Sportbusiness.com’s Frank Dunne looks at the growing trend of private equity investment in sport, as the financial crisis brought on by the impact of Covid-19 leaves governing bodies in a weak bargaining position.
Professional sport has entered the most rapid phase of modernisation in its history. The cluster of private equity investment deals over the last 12-18 months is a part of that. The tectonic plates of the industry are moving, and new structures will solidify as the decade unfolds. Covid has accelerated this process, rather than creating it. But it has left sports bodies in a weak position to decide how the future looks.
Private equity investments in the sports industry are not new. But deals with sport’s governing bodies are. The International Volleyball Federation (FIVB) last month agreed a deal with CVC Capital Partners which gave the private equity firm a one-third stake in the federation’s commercial arm, Volleyball World. Also last month, Silver Lake tabled an offer for a 15% stake in the commercial activities of New Zealand Rugby. Rugby Australia has “approved a pathway” to secure private equity funding. The governing body’s Chief Executive, Hamish McLennan has said that private equity funding would help modernise structures in Australian rugby, as well as shore up its finances. Fiji Rugby is exploring similar options. Many more will follow.
In 2019, Fifa was criticised for holding talks with CVC about funding for the planned expansion to the Fifa Club World Cup. In retrospect, it was merely ahead of the curve.
Unlike clubs and leagues, governing bodies have a remit to protect the wider interests of a sport, involving many promotional and educational activities which, on a standalone basis, are loss-making. They invariably try to secure the largest possible revenues to run their sports but – critically – they are not-for-profit organisations. The money is supposed to go back into the sport, not into the pockets of fund managers.
Voting mechanisms become central to any negotiation between a fund and sports body. Even though private equity companies are typically taking a minority stake in the commercial vehicle of a league or federation, they want a say in how that is run. In some cases, they want the final say.
These deals and negotiations raise important questions for the future of sports governance. They include:
- Is selling equity to a private fund appropriate for the governing body of a sport?
- Where does control really lie in these relationships? Who has the final say?
- Are there ways for governing bodies to secure cash and expertise without sacrificing control?
For some senior figures in sport, governing bodies should be taking a different approach to funding than leagues or clubs. Alex Phillips, former Head of Governance at UEFA, tells SportBusiness: “For me, it’s a massive red line to sell equity for a governing body because it’s in perpetuity.”
He argues that the profit motive animating the funds may be inimical to the logic of operating a governing body.
“Funds want to make a profit in the short-term, whether it’s three years, five years or 10 years,” he says. “They will want to see the asset increase and then they’ll disappear. That is obviously going to tend towards short-term thinking at the cost of long-term health. For example, a shift to pay-TV might create additional revenue short-term, but might have a negative impact on development and participation. It’s often better to take less cash but get greater exposure and the know-how and reach of a major partner.”
Phillips argues that while sports clubs will need funding from time to time for investing in things like new stadiums, which require a substantial capital investment, this does not apply to federations.
“The economic model is fundamentally different to a club or a league’s economic model, because they don’t have to pay for the main costs of production,” he says. “In team sports the main costs are borne by the clubs. They’re paying the players. The federation business model is massively insulated. Most governing bodies don’t need private equity financing. The big ones already have big reserves.”
The reason so many are turning to private equity is because – suddenly – the offers are there.
“It’s very intoxicating to be shown vast amounts of money by people who talk a very good game. And people do get intoxicated by it, especially if they come from sports administration – blazer – backgrounds,” says Phillips.
Others think the professionalisation of sports management is overdue and applies equally to governing bodies. Simon Thomas, the former Chief Commercial Officer of FIFA, who is now a partner in strategy consultants Colgan Bauer, says: “I think there is a need for governing bodies to up their game, and if the introduction of greater expertise and financial discipline via third-party investment achieves this, that’s a good thing. They may also bring a less conservative approach, with a greater appetite for risk and innovation. It should benefit the sport involved. Maybe the balance of power shifts away from the governing bodies long-term, but that’s OK if, at the end of the day, the fan is still at the centre.”
The price to pay for maybe being able to make a quantum leap is some degree of control, he adds.
“The governing body will usually want to retain approval on strategy and execution of deals. But they have to be realistic and professional about it. If they’re accepting funds from a third-party, it’s not a free lunch. They’ll need to work with them and allow the opportunity to earn an appropriate return. I don’t actually see a problem with that, if there’s the right fit between the two, and the private equity fund has the right level of expertise and understanding of the sporting issues.”
Anthony Indaimo, a partner in the Withers Worldwide law firm, whose clients are drawn from across the whole sports ecosystem, believes there is no in-principle incompatibility in federation/private equity deals.
“The federation will still have a majority stake in the commercial entity,” he says. “And it will have to reinvest the money it derives from the commercial entity into the sport as per its by-laws or constitution. It is not driven for a profit. It is driven to reinvest back into the sport, so you’ve got a better quality of product, an increase in participation at a grassroots level and pathway for future talent, an increase in prize money, and a more flourishing ecosystem for the sport globally. As an advisor, one of the things we bake into the shareholders’ agreement is that the money needs to be reinvested. You have to make sure that everybody wins.”
However, Adam Sommerfeld, Managing Partner at Certus Capital Partners, whose clients include both private equity companies and US sports franchises, predicts that when the dust settles, governing bodies will be less important in the sports ecosystem than they are today.
“They will always have a prominent role in rules and regulations and the calendar. But you’ll see private equity companies looking to take a far more prominent position in decision-making,” he says. “We’ve seen that with the proposal for a European Super League with JP Morgan and other financiers behind it, and I think we’re also seeing it now in rugby and any other sport where there is potential for change.”
Balance of power
Striking a shareholder agreement which enables a governing body to unlock value without losing control of commercial strategy is the challenge currently facing many federations. The financial crisis which has made governing bodies open up for the first time to the idea of external funding has also put them in a poor negotiating position.
For Sommerfeld, the losses many sports bodies have suffered due to Covid have made them vulnerable.
“Now is the time to come in with something aggressive and I think funds can sense that. They can smell blood. They can sense an opportunity for a well-priced deal. And their lead-off position can be something quite aggressive. PE is going for the jugular in terms of the running of these bodies,” he says.
Finding the right mechanism to balance the needs of both parties is not simple. In at least two cases, private equity interests in football leagues have – so far, at least – foundered on the issue. Those are the offer for a 10% stake in Serie A’s planned media company by CVC, Advent International, and Fondo Strategico Italiano and TPG’s offer for a stake in the commercial rights of the English Football League.
Indaimo, who has constructed such agreements, explains the challenges and the ways to overcome them.
“If I’m the private equity fund with 30% of the commercial vehicle, I will say that there are material decisions at a board level, or at shareholder level, that we should take unanimously with the governing body or federation. They will normally be around the direction the sport goes in, strategic decisions that have a commercial impact. If I’m putting up, in some cases, over a billion dollars, I want to have a say on material decisions and don’t simply wish to be a passive investor.”
But if a vote ends in deadlock, whose interests should prevail?
“Those shareholder agreements will also provide a mechanism for when we can’t agree on something material that prevents the commercial entity from proceeding. Then we would refer it to a third-party, or we might need to mediate, and escalate the decision-making process to the CEO or Chairman of our respective organisations. But it is designed to be as consensual as possible because of the significant amount of money that is invested for the minority shareholding by the fund.”
Private equity funds provide both capital and know-how, with access to expertise in a whole range of areas – from advanced technologies to debt restructuring – that many governing bodies don’t have in-house. In the last four decades, federations have looked to secure these things with other models, which did not involve selling an equity stake. These range from long-term partnerships with sports marketing agencies like Infront or IMG to joint ventures with media companies, like the deals the International Basketball Federation and the Women’s Tennis Association have with streaming operator DAZN. There is even a DIY option available to federations: taking bank loans and recruiting wisely.
“There are always other sources of capital, but they will inevitably ask for something,” Sommerfeld says. “A drawdown facility or credit line is clearly one way. But why would they want to? With smart private equity, like a Silver Lake or a CVC, you’ll welcome that level of expertise and financial ability.”
And not all money is the same. In most cases, what is attracting federations is the idea of getting access to a large pot of capital that can be ring-fenced for projects which could be transformational for their sport. This is very different to securing loans indexed against future income from agencies or joint ventures, which has to be divided up each year among the members.
One senior rugby source explained how this difference could play out in practice.
“World Rugby has talked for a long time about investing significant amounts of money in the US, China and Brazil, which ultimately is going to help grow the sport. Because of the way monies are distributed, the members are never going to sanction spending a disproportionate amount to invest in new markets, for two reasons. One, you’re taking money out of those unions’ pockets. Two, you’re taking money to potentially help other countries compete better against them. You can’t do it unless you have a private equity company coming in and saying, ‘we believe that we can make a much bigger pie for rugby in the future, and in order to do so we need to invest money here, here and here’.
One of the reasons for the residual anxiety about working with private equity companies is that the ‘barbarians at the gate’ image persists. This is one of funds who cut costs, ‘sweat the asset’, cash out and move on after five years. But some say that while such a modus operandi still exists in many other sectors, the private equity companies with experience in sport understand they have to approach sport differently.
As Indaimo puts it: “That’s not a model that works in sport. And it can’t. The members of any federation have to vote on what is being proposed. The first thing they will want to hear from the board of the federation is why they think that this private equity fund is good for their sport. And that is why most federations will run an auction process with clear objectives and metrics for what a successful outcome looks like at the end of the process.”
The ITT for such processes should make it clear, he adds, that the investment should be used to make improvements to the sport and that the life of the investment is longer than private equity funds are used to. “And just as important is what happens when the private equity fund needs to sell out and you’ve got a new third-party. The federation will want to have approval rights over that.”
Thomas concurs that a different approach is required for sport.
“In other industries, you might just buy off a multiple of Ebitda (Earnings before interest, taxes, depreciation and amortization), improve performance, cut costs and flip it. Sport is more complex and nuanced. There is a multitude of stakeholders that you have to take into account. The partnership isn’t just with the asset, it’s with the sport itself and its fans.” Where funds don’t understand that, he says, “I can see that things may not work out well”.
He concludes with a word of advice for governing bodies pondering private equity deals.
“Everyone, ultimately, needs to be on the same page, and the good (private equity firms) will be. Choose your partner wisely. Don’t make it just about who writes the biggest cheque.”