. These vehicles may be preferred in order to comply with jurisdictional restrictions on foreign ownership, but also for investors looking to pool resources or share the risks of entry into a new and developing market. Vital to the success of these JVs and minority investments is clearly defining the legal relationship between shareholders to best reflect the commercial intentions of the parties. According to media reports, a clear understanding between CVC and the Six Nations' other shareholders regarding CVC's ambitions to reshape the competition's media rights appears key to completing that deal. To best ensure the success of underlying portfolio companies and investors alike, decisions on the responsibilities for operation of the company, the mechanism for resolving shareholder disputes and the paths for exiting an investment should be made explicit in the shareholders' agreement drafted at the outset of an investment.
  • Comment: what next for investment into the sports industry

    As our consumption of sport becomes increasingly digital, sports-related media and technology companies will attract increasing investment attention – as will growth markets such as esports and women's football.

    Ultimately, the investment opportunities across the sector will be dependent on the commercial directions and legal decisions of competition organisers, regulatory bodies and clubs as they continue to grow in sophistication and lay down commercial frameworks that will govern the future of their sports. Potential investors must be attuned to these developments and their potential impact: how might Silver Lake's $500m investment in Manchester City FC be affected by UEFA’s recent decision to ban the club from European Competition (pending appeal)? How might the ongoing discussions about a unified "World Cup of Tennis" affect the success of Kosmos's investment in the Davis Cup? What will be the impact of the FAANG’s* entry into the sports media market on revenues across the sports sector?

    As with the final rounds of the Six Nations, we will be watching with interest.

    *FAANG refers to the collection of five high-performing technology companies: Facebook, Amazon, Apple, Netflix and Alphabet (formerly known as Google).