Private Equity Bets on Sports May Not All Be Winning

Rigid league rules create high barriers for success for sports-focused private equity.

Qilai Shen/Bloomberg

Qilai Shen/Bloomberg

With new ownership rules, institutional investors and private equity firms are getting their chance to shoot their shot in sports finance.

But new research is skeptical that these investments will result in big profits for all investors.

Even though sports franchise values are swelling and several minority and majority owners are likely to sell to private equity firms, PE professionals without strong connections in the sports world may face barriers of entry that are too high for success, according to a recent PitchBook analyst note. Since 2019, several sports leagues, including the NBA and MLB, have changed their ownership rules to allow minority investments by private equity-style funds into multiple teams.

“Now, we have three sports-only funds raising capital and several other non-specialists looking to deploy capital,” said Wylie Fernyhough, Pitchbook senior analyst and author of the note. “LPs are interested in the space.”

As a result, more sports-related private equity funds emerged to take advantage of this new, previously inaccessible asset class. But mostly it’s the firms with “unique approaches to investing in sports teams” that are seeing success. The note cites Arctos Sports Partners, Dyal Capital Partners, Galatioto Sports Partners, RedBird Capital Partners, Silver Lake Partners, and CVC Capital Partners as the dominating forces in the space.

Leagues To Investors: Hands Off

According to the note, it is notoriously difficult to get approved by leagues to invest in teams, and leagues are wary of permitting investment firms that are also led by existing owners because of potential conflicts of interest. As a result, only firms with experience in the industry and connections in the field have a chance at surviving.

“Sports is a closed ecosystem,” Gerry Cardinale, founder and managing partner of RedBird, told Institutional Investor. “Very few people have the access and the relationships with the rights holders to really invest successfully. You really need to have had longevity and success in working with rights holders and treating them well.”

Leagues want minority investors, according to the PitchBook paper, but due to league rules, minority investors are required to be passive partners and only use hands-off approaches to their properties. In short, leagues don’t want investors involved, particularly when an investor owns share of multiple teams.

“For these reasons, it is no coincidence that many of the firms entering the space are raising first-time funds,” the paper said. “Moreover, it is unlikely many additional firms will enter the space.”

Professional sports are a unique asset class for investors. The most appealing factor is its massive media presence. While most streaming today occurs on-demand, most people watch sports live, which causes advertising revenue to skyrocket. For instance, sports rights are expected to jump from $48.6 billion in 2019 to $85 billion by 2024 as global viewership grows, the paper said.

For minority owners, sports also provide opportunities for portfolio diversification, scarcity, discounts, and capitalization on sports betting and NFTs. Within the category, a handful of franchises, including the National Basketball Association and Major League Baseball, may “provide the most fertile hunting ground,” the paper said.

Going forward, Fernyhough expects institutional capital in sports ownership to mature, but the sports world will still be difficult for private equity firms and funds to break into. There is some hope.

“We have seen many firms attempt and fail,” the paper said. “On the other hand, with the amount of interest and capital careening into the space, it is likely that at least one, if not two firms, will hold final closes on sports-focused minority ownership funds.”

Less well-connected PE firms and minority shareholders may see opportunity in European soccer leagues, said Cardinale: “There are no barriers to capital coming into European football,” he said.