Sport is back. From the Italian Serie A to the English Premier League, teams are finally returning to the pitch.
This will be good news for private equity firms, which have been capitalising on the opportunity to pick up assets during the months-long hiatus.
CVC Capital Partners, Bain Capital and Advent International are reportedly going head to head to acquire a stake in Serie A, according to Bloomberg. KKR is in discussions with Rugby Australia to take a stake that could be worth hundreds of millions of dollars. Meanwhile, a newly formed firm, The Sport Investment Group Italia, made an offer last month to take over third tier Italian football club Calcio Catania for €54.5m – which will cover the team’s debts.
Another firm that has targeted lower divisions is US group RedBird Capital Partners, which is set to take an 85% stake in French football club Toulouse. Over in South Africa, SA Rugby CEO Jurie Roux confirmed earlier this month that the group is in talks with private equity firms.
The Covid-19 lockdown left stadiums deserted, fans frustrated and owners of broadcast rights questioning their multi-billion dollar contracts. For buyout groups, which are persisting with the view that sports has significant growth potential, this has been a good time to buy. Not only has the pandemic reduced valuations, it has also created a need for financing for teams previously not on the hunt for investors, according to private equity groups and industry bankers.
All this activity is keeping people like Adam Sommerfield busy during lockdown. Sommerfield is chief executive of Certus Capital, a London-based firm that brokers deals between businesses and potential investors in sports and healthcare.
He told Private Equity News that there is a “huge amount of appetite” from both new funds and existing clients. Some investors are even eyeing distressed opportunities, though Sommerfield said these will not be found among the top leagues in Europe.
“They [PE groups] understand now is a good time to buy because they will get a reasonable price. Valuations are not massively inflated,” Sommerfield noted. He also said he is seeing a lot of interest from US firms looking to take preferred equity positions in European teams.
Private equity funds say they are attracted to the stable cash flows offered by sports teams which have multiple revenue streams. These include income from ticket sales generated on match days, selling broadcasting rights to games and sponsorships. Merchandising deals, prize money from winning competitions, and earnings from transfers all top up a teams’ income which will ultimately turbo-charge the internal rate of return for general partners.
The flip side of this buyers’ market is that the financial dangers pushing sports owners towards private equity could turn these investments to dust.
Antonin Baladi, partner at investment bank PJT Partners, said there is a real economic crisis across sports teams, because of coronavirus’ impact on sponsorships and broadcasters. “The sponsors are going to be looking at where they will spend money. While sports is still probably one of the best areas, most advertisers are retrenching on spending money on sports ads.”
Deloitte warned last week that England’s Premier League clubs, for example, face a £1bn reduction in their revenues in 2019-20 because of the coronavirus pandemic. Half of this reduction – in rebates to broadcasters and loss of matchday revenue – will be permanently lost, Deloitte said, with the rest deferred until the next financial year.
Private equity backers of sports argue that the slump will be short-lived. Nick Clarry, head of CVC’s sports, media & entertainment division, said the firm’s view is that sports will bounce back from the pandemic.
“The lack of sport over recent months has made players, fans, broadcasters and governments realise the importance of sports for our sense of community and wellbeing,” he told PEN. “We expect sport to recover from the crisis, to return to growth, and to make a strong contribution to the recovery – and we wanted to invest now to support that opportunity.”
Private equity’s buy-low-sell-high ethos was behind Redbird’s decision to buy into Toulouse. The team was relegated after finishing last in the first division in the most recent season – which ended early because of the coronavirus pandemic.
“We like to be value buyers in the way we invest,” RedBird managing partner Gerry Cardinale said in an interview with PEN. “In Toulouse we believe enough in our capabilities we are not daunted by the prospect of buying into a team that’s relegated. We believe we have what it takes to get them back to the first tier.”
Although RedBird has previously invested in the world of sports – owning media companies such as regional sports network Yes Network – this will be the firm’s first team ownership. Cardinale said he will be looking to do more deals in this arena.
He said there is still a reluctance to make a “Covid trade” in sports but he believes “you’re going to see pockets of financial distress”. However, he added: “These are still great assets and intellectual property, the business model is still intact.”
“There is a period of time where everything will be massively dislocated and that will provide opportunities for capital to come in.”
For all their professed optimism, private equity firms are looking to protect themselves in these deals.
Minority deals, which allow buyout groups to take a position at a lower cost and with less debt and increase the investment at a later date, are all the rage at the moment, Certus Capital’s Sommerfield said. With debt more difficult to source in the current market, such smaller deals are more appealing as they are easier to finance. He said that Certus is working on advanced processes on deals for teams in EPL, Serie A and La Liga.
And many buyout groups are playing the long game. Firms admit that, given the situation, they are willing to hold these assets longer than the typical three-to-five year period and are betting on the loyalty of the fans when matches do come back.
PJT’s Baladi said: “There are a lot of examples of people having made money in sports. Private equity is going to say that the reason they are looking at all this is fundamentally because people love sports. There is a question mark on how long this crisis will go for, but things will go back to some form of normality.”
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