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Winna Brown

Private equity is now undeniably present in the world of professional sports. According to PitchBook, over the last 18 months, PE firms have taken on passive stakes in professional sports franchises and leagues after the NBA, MLB and Major League Soccer loosened ownership rules to include institutional investors. In addition, there’s now funds that are focused solely on sports, including a $1.5 billion fund from Arctos Sports Partners and a $2.6 billion fund from RedBird Capital Partners. The total value of private equity investments in sports teams and leagues has doubled in the last three years, from $3.3 billion in 2018 to $7.1 billion in 2021. So, this begs the question: Why is sports such an attractive sector for private equity? 

Today we’ve spoken to Tyler Brewster, a senior director at EY-Parthenon, who leads many of the firm’s strategy engagements in the sports business sector. Since joining EY-Parthenon in 2010, Tyler has worked across a variety of consumer verticals, including food and beverage, restaurant and food service, retail and personal care. This episode, though, dives into the current trends driving private equity presence in the sports industry, including digital transformation, asset diversification, and the impact of COVID-19 on current and future operations. 

So, Tyler, through the pandemic, we’ve seen a real significant uptick in private equity interests and investing in professional sports. Now, why is it that a private equity investor would want a stake in a pro sports team? Is it about the typically stable cash flows, or more about the other kind of opportunities around the sport, such as streaming or broadcasting or sports betting?

Tyler Brewster

Yeah, Winna, that’s a good question – it’s actually a bit of both and also, you know, the more recency of it is actually leagues and structures now approving private equity investments where, historically, they hadn’t. But, even before that, you know, when you think of it, pro sports and the sports industry as an asset class for large investors, you know, it’s one where revenues and franchise values have just continued to surge over time, and it also typically tends to be uncorrelated to the rest of the economy. So, you know, pandemic aside, when you look at ’08, ’09 or other past recessionary periods, people will still go to sporting events. They still watch the games. A lot of the media contracts are long in nature, so when you have a broad-based portfolio, it’s a nice diversification tool as well. On top of that, it’s traditionally inefficient and illiquid. You’ve got a lot of fragmented owners, and so that creates opportunity for an investor to, you know, create attractive deals across the spectrum.

Brown

So, on paper, from everything that you’ve said, it just sounds like the perfect investment opportunity; however, what we’re seeing in the news is controversy on some levels and maybe some pushback from fans and from leagues around private equity coming in. And so, what does that say about the push and pull of investing in sports?

Brewster

You know, for a long time, even before private equity was involved in sports, there is this trade-off that owners or operators of sports teams have to make. Do we optimize for profitability and cash flow, or do you optimize for winning and investing in the experience? And you know, sometimes you can balance both, but a lot of times, you see a choice on that spectrum of, you know, paying the most for your players, willing to go over the luxury tax, willing to invest back in the stadium and infrastructure, you know, at the expense of money that could go into the owner’s pockets. And so, it’s a long history before private equity was even involved, of how do you deal with fans that are, you know, they want to win, they don’t care if you made 10% or were break-even or lost money in a given year.

Brown

So how does that then play into the private equity model? I mean, private equity comes in obviously to make money for their LPs, and they also come in with the premise, if you will, or the thesis to create value over time and then eventually exit, hopefully, with a healthy multiple. So how does that play in with fans and reinvesting in the team and this emotional tie that sport has?

Brewster

Yeah, I think it’s, in part, it’s an awareness of the elevated risk. For most fans, they are highly, highly passionate on these products. A level of passion you’re not going to see even in consumer products where you may have a connection to the brand, but beyond that where you get into other B2B services, you’re never going to get that level of customer engagement that you see in sports. We worked with, just recently, with a major athletic department in the US college sports space, and the president described it as the “10X effect,” of if something happened on campus with a student that’s one thing … if it was a football player, it’d be 10X the media attention out there. And that’s one example of a college, but that’s all of sports too, where you just kind of have a lot of eyeballs and a lot of attention and a lot of passion behind it, so it elevates the risk if things do go a little bit sideways on the on-field performance or the perception of on-field performance.

Brown

So you need to bear in mind the potential brand risk or backlash when you make these investments because it’s not – it’s on the public stage.

Brewster

Yeah, and the other thing is, you know, a lot of this talk right now is on leagues and teams fail. As you think of the on-field product; the other way that private equity can get into the sector and think about it in less of a risky high-profile manner is to think about, you know, kind of derivative investments, whether that’s an upstart league that may not have as existing passionate fans or even be creative carving out rights of leagues and teams. There’s a fairly well-known famous deal that Providence Equity had made with Soccer United Marketing, which is the US soccer commercial rights arm and that’s, had nothing to do with the on-field performance, it’s just, How do you monetize and make more money off of the rights that are there? And so there’s other ways you could do that, whether it’s carving out rights for individual teams, carving out some of the rights for different leagues and using the skills that private equity brings to the table of sophistication, investment, relationships, you know, technology or media connections to really amplify things; so there’s other ways to get at it that’s not purely “I’m going to invest in a specific franchise or a specific league,” which has a lot of that attention, you could still get at the sector in more creative ways.

Brown

And as I think about structuring these deals, I guess, I was thinking about the example that I read about with the all-blacks investment, and there is clearly some national pride or some player backlash, but if you dig through the layers, the money is going to help the smaller leagues and help stand up women’s rugby. So there’s a whole community aspect, where that private equity money will be held, bolstering up, but then also there is the rights around broadcasting, streaming, global expansion, bringing the sport more broadly. So you know, there’s the community aspect, but there’s also the financial aspect, to your point, where there is some profits to be made in expanding the sport. So it’s interesting: Does some of it also come to the point of how the investment or how private equity approaches the investment and the communication to the fans and to the broader community around the good that’s going to be done, as well as the profits and the expansion?

Brewster

You know, I think it is both external and internal communication and mindset that it is a, because all of the things we talked about of optimizing on-field performance vs. short-term profit gains or financial gains. You know, with all these things, you have to have a long-term mindset, and so for, externally to the investment you’re making or for the fans who are out there, the communication should be around what this could become. We’re scaling this, making this better, making it more accessible to all, and then also internally, at this mindset that it’s not going to look like a traditional deal where you’re going to be able to put a bunch of leverage on it and you’re going to do a five-year return; some of it happens that way, but you kind of have to have a longer-term mindset because a lot of the value creation comes from asset value appreciation as opposed to cash flows that you’re paying off of, you know, on an annual basis.

Brown

That’s actually a really good point. So, what type of private equity is better positioned to make these types of investments so it’s not, it’s clearly not every fund, and not every PE complex is geared toward that type of longer-term growth investment. So, are we finding niche players coming out, or are only certain parts of the private equity ecosystem?

Brewster

There’s been, in combinations, so there’s definitely been some emerging niche players that are, you know, have a mandate to solely focus on investments in sports and even solely focus on one specific sport, so that is existing at a macro level. Most of the large funds are diversified enough, and they’ve got different fund types within there where they can find a longer-term mindset piece of the portfolio that could make these investments, but really it’s, you need to find the group within the fund or the firm that has a long-term mindset, I think from a sector standpoint, if you’ve got connections in media and technology, those are really the areas where the next level of growth and moving, you know, the sports ecosystem from just an in person selling hot dogs and beer and tickets into global media property and not just broadcasting games, but, you know, you look at what Formula 1 has been able to do with their Netflix series in gaining popularity that way. That’s really where a partner can add a lot of value beyond just being a financial sponsor in helping with cash flows or investing for growth. Someone who can add value through the technology, media, data connections – those are the ones who really succeed in this space. 

Brown

And have we seen some really good examples of that? I know there’s been investment or, you know, for a number of years in Formula 1 and probably other sports, can you point out some examples of “best in class,” how you can really make this work for both sides, both parties?

Brewster  

I think, you know, Formula 1 is a great example. That was investment where they have exploded popularity in its, in all these things, there’s pressure that they’ve overdramatized the sports, they’ve dumbed down the products, it’s become less parity, it’s more winners – so, in all these things, there’s that pushback, but financially, CBC had a great outcome on there, they’re now owned by Liberty Media in that exit. It’s more popular in the US, which is the largest sports market that it’s ever been, and so there’s a lot of things you can point to how they’ve grown the pie for the sport overall and the popularity for it, so, while there is some backlash there on the on-racetrack product, more people are watching it, there’s more dollars in attention and sponsorship in all of that that, that benefits it, you know, obviously, CBC did very well on their particular deal there. It’s a playbook that a lot of people looked at and said, “Ok, where else can we repeat this?” Either in other sports properties, teams, leagues around the world, you know, that’s just one very successful case study of someone who took a great property that has a lot of fandom, made some investments, really helped kind of steer and add value, and then it’s helped a lot of parties along the way, even though you’re always going to have some squeaky wheels along the way as well.

Brown

And are there some sports that lend itself to private equity investment more than other sports? I’m just thinking, you know, if there’s regulatory barriers or other barriers that prohibit that type of investment of coming into certain sports?

Brewster

Practically speaking, the NFL is the only one that does not allow private equity investments still. So, that’s one that’s probably off the table and not well-suited, at least in NFL teams and the league overall. You know, beyond that, most of the other major American and global sports allow private equity ownership, at least in minority stakes, so, you know, if majority-controlled matters, yet it’s probably off the table to do invest in specific teams, because they still want to mandate that, you know, there’s an individual owner, a single “throat to choke” in the membership of the clubs, so that’s, that part of it, yeah, outside of football, you’ve got all of the major sports leagues are now open to investment. And then, if you think of the league side of it, really the emerging ones are probably more attractive, you know, I don’t think you would convince the NBA or the NHL to invest in the league overall, but clearly with, you know, Formula 1, that’s kind of a league in its own right, there’s an investment there. As you think of other upstart leagues, whether that’s an emerging sport like lacrosse or arena football or other, you know, derivative leagues, like e-racing; there’s things like that where you can make investments at the league level because the individual franchises don’t have enough power to influence it. So, more of the power is still sitting at the league level.

Brown

I have to ask, what’s e-racing?

Brewster

E-racing is electric car versions of auto racing with motors and traditional motors. So there’s things like that emerging, whether it’s drone racing is another one out there that’s been hot over the last few years, where you take a concept in its traditional form and then it’s derivative products like that, and so, you know …

Brown

So the cross section of sport and ESG and sustainability.

Brewster

Correct.

Brown

That is, that is fascinating. I love it. If I were to, just wanted to also pull on something that you mentioned, you mentioned minority stakes. Are we finding typically the investments that private equity are making in the sports area are minority stakes, or are we seeing examples where they’re taking control?

Brewster

In most of the investments for teams and leagues, they’ve been minority stakes. A lot of this is the, what we talked about earlier in this discussion, the league doesn’t want, they want stable long-term ownership of their membership clubs, and there’s a perception that, if the majority owned by PE, it won’t be committed for the long term because of the reputation of 5-10 years you’re going to get out of an investment. And so, while it opened up the doors for minority investments in teams and leagues, you know, they’ve kind of barred majority investments being placed. That being said and some of the things we talked about of, you know, some of these derivative leagues, things that are servicing sports, you know, like a concessionaire or sports agency or things navigating sports betting, an emerging new revenue stream. Those are clearly more like businesses that touch into the sports ecosystem as opposed to a team or a league themselves.

Brown

Really what we’re talking about is, as you said, the sport ecosystem. That’s where the opportunity lies and to really create value and differential returns, especially as we are thinking about more online and streaming, and our technology catches up.

Brewster

Yeah, yep. And not to forget the, you know, the core of the traditional sports of teams and leagues are also now in that ecosystem as an option for a private equity investor to participate and get those, you know, what makes the asset class in the sector attractive in the first place.

Brown

And so, do you think also when private equity thinks about investing in the sport or a particular sport, traditionally you have operating partners who come to the table and, you know, they bring in a certain set of expertise. Are you seeing that the private equity that are focused on the sporting area are also bringing on that new type of generation of talent that’s, that understands the sector and brings certain perspectives to the table?

Brewster

Yes, and part of it goes back to a question you asked earlier around the communication of this. I think it’s a lot more palatable for fans and even teams or leagues that are accepting the investments to know that this partner is not just a financial partner; they can add value, they have relationships in media, content creation, technology, maximizing data monetization, whatever may be, the communication of we’re accepting this money goes a lot further, or it’s easier to communicate when it’s someone who has a track record or even maybe not a track record in sports specifically, but experience they can bring to the table on really adding value outside of just the checks they can write.

Brown

Tyler, you’ve done a really great job of explaining to us the compelling nature of investing in the sporting ecosystem. Tell me, would you be able to help us kind of articulate what are some of the, maybe, the risks or pitfalls that a private equity investor needs to be aware of so that when they’re looking at these types of investments, they can make sure it’s as successful as possible?

Brewster

Yeah, we’ve discussed these over the course of the conversation, but we’ll just summarize. You know, I think there is the difference in mindset. So, if you’re looking, this is a traditional leveraged buy-out model where we’re gonna have consistent cash flows and all of that, it tends to look different from that. Now, not to be said that can’t be found in sports, you know, a lot of the investments are, tend to be a longer-term mindset, a thesis around asset appreciation as opposed to, you know, cash flow coming in, and so, certainly, it’s a different mindset, and if you don’t go well with that right mindset, you could get into some trouble. And then really the biggest thing is, you know, after that is just the amplification and the risk that comes along with that. And so, you’re going to be putting yourself in the spotlight depending on what that, you know, what part of the sports ecosystem you’re investing in. You’ve got to be willing to carry on that reputation or risk that comes from the fans and the media talking about your participation. Now this, as an example, this was not private equity investment, but you know, the top European leagues in soccer coming together to create the super league, you know, that was a, the fans saw this as a money grab – it’s the rich getting richer – and they squashed it very, very quickly. It was kind of amazing how quickly the fans and the media turned on them and they reversed course because of this perception of “We are just trying to make an extra buck out of this.” And so, if you’re not thoughtful on the communication of what you’re doing to grow and improve the product, either on the field or participation or the global brand of it, now if you’re failing to do that, you know, you can really quickly get a lot of public backlash that you’re not going to get when you’re talking about investing in a small regional chemical plant or a B2B services provider. You know, you just have that much more attention.

Brown

Yeah, so I guess the, to your point, you always have to know what you’re investing in, you have to do your research, you need to understand who your consumer is, you need to understand the entire ecosystem; the difference is if you’re making an investment in, to your point, a chemicals plant or a technology company, if you make a mistake, it’s usually not broadcast on the global stage.

Brewster

Exactly, exactly. And so, when you think of your diligence, when you think of all of the things you want a game plan for in executing a deal and building out your 100-day plan, you need to be thoughtful of all the stakeholders, which every transaction should do this anyway, but it just amplifies the outsider perspective and what they can do to change the narrative of the deal.

Brown

All the more important to have people on the deal working with you who understand the sector and understand the wider reach of the sector and all of the different opportunities that may come along with investing in the ecosystem. So, Tyler, can you share with us how COVID has potentially accelerated the trend and perhaps even the need for private equity investment within sport broadly? I mean, clearly, you haven’t had fans in stands for a long period of time, so can you share with us how this, how the pandemic has impacted?

Brewster

Yeah, so it definitely varies from team to team, and even league to league, on their reliance for ticket revenue and concessions and all of that. You know, some more reliant on that than others, but overall, when you’ve got one of your biggest revenue streams essentially drying up to effectively $0 because you can’t put butts in seats in your stadium and you can’t be selling beer and hotdogs and parking and all of that, that there’s a big hole for the revenue side of your P&L. On top of that, you know, your expenses haven’t changed, if not, they’ve only increased because you have testing and all this other stuff that was imposed on a league that was trying to maintain operations over the course of the pandemic. And so, the near-term financial hit was fairly strong on the industry. Now the long-term fundamentals, none of that has changed once we return to normal. The attention is still there, the media rights values continue to increase in value in the eyeballs that go to the sport, but, so, through that short-term blip, a lot of these teams and leagues are feeling a lot of financial pressure. And so, that’s triggered a need to raise capital to help support the financials in the near term, and so it’s opened up the door in those conversations for PE investors and other large institutional investors to inject some capital for a minority stake to help, kind of, the teams and leagues weather the storm financially.

Brown

So, Tyler, I think the story around, and the acceleration of, private equity investment in sport makes sense, and it’s interesting and fascinating, and we can understand where there’s additional value that can be had certainly around the ecosystem, but where to from here? What’s the art of possible when we think about private equity investing in sport in the long term? What do you see?

Brewster

In the long term, you know, I think there is, sport’s been incredibly successful to continue driving the increased revenues, to continue driving asset values of major sports properties; while they probably can’t add more seats in the stadiums, and the pricing of tickets has been at a rapid pace where it’s becoming probably a lever you can’t keep pulling to get more and more price per ticket. You know, that being said, there is a lot more runways for continued growth, media rights continue to grow. You look at the new rounds, whether it’s the NHL deal that was just signed, the new NFL deals, media rights continue to become more and more valuable, so that revenue stream will keep growing. Sports betting and the navigation of that, at least in the US, creates a new revenue opportunity for a lot of sports leagues. You know, you see a lot of sophisticated owners of, you know, both of the teams and the stadiums and arenas looking at more of, ok we’ve got something that sits here, we use it 8 or 40 or 80 times a year. How do we have this be a 360-day-a-year real estate property? So, the real estate development, that lever to pull is something that we’ve seen across a lot of the more sophisticated owners. And then just the globalization. So, sport in its nature is, if you go back 100 years, it’s a very local thing, and a lot of these leagues have become very global and there’s more runway, more exportation of the NFL into other parts of the world or NBA to other parts of the world. Importation of rugby or Formula 1 or European soccer into the US. And so the opportunity to create more global properties continues to be there. And then you layer in what private equity can do from their ability to value add through technology, bringing smart people to the table, media content connections; it just, there’s a lot more value to be created over the long term. We are not in the 9th inning. We are still in the middle innings, to put a baseball analogy out there, where the industry can go.

Brown

Wow, thank you, Tyler. That is truly insightful and fascinating actually because I hadn’t really thought of the sporting sector in the way that you’ve described it and the opportunities that lie in making, call it assets, more efficient. And also bringing sport to, making it more accessible to the world at large. And great to see that private equity is going to be playing a hand in that, and I look forward to hearing updates in due course.

Brewster

Yes, of course.

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