PE Investment in League-Level Assets Gaining Momentum

The WNBA announced a groundbreaking $75 million capital raise back in early February. That announcement came less than two months after it was reported that Genius Sports had acquired a minority stake in the CFL’s newly formed commercial arm, CFL Ventures. Park Lane VP Edwin Draughan said those developments are part of a broader trend taking place across the global sports industry. “We’ve started to see leagues create new entities to market and manage their media and commercial rights, assets that have the potential to attract strategic and financial capital.” While some sports properties are trying to recover from pandemic-related financial losses, others see cash abound and an opportunity to leverage outside capital for growth.

JWS’ Take: Private equity has increasingly gained interest in sports assets over the last decade as team valuations and media-rights contracts have grown at astronomical rates. “We really are in an unprecedented period,” said Steve Greenberg (managing director, Allen & Company). “Sports is now squarely identified as its own asset class [among] highly sophisticated investors, as opposed to [being viewed as] merely an activity for hobbyists and the uber-wealthy.”

More from

PE firms looking to invest in sports can now buy into in individual teams. But as Greenberg explained: “Sophisticated investors, in general, like the concept of diversification. [That is why] when we were looking with the NBA at the notion of permitting private equity funds to invest [in teams], we very quickly gravitated to [the portfolio approach]. The notion of owning a piece of six, seven or eight different teams as a way of diversification is very appealing.”

Owning a league in its entirety has always been viewed as the holy grail for sports investment “dating back to when Bain [Capital] tried to buy the NHL [during the 2004-2005 lockout],” Greenberg said. That is because the opportunity would provide investors with the “ultimate diversification … a [broad] bet on the growth of the league, not a single team that experiences ups and downs,” he explained.

The problem is most leagues are structured as not-for-profit entities or have internal rules that render them unable to take on outside capital. So some have spun out separate entities that house the league’s most valuable media and commercial assets. While not the same as owning the league in its entirety, the vehicle does give investors an opportunity to capitalize on revenue streams that have historically only gone up, without having to worry about variable costs like player and front office salaries and marketing expenses. “The de-risked nature of this approach is what’s most attractive to investors,” Draughan said. “It’s like acquiring an expansion franchise and participating in the national distributions but not incurring any of the main expenses of owning a team.”

The league-level opportunity also allows PE firms a chance to make a greater impact on the business than it could with an investment in a team (or series of teams) and in theory “increase their financial return,” Draughan added.

MLS was the first North American league to spin off its commercial assets into a separate entity. The league created Soccer United Marketing to maximize value from licensing, sponsorship, media and marketing rights and served as the vehicle for a $150 million investment from Providence Equity Partners back in 2012. That interest (25%) has since been sold.

The COVID-related hardships suffered over the last two years help to explain why the approach has gained momentum. “Some of the European investment [activity] we’ve seen has been to fortify the P&L of the league and its teams,” Greenberg said. Just last week, France’s League 1 approved CVC Capital Partners’ $1.66 billion investment into a new subsidiary that will manage the league’s media rights. CVC has also invested in an entity that controls LaLiga’s commercial rights, as well as Six Nations Rugby and the United Rugby Championship since the start of the pandemic. Back in February, Silver Lake took a $200 million stake in the commercial operations of New Zealand Rugby.

The rising cost of growth (think: marketing, innovation) has also been a factor in more leagues considering outside capital. “The NFL, NBA and MLB have historically funded growth initiatives internally because they had a huge amount of media dollars coming in and really well-established owners.” Greenberg said. “But as the dollars have grown, it [has become] sensible to use other sources of capital rather than take on all the risk [themselves].”

That is particularly true at a time when an abundance of capital exists. Greenberg explained the WNBA’s decision to raise money “is 100% an effort to supercharge and accelerate the growth of the league given the opportunities.”

There has also been a realization among leagues in recent years that third parties can often bring something strategic to the table besides capital. “It is the reason the NBA brought on Chinese partners when it launched NBA China,” Greenberg said. “The league recognized they needed local partners. There was a strategic angle beyond just the capital.” The WNBA was able to bring on a host of strategic investors as part of its recent round including Nike, Michael and Susan Dell, Karen Finerman, Dee Haslam and Condoleezza Rice.

Both Greenberg and Draughan see PE investing heavily in leagues abroad and predict we will soon see activity pick up in North America. “There are a lot of private equity [firms] with sports mandates, with a lot of capital to deploy,” Draughan said, “and the risk profile of a league investment is more attractive than that of the teams.”

Best of

Click here to read the full article.