Does Pro Sport Want Private Equity?

Since 2019, some of the biggest players in professional sports have been investors. The rising trend of Private Equity (PE) ownership, may it be minority stake in a team or the whole entire league, totalled to $50 billion USD in deals in 2021. What this means is major PE firms such as Blackstone, KKR, and the NBA’s very own fund, HomeCourt, created by Blue Owl, are financing stakes in professional sports franchises, a role traditionally occupied by billionaires. In the fairy-tale of HomeCourt and the Suns — the NBA’s first ever PE exit case — the 2021 $1.55 billion USD valuation at buy-in proved itself when Mat Ishbia purchased the team at $4 billion USD earlier this year. The sale demonstrates a 158 per cent appreciation of their minority stake, after a short 18 months of ownership — sealing the deal on investor perception.

Economy of Opportunity

The attractiveness of this investment opportunity can be simplified to a few truths. Firstly scarcity — with a fixed number of teams across the major American sports networks and a 30% eligible for sale cap per team across the board, the opportunity exists in a small pocket, in a big way. Another is industry resilience. As PE firms look to manage risk in a post pandemic downturn, the professional sport market growth stands out above the rest. Where live-time viewing has undeniably declined across the NBA, NFL, and most notably the MLB, down 50% since 2016, the sports industry has found other ways to outperform pre pandemic levels and has even seen franchise valuations outperform the S&P 500. Driven by the legalization of sports gambling in most U.S States and Canada, popularization of sports advertisement opportunities, market growth of sports mobile streaming and media networks, among other factors, the North American sports industry market value has grown by 16 per cent in the last five years. Back to the big idea — what draws so many investors is the unique opportunity for diversification and what ownership of this asset actually entails. In many cases, this includes perks such as media rights, stadium operations, and/or greater community impact revenue opportunities.

So is that the whole story? Not really. Over time we have seen not only hesitancy towards PE from leagues such as the NFL, who have disallowed it altogether, but push back from fans who cannot disassociate their beloved teams, rivalries, and traditions from ownership.

Public Perception

When it comes to PE ownership, there are rather common negative connotations. In this context, it is primarily a perceived lack of long-term commitment. Say an investor has a short-term exit plan, prioritizing financial gain over growth could be damaging to player development and the sustainability of team dynamics. There is additional stigma that firms will move to cut jobs and operational components to maximize profit, though it is of note that North American leagues do not allow PE investors to sit on the board of their respective teams nor can they vote on any operational matters. But after all is said and done, there is a looming fear that PE firms are not always transparent in their intentions or even in their interests.

Compassion Not Compensation

Looking at England’s beloved football clubs, the entry of PE owners majorly displeased fans of a league where competition is high and willingness to pay is low. Exemplified by the 2005 purchase of Manchester United, a wealthy American family made an unwelcomed £270 million GBP investment in the team which was financed by an additional £520 million GBP of debt borrowed against the franchise, reflective of the leveraged buyout approach of PE investors. Right out of the gate the Glazers (owners) were met with vandalism, protest, and as recent as in 2021, signs reading “Love United. Hate Glazers.” The financial burden to the team was eventually repaired, but their image was not. The Glazers were reported to attend few to no games and statistically the ownership over the last 5 years delivered poor performance on the field, all while delivering spectacular performance in commercial earnings — further enraging United followers. Plainly, fans aren’t interested in the money, but respect for their team.

In 2021, this same perception brought together two historically rival teams, Real Madrid and Barcelona. The teams moved to sue Javier Tebas, the Spanish football league president and chief of CVC Capital Partners — the PE group behind the proposal which would deal 10% of the Spanish football league’s television rights to the firm. As reported, the deal leveraged a period of economic insecurity to take advantage of the country’s broadcast and sponsorship revenues for the next 50 years. Yes, 50. Tensions between the two groups led to the removal of both Real Madrid and Barcelona from all meetings concerning the league’s broadcasting rights as well as their respective rights to vote. This here presents an instance of overtaking by PE investors and primarily their financial powers, which undermines the legitimacy of long-standing franchises. The lawsuit addresses the violation of their fundamental right of association. As of early August 2023, the complaint has been admitted and awaits deliberation.

Facing the Fans

Revisiting HomeCourt and the Suns, this rather short-term ownership fuels an equally negative perception. With only four majority ownership changes made in the NBA in the last 10 years, it goes without saying these commitments are long withstanding as well as impressionable. Leading up to the 2023 sale of the Phoenix Suns, the (now) ex-majority owner Robert Sarver had undergone investigation for fostering a racist, misogynistic, and hostile working environment. The silence from HomeCourt, who worked closely with Sarver since the sale is quite frankly troubling. Short-term ownership in this case has triggered disruption to team and fan culture where unclear signals are being dealt from the top of the value chain.

The pride fans take in their team is expected to be reflected by owners. This is exemplified by those with entire documentaries dedicated to the teams they’ve invested in; namely Ryan Reynolds, or Birmingham FC minority stakeholder Tom Brady, who was seen enjoying a pre-match pint with fans at a local Birmingham City pub. This type of engagement cannot be replicated by suits with deep pockets, and fans are picking up on it.

The Anti-PE (for now)

This may lead you to wonder where and when leagues might put a stop to entity ownership, and the NFL would tell you here and now. The NFL is currently the world’s most valuable sports league with a 2022 revenue of $12 Billion USD, more than double FIFA’s 2022 revenue — cue the football v football argument. Point being, the world’s most valuable sports league has shut out PE investors, any ownership group exceeding 25 people, public companies, and the list goes on. This traditional, almost stubborn, ownership regulation is justified by the success of the franchises, notably the Dallas Cowboys, the world’s most valuable sports team valued at $9.2 billion USD. But amid the continued growth in the NFL, their team owners themselves are pushing for PE investors to generate more cash flow. So, what will it be? Does the NFL know something we don’t about institutional ownership, (or maybe something we already do) or is it on the horizon for the American sports league?

At the End of the Day

If nothing else, this industry summary makes it clear that PE investment is not right for every team, every time. Regulation varies from league to continent, and reputation sneaks up behind it. Being a relatively new investment strategy, the undisputed financial success of PE team and league ownership will surely lead to more investment. Industry experts predict existing high-profile sports investment groups such as Magic Johnson Enterprises and Kevin Durant’s 35V to jump-in. As we sit back and watch, we can expect reactive trends to level out and reveal whether investors and their desires can co-exist with fans and theirs.