Can Private Equity be the MVP of sports ownership?

Across major sports leagues such as MLB, NBA and NHL we are seeing increasing investment from private equity. The lifting of prohibitions on PE ownership stakes has opened the door for early movers such as Arctos, Redbird and Dyal to take minority stakes, as reported this week in Sports Pro Media. But, what’s the appeal? Yes, there’s money in sports, but valuations are high and control minimal. With private equity firms focused on value creation and, ultimately, exiting at increased multiples, it’s an interesting development. Sports investments are more restrictive than a typical PE play with opportunities limited to minority stakes, minimum investment timelines of 10 years, and having limited or no voting rights. So, why are PE firms making these investments?

Look a little deeper and the attraction becomes more obvious. US major league sports teams are stable businesses. They have growing assets and potential annual growth north of 10% based on recent transaction valuations. Additionally, private equity firms believe they can add value to entire "franchise platforms" (team, venues, real estate, sponsorships, etc.) to further enhance growth and ROI potential. As North American sports teams have a large portion of their value tied to national revenues like TV deals and sponsorships, on-field performance isn't as important a factor in maintaining a successful sports business.

For the majority owners, there are also advantages to giving PE a seat at the table, including consolidating other minority stakes, providing liquidity without increasing leverage, and providing investment capital. PE firms are arguably more adept at off-field business elements than current management, especially in areas that are needed to improve fan experiences, particularly where experience from other industries can be leveraged. These include:

• Upgrading technology – from making parking easier, to reducing wait times for concessions, or even offering all stadium services via mobile so that fans may never need to leave their seat
• Venue modernization and real estate development – reimagining venues as entertainment hubs to draw patrons even during non-game days
• Applied analytics – using data to discern fan behaviors to ensure services and offerings really are what fans want (and will be willing to pay for)
• Revenue enhancement – expanding revenue streams to capitalize on the inherent geographic monopolies of sports teams
• Sponsorships – developing event-focused sponsorship opportunities (e.g., Packers vs. Bears rivalry weekend)
• M&A – improving deal flow and evaluating revenue enhancing opportunities, focused on transforming a “franchise platform” into a year-round revenue generating group of businesses
• Shared services – improving the cost and effectiveness of back-office services by leveraging other companies in the PE firm’s portfolio.

With benefits for both parties, it’s likely we’ll see increasing PE activity across sports for some time to come. We’ve already seen PE interest grow in other stable industries such as grocery or aerospace and defense; is this marking a shift in more diverse portfolios to weather uncertainty and disruption in the future? And for sports teams, many of which have felt the full force of the pandemic, new investment and the ability to capitalise on new revenue streams holds obvious appeal.