It’s no news that big money gets poured into buying sports franchises. For decades, the going price of a major sports franchise across leagues has been climbing at an ever-accelerating rates. In some ways, the rise in team valuations paralled the art world where very high net worth individuals pushed collectors aside as the driving force in setting prices for the top of the market. What is news is that the “vanity money” that drove a good portion of the escalating sports pricing in the past is being increasingly joined by “smart money” private equity investors and investment consortiums.
A major driver for this new source of investment was a change in the regulatory environment. It started in 2005 when Formula One took a major PE investment from CVC Capital. Other leagues saw the benfit of widening the potential ownership pool to bid up the value of franchises and to create liquidity events (i.e., profitable sell-off opportuniites for minority investors or partial carve-outs for majority investors). The MLB led the change in 2019 when they allowed private equity funds to buy passive stakes in teams. The other leagues soon followed, with the NBA, the NHL, and MLSnow all allowing PE firms to buy up to 30% minority stakes in teams. Pitchbook estimates that there have been more than 20 major PE investmetns in sports since 2019. That rate is likely to continue to accelerate. Discussions between Florida State and Sixth Street Capital suggest it won’t be long until PE establishes a beachhead in the as-of-yet untouched territory of college sports.
What do investors see in sports that is so attractive? From a business perspective, many things make it a uniquely attractive asset class. Among them are:
- Barriers to Entry – Whether by law or by the nature of the business, established sports leagues have fairly wide competitive moats. It is hard to start of rival league. While the AFL (football) and ABA (basketball) show some success, they are the historical exception. Far more efforts to create rival leagues have failed, and even these exceptions defined success as being subsumed into the pre-existing league. As opposed to tech, there’s very little chance of a start-up competitor disrupting the competiive market for premier sports.
- Uncommon Customer Loyalty – How long would people keep going to a restaurant if half of their meals there didn’t turn out well? Sports teams have a hold on their core fan base that survives even worse outcomes than that. For most teams, being fairly successful once in a while is enough to keep a stable customer base. Team loyalties are passed down through generations, and our collective base instincts make us treat rooting for the home team as a civic duty. While players, coaches and owners increasingly flip over, the fan base stays stubbornly connected to their team affiliations. Compared to most businesses, sports are more resilient to mismanagment and underperformance.
- Multiple Revenue Streams – Sports teams draw on multiple sources of revenue. The most impactful of these is media rights. As audience diffusion across media platforms, channels, and time-shifting has reduced the value of traditional broadcast fare like sitcoms and dramas, it has increased the value of live events that command large simultaneous viewing. The price of broadcast rights keeps rising higher than inflation every year. In addition, teams draw revenues from ticket sales, merchandise, events and sponsorships. The rise in legalized gambling has opened up yet another licensing stream for teams to tap into, showing they’re may be other untapped opportunites ahead.
Because of these factors, there is one more important source of attraction to PE investors: the ability to add value. While much has been made about the increased rigor and sophisitcation with which team analyze their on-field performance, they’re relatively unsophisticated in their approach to off-field performance. There have been investments at the league level, with top talent overseeing media negotiations and expansion opportunities. But at the team level, most organizations are operated more like lower middle-market companies than companies with the multiple billion dollar valuations they command. There is a large variation between teams, so this isn’t true across the board. But in general, because there is such a natural and persistent customer base, little time or money is spent on customer acquisition, market expansion, customer relationship building, new product development or brand differentiation. The main focus of individual franchises is on marketing operations (ticket sales, fulfilling sponsor deals, etc) and very little in building a deep understanding of new and existing customer segments and their relative value to the business. There are few franchises that would be able to tell you the approximate annual value of an avid fan. What PE investors see in this is the opportunity to do more and make more from the unique business advantages of the sports
The Ryan Report 