Welcome to the ninth article in our Sports Economy series.
Sport Finance and Private Equity
Sport around the world was once rooted in local traditions and cultures. Not only were players typically drawn from within a community but where teams were owned or supported by individuals it was done on the basis of civic good or personal ego.
Self-sufficient governing bodies controlling indigenous competitions were standard.
However, the dynamics of sport ownership and control has since evolved along with the role of sport as a business activity. ‘Profit maximising’ investors are increasingly targeting clubs, competitions and governing bodies.
Although the concept of investing in sport for profit is not new, the most recent wave of investors, ‘private equity’ firms, differ from what we have seen before.
This article examines private equity investment in sport and discusses CVC Capital Partners, one of the largest private equity managers in the world, which have recently made many transactions in sport and are likely to make many more in the future.
Private Equity Explained
Imagine buying a house as an investment, fixing it up and reselling it. Now picture that your reputation for ‘flipping’ houses leads to you receiving money from family and friends to buy more. Finally, because of your proven track-record, banks agree to loan you amounts that are a multiple of the money, or equity, you have raised. As a result, you are now able to buy lots of houses.
This is what private equity (PE) managers do, except it is not houses, it is companies that they specialise in acquiring, restructuring and exiting in a relatively short period of time, typically three to five years.
Their investors are sovereign wealth funds, pension funds, college endowments and high net worth individuals, and the debt and loans available to them can be two to three times the amount of equity they have raised.
Often considered a glamourous area to work in, Private Equity managers operate in secrecy and are, in their own jargon, “deal makers.”
The sector offers extremely high compensation with firms typically receiving 20% of the profits made on investments.
In 2019 Bloomberg reported that the top three executives of the Blackstone Group, the largest private equity firm in the world, collected a combined $802.6m in compensation and dividends. Nice work if you can get it.
Why invest in sport?
Primarily driven by broadcasting revenue, the valuations associated with sport have increased dramatically over the past few decades.
Sport revenues have low correlation with stock and bond markets thereby offering investment managers diversification.
In the normal course of economic cycles sport is a relatively recession-proof investment but up until recently sport investing has remained niche.
When anyone ever buys an asset, someone else is selling. Both think they are right. However, the situation can become less clear cut when parties are forced to sell assets to ensure liquidity and survival.
Because of the unique nature of the coronavirus pandemic and the way sport has been affected, sport assets that would not have been available before are now potentially so. There is ‘blood on the streets’ and Private Equity firms see the opportunity.
The private equity firm vs the private equity fund.
Private Equity firms don’t directly own the assets they purchase. Unlike investment companies like Fenway Sports Group who directly own Liverpool FC, or Peak6 Investments who purchased Dundalk FC, private equity firms instead buy on behalf of outside investors and do so through a fund structure which has a finite life which is usually 10 to 12 years.
For example, CVC launched their first flagship fund, CVC Capital Partners Fund I in 1996, with €667M of commitments from investors and the fund has since been fully liquidated.
CVC invested in Formula 1 via their fourth fund, CVC Capital Partners Fund IV which was launched in 2005 with €6 billion in investor commitments.
In 2015 Forbes revealed that the term of Fund IV, as per communications from CVC to investors, was 10 years with three one-year extensions if consent was given by the majority of investors.
Why cap the life of a fund instead of operating it indefinitely? Because investors will want their money back and ten years is a long time to be without your money compared to investing in the stock market for example where shares can be bought and sold at any time.
In the first stage of a private equity fund’s life, purchases are made with investors being asked to pay each time based on their original commitment amount.
Lessons from Formula 1
In 2006 CVC Fund IV purchased a 38.1 per cent stake in Formula One for $2.065 billion, financed with equity of $965 million from fund IV and debt of $1.1 billion from RBS.
In a Private Equity fund’s second stage, assets are sold off until all holdings are liquidated and all monies are returned to investors. Within their marketing materials, CVC refer to their ‘exit focus from the start’ as one of their key strengths.
CVC sold their interests in F1 in 2017 to Liberty Media Corporation for approx. $3 billion having already taken an estimated $4.4 billion from F1 through dividends and share sales over the course of their investment.
The same Forbes article referenced above claimed that CVC had been assessing offers to sell for five years.
Private Equity managers often facilitate their short-term buy to sell model by aligning their economic interests with the managers of the companies they control or co-control via results-driven pay packages and ambitious targets.
While in ownership of F1, CVC increased hosting fees and state-backed venues like Singapore, Abu Dhabi and Azerbaijan entered leaving the traditional European tracks such as Silverstone and Monza in financial trouble.
CVC also led a major departure from free to air television. In the UK and Ireland, for example, F1 is exclusive to Sky after signing a six-year deal for £600m.
A Stronger Move into Sport
In 2017 CVC closed the fundraising for their seventh flagship fund, CVC Capital Partners Fund VII, after raising €16.4 billion in equity commitments. 46 per cent came from North America, 23 per cent Europe, 17 per cent from Asia Pacific and 11 per cent from the Middle East.
Although it is not disclosed it would be reasonable to assume the remaining 3 per cent would be capital from CVC themselves as they have a history of co-investment alongside investors to ensure “skin in the game.”
It is within fund VII that several more forays into sport have been made. For example, a 27 per cent shareholding in English Premier Rugby for £230 million, 28 per cent of PRO 14 Rugby for €140m and a $300 million investment into world Volleyball World with the International Volleyball Federation.
With debt on board, this fund will likely make total investments two or three times the equity.
In addition to Six Nations negotiations which according to widespread reports are ongoing, CVC are rumoured to be making several other sports transactions.
The NBA has agreed to allow private equity and institutional investors to own minority equity stakes in multiple franchises and CVC are reportedly in the process of acquiring a 15 per cent stake in the San Antonio Spurs.
Furthermore, Football leagues such as Italy’s Serie A, Germany’s Bundesliga and Spain’s La Liga are contemplating making vehicles that will house their commercial rights, which can then be sold to institutional buyers.
CVC have been leading a consortium bidding to own 10 per cent of the commercial entity that would hold Serie A’s broadcast rights, although recent reports indicate this deal may fall through.
Control
CVC have not yet been able to take many controlling stakes in sports entities, having to make do with minority positions. However, they probably see a route to exerting some degree of control as The Financial Times reported that private equity groups that initially considered investing in Germany’s Bundesliga “have since been put off because they believe they would have little influence over the league itself”.
Although some negotiations between private equity managers and sports clubs and bodies began before the coronavirus pandemic, Covid has opened many doors that otherwise would have been closed.
Furthermore, due to low interest rates globally, institutional investors that would have previously favoured interest rate linked instruments have been allocating more capital to private equity funds.
CVC for example launched CVC Capital Partners Fund VIII in 2020 with $21.25b in commitments which they have only begun to invest.
Other private equity managers, many of which have little or no experience in sport have stated intentions for investing in sport.
We can confidently expect that private equity’s interest in sport internationally is not going away and the main interest will be in high revenue large scale operations with potential for value increases.
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Conor Foley has a business degree from Trinity College Dublin, an MSc in finance from DCU and is a Chartered Financial Analyst. Over a 12-year professional career, Conor has experience of advising clients such as institutions, charities and bodies in the areas of global strategy, project management, asset allocation and financial structure. Conor will be working with Sport For Business to produce The Sport Economy, a regular piece, offering insights from the domestic and international sporting worlds of finance, economics and business, aims to bring Sport For Business members lessons and information from around the world to aid you in your strategy, financial affairs and business decisions. Conor has worked in leading financial institutions both at home and abroad and is committed to the growth and development of professional and amateur sport in Ireland.
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