It might not feel like it right now, but sport event rights holders are extremely fortunate. They have access to a wide range of revenue streams: broadcasting and city hosting rights, ticket sales, sponsorship and public funding. For the last twenty years these streams flowed ever faster, until the age of social distancing and staying at home blocked many of these lifelines.
With loyal customers and packed calendars of events, sports organisations rarely felt the need to save up for a rainy day. Few could have envisaged a black swan like Covid-19 preventing them from serving their loyal customers or paying their bills.
While some organisations have been able to stage events through the pandemic, they have tended to lack audiences to sell tickets to – and not all sports have a level of broadcast reach that can make up for this shortfall. This means most rights holders are now under intense pressure. And one person’s loss is another’s gain.
“Private equity companies are circling due to Covid,” says Andy Westlake, Chairman of the European Sponsorship Association. “A lot of rights holders will go over the cliff if they don’t get investment.”
The most popular sports have attracted ownership from high net worth individuals for decades, but institutional investment in teams is a relatively new phenomenon. “They were once seen as risky ventures that wouldn’t get past an investment committee – this has changed,” says Nic Couchman, Head of Sport at international law practice Charles Russell Speechlys (CRS).
Private equity investment in sports federations
Private investment in international sports federations is also on the rise. One of the earliest adopters was the World Professional Billiards and Snooker Association (WPBSA), which set up World Snooker in 2002 as a self-perpetuating commercial model to fund the not-for-profit WPBSA.
“Private equity is very interesting to sport right now," says Jason Ferguson, Chairman of the WPBSA and Director of World Snooker Ltd. "International federations can do things differently; many are not running as proper businesses.”
Much more recently, the International Table Tennis Federation (ITTF) set up World Table Tennis as a new commercial arm. “Establishing World Table Tennis as the rights holder has enabled us to get equity, which has positioned us well through the pandemic,” says Matt Pound, Director of World Table Tennis.
The latest federation to buoy its governance function with a commercial arm is the International Volleyball Federation (FIVB), which at the start of February 2021 announced the launch of Volleyball World with backing from private equity giant CVC Capital Partners.
Rugby is also attracting a wave of private investment. CVC, having invested £200m in a 27% share of Premiership Rugby in 2018, is now closing in on a major investment into the Six Nations. Meanwhile, Silver Lake have reportedly offered US$330m for 15% stake in New Zealand Rugby.
The sport’s international federation, World Rugby, has been relatively fortunate in that the cycle of its World Cup events have so far avoided being impacted by Covid. The men’s event in Japan in 2019 broke attendance and viewing records despite Typhoon Hagibis, while the largely Covid-free New Zealand hosts are expected to fill stadiums in 2021.
But financial challenges remain. “With Covid, many of our Union members are struggling due to a lack of crowds and matches,” says Mihir Warty, Director of Strategy at World Rugby. “We have drawn down on our reserves to actively support several in managing their cashflow issues’.
“We are conscious that some organisations within the sport have attracted external investment. This appetite from investors points to the potential of rugby to continue growing as a global sport.”
Sport gets serious
“Investors normally look for strong commercial fundamentals – predictable, annual revenues, strong brand loyalty and market share – and the ability to use cash and expertise to increase market share and accelerate growth,” adds Robert Datnow, Managing Director of The Sports Consultancy. “For decades, sport has been seen as a complex and impenetrable investment – with a few notable exceptions – but now, the right opportunities, at the right price, and with the right execution plans are serious business.”
Recent years have also seen the rise of strong challenger brands within the sport event space. Super League Triathlon was set up with venture capital funding from triathlon fan and co-founder Leonid Boguslavsky – a model that CEO and co-founder Michael Dhulst says is others will no doubt replicate. “There will be growth of new events with passion-driven investors. Private investment is going to become more important for rights holders.”
It’s not just immediate financial concerns that are driving the trend towards private investment: the media landscape is shifting the foundations of the industry. The sport event industry is reliant on broadcasting revenues, which has become increasingly problematic as the internet draws audiences away from TV.
“Sport at its core is a media enterprise. It was inevitable that it would confront forces of changes due to new technologies and evolving consumer habits. The pandemic accelerated all of that,” says Scott Novak, Head of Global Communications for Bruin Sports Capital.
As Giles Morgan, global sports industry veteran and executive vice president of Pumpjack Dataworks puts it, “Sports has reached a perfect storm. The sports industry was created around the eyeball; TV ratings were the gold standard. Sponsorship is the most valuable form of marketing, but it’s quick to fall in a downturn – and it relies on TV.”
Future growth of sports events
All this disruption brings an opportunity for private equity. But investors are not only looking for distressed assets; they are looking for future growth.
“We have been approached by investors from a variety of sources. There’s clearly a lot of interest in investing in sport," says Mihir Warty. "However, the crucial thing is to identify properly what the money is needed for. All federations and rightsholders need to ensure that investment is seen as just that – a way of growing the entity and driving sustainable revenues. Not as a windfall.”
The loyalty of sports fans is an important, untapped asset. Although younger people are becoming more fluid about which teams they support, tending to follow the individual athlete as much as the team, there are still few industries that have as unique a hold on their customer’s hearts as sport.
“The reason that investors see potential returns in these properties is fundamentally because of the unrealised value in the fan bases,” says Charlie Greenwood of Sports Loft. “If the teams can start to know that fan base better, engage with them more through great content and sell them more products – all of which requires better technology than what has been previously used – then the investors can increase the value in the property.
“As investors are looking at investments into teams and leagues, there is much more appetite for investing in the technologies that support sports organisations - and in many cases there is an opportunity to use the sports property to help increase the value in their tech investment.”
A challenge for investors will be how to value companies coming out of the pandemic, and the rate at which fans will return – not only buying tickets to live sport, but also subscriptions and merchandise during what could be a prolonged economic downturn. A rapid rebound would represent a great opportunity for investors. According to Ian Clayden of BDO, “Private equity views sports as a sector that can mobilise quickly post-lockdown.”
Where future growth will come from is a question that applies not only to sport. Asia – particularly China – is emerging fast and strong from the pandemic. There are large, young populations with growing disposable incomes representing plenty of headroom for growth in the entertainment industries.
Sports are not the only events that have been hit by the pandemic. “Trade shows enable the discovery and furthering of commercial relationships and long-term partnerships in a way that no digital business has been able to replicate online so far. At the right entry price, this asset class could deliver quite attractive returns on the 2023-2025 horizon,” wrote Alfonso Marone of KPMG in a recent insight piece.
Music festivals have been equally badly hit, with no viable digital alternative to the real thing. Before the pandemic, private investment was growing in the live entertainment sector, which could enjoy a similar rebound to sports post-Covid.
“As the owner of Host City, the world’s largest meeting of sports, business and cultural events, we know these properties have perennial value to a variety of stakeholders,” said Matthew Astill, CEO of Cavendish Group, which also owns leading China-Europe investment forum International Capital Conference. “As the events industry opens up around the world, the opportunities are immense for anyone investing in these vital sectors.”
But private equity won’t go in with its eyes closed. Large, structured investors want detailed data on a business and its customers. Fan bases are a massive untapped resource of data – the sports and entertainment organisations that can show business acumen and a deep knowledge of their customer base will be the ones that are most attractive to investors. And in this area, sport and entertainment have a lot of homework to do.
Private investment will be a central theme of Host City Asia on 14 April and Host City Americas, set for 30 June (both virtual). Host City's global series of events climaxes in Glasgow with the hybrid Host City 2021 on 7-8 December 2021. For more information ask ben.avison@hostcity.com
