Buyout firms must beware the unique legal, regulatory, and commercial issues that can complicate sports transactions and impact returns.
Private equity interest in sports assets has grown over the last few years, with investments in teams, leagues, and other members of the sports ecosystem. Sports investments by sponsors, including CVC’s US$8 billion sale of Formula One racing in 2017, have underlined the strong returns available.
Today, the COVID-19 crisis, with the stresses that it has placed on sports media, sponsorship, and match-day revenue streams, has created new opportunities for investors — and interest is accelerating. Financial sponsors are continuing to seek out opportunities. Firms have invested in, or are in the process of investing in, a range of sports, from martial arts to football, and rights holders are signalling that they would welcome investment to see them through and beyond the current crisis.
Even before COVID-19, as revenue streams diversified and grew, and sports organisations became more open to investment, we saw deal teams evaluate an increasingly wide range of opportunities.
Balancing Demands
Organisers of sports events have a number of different roles — alongside overseeing revenue generation and commercial activities, there are usually governance and regulatory functions, stakeholder management, grassroots participation, and obligations to grow their sport. When assessing an investment at the organiser level, it is important to remember that all these roles are interconnected. For sports, the taking of an equity investment is often a philosophical question and sponsors must recognise the need, structural and otherwise, to balance what are often conflicting demands, not least during the COVID-19 crisis.
Investing in a Regulated Business
Leagues and fans alike are focused on the source of funds and who has overall control of the investment. Sponsors and LPs should be prepared for a high level of scrutiny of involved directors, entities, and deal structures, including ultimate beneficial owner disclosure regulations and owners’ and directors’ tests.
The structure of investments will need to comply with the regulatory rules of the game, whether it be prohibitions on common ownership, the effect of investments in other industries such as sports agencies and betting, or restrictions that can impact debt or equity holdings elsewhere in the fund and beyond, particularly in co-invest situations.
As with any business, expanding and evolving the size and shape of the overall proposition is one technique to increase revenues through greater commercial power, particularly in emerging markets. However, in considering bundling together currently disparate parts of the sports family, an investor must bear in mind ownership restrictions, such as those under European football regulations which limit ownership stakes when more than one club participates in the same competition. While imposing a non-compete on a co-investor may be uncommon in non-sport deals, within the sports market it is both common and necessary to protect the asset and prevent breach of broad ownership rules. Even owning clubs in different countries can cause problems — Red Bull was forced to unwind the ownership structure of its football teams in Germany and Austria after both qualified for European competition.
Deal teams involved in team investment must also be cognisant of direct and indirect limitations imposed by operational restrictions such as cost controls, financial fair play, and salary cap restrictions. Such measures are now applied by many sports to promote sustainability, but they can impact plans for team growth, and some may have an impact on other elements of the ownership structure. Sponsors, particularly those considering league investment, should be wary of the ramifications of “listed event” / “anti-siphoning” legislation, which limits the ability of a sport to determine whether to place coverage of certain matches or events on pay TV.
Managing Change
Risks exist in many European sports, which, unlike many of the major US sports, do not operate as a “closed league”. Assessment of the relegation risks and the financial consequences (including decreased broadcasting revenue and sponsorship income) is imperative for investors in clubs or teams. Accordingly, deal teams should understand the financial risks of relegation, including structuring commercial contracts to seek to limit financial distress in the event of poor performance.
New competitions, breakaways, and super leagues present both risks and opportunities, largely determined by whether an investor and its portfolio are inside or outside the “tent” at the relevant time. We have seen launches, or threats of launches, of new competitions across most sports, notably football, motor racing, rugby, rugby league, cricket, golf, and swimming as different stakeholders jostle for primacy. These “revolutions” have the ability to change the scope and value of any investment and can impact exit. Again, being aware of issues (contractual, legal, and commercial) and aligned opportunities is critical.
