Friday, April 16, 2021

The rush of private capital to sport

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the The most important 2020 sports transaction – the $ 2.4 billion sale from the New York Mets baseball to hedge fund manager Steve Cohen – was both a record sum for a North American franchise and, according to fund managers and sports industry executives, perhaps the start of the end of the era of wealthy individual property.

“There are very few Steve Cohens in the world who can afford to just write a check” for a big franchise, said one investor in the sports industry.

The coronavirus pandemic has devastated global sport this year, canceling or postponing events and virtually eliminating match-day participation in the remaining matches. But as leagues and franchises prepare to gain a foothold financially, the uproar of 2020 has accelerated an emerging trend in the sports industry: the influx of institutional capital.

With a wave of new, special-purpose acquisition companies and the establishment of specialist funds seeking to invest in leagues and teams, private money is shaping the sports business in new ways. Private equity groups scramble to obtain a stake in European football media rights, while the American sports leagues are relaxing their statutes to allow new forms of investment.

Underlying these changes is the fact that assessments of license fees and individual franchises remain on an upward trajectory.

“Sports assets have shown a low correlation to the broader market, with teams selling for record values ​​during the 2008 financial crisis and Covid-19,” said Michael Kenworthy, head of sports investment banking at Goldman Sachs. In some cases, he said, valuations had outperformed other traditional investment benchmarks, such as the S&P 500.

“If you are wondering what is the best way to build a portfolio and you want to diversify yourself, it might be worth having some sports assets in that portfolio.”

Thirty-five years ago, it was possible to become the majority owner of a National Basketball Association team in the United States with a few million dollars in hand, as did Larry and Gail Miller with $ 24 million to buy the Utah Jazz in 1985-86. This fall, the family sold its majority stake to an ownership group led by Qualtrics entrepreneur Ryan Smith for $ 1.6 billion, more than 66 times their initial investment.

“The universe of people [to buy in] is so big, ”Mr. Kenworthy said. “There must be other mechanisms to help them make them affordable and make it a bit easier for them to buy these assets.”

That thinking led to the NBA’s decision in May to change its ownership rules and select Dyal Capital, a unit of U.S. asset manager Neuberger Berman, to buy stakes in more than one team, according to three people close to the transaction.

Dyal was set to raise around $ 2 billion in a new fund that would focus exclusively on buying minority stakes in NBA franchises, with the aim of buying from existing owners, many of whom have acquired their parts of ‘a team when valuations were significantly lower, two out of the people said.

The NBA’s move followed a Major League Baseball decision in 2019 to allow institutional investment in multiple clubs at once. Although taken before the pandemic, the MLB rule amendment “could not have been more timely,” according to a person familiar with the league.

Steve Cohen is the new owner of the New York Mets baseball © Bloomberg

Billy Beane of ‘Moneyball’ fame created a Spac © AP

The league’s shift in focus on who – or what – can own franchises is also fueling an increase in sports-related special purpose acquisition companies, or Spac. They are listed investment vehicles sitting on a pot of money with which to buy an existing business.

The most prestigious of these is the vehicle created by former Goldman Sachs partner Gerry Cardinale and Moneyball legend Billy Beane, who attempted a reverse merger with Fenway Sports Group, the holding company of two of the most valuable clubs on either side of the Atlantic.

If successful, the RedBall Spac would result in a public list for the company behind the Liverpool FC football team and the Boston Red Sox baseball team.

“The acquisition of RedBall Spac is the next step in an ongoing transition in the sports ecosystem,” said an executive who is now raising money to invest in clubs. “These assets and this asset class have appreciated in scale and value where they are institutional. So there is a movement towards institutional investment, and public money is part of it. “

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Of course, investing in sports is hardly risk free for institutional investors, who wonder if the upward trajectory in valuations will be sustained, if sports investments will be liquid, and to whom they could sell in the future.

There are also many idiosyncratic risks to the industry.

In November, CVC Capital Partners and Advent International sought to add a “separation” clause to their € 1.6 billion deal to buy a stake in Italian Serie A media rights, after some of Europe’s top football clubs discussed the creation of a separate super-league across the country. continent.

Uncertainty could be a factor in other nascent football deals, including a move by around 20 private equity groups seeking to invest in media rights for the German Bundesliga.

In the United States, institutional investors will be subject to the vagaries of league governance, as the leagues ultimately decide who is acceptable as a club owner.

The executive who is currently raising money to invest in clubs said the potential deal with RedBall Spac would set the tone. “The real question with Fenway is whether MLB will approve. It is a real risk in this circumstance. Approval changes everything. “

Discussions between RedBall and Fenway are ongoing, but there can be no assurance that a deal will be reached, especially given the current disruption.

For the 2020 season, the Red Sox are expected to suffer a blow of $ 338 million from lost ticket sales alone, according to Team Marketing Report analysis.

“Everyone is looking to solve the short-term problems of the pandemic, and one way to do that is to allow the injection of institutional capital,” said another third-party financial manager, who both works with the leagues. and the owners.

As Covid-19 cases climb around the world again, combined with the fact that the rollout of vaccinations can take months, the call within the sports world to attract more private capital is only expected to continue 2021.

“There is a lot of blood on the floor here, these franchises are bleeding,” the CFO said.

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