Unlocking the Potential: The Rise of Sports Finance

The sports industry has long been a playground for the wealthy and powerful, with major franchises often falling under the ownership of billionaire investors. However, a new wave of interest is sweeping through the world of sports finance, as private equity firms and savvy investors seek to capitalize on the untapped potential of this lucrative market. From media rights to operational opportunities, the sports ecosystem is becoming an increasingly attractive proposition for those seeking to diversify their portfolios and maximize their returns.

Powering the Sports Finance Revolution

The Allure of Global Appeal

The ownership of major sports franchises has traditionally been the domain of the ultra-wealthy, with billionaires often vying for control of these prized assets. However, a growing number of investors are now turning their attention to the European soccer market, recognizing the immense global appeal of these clubs. As Neil Barlow, a seasoned advisor, explains, "US investors look toward European soccer and say, 'There's this amazing asset that has global appeal across Asia, the Middle East, South America ... but how come their valuations don't match that of an NFL team? What are they not doing?'" This realization has sparked a surge of interest, as private equity firms seek to uncover the operational opportunities that could unlock the true value of these sports franchises.

Operational Opportunities Abound

Private equity firms are not just interested in owning sports teams outright; they are also exploring the potential of adjacent opportunities within the sports ecosystem. One such example is the redevelopment of stadiums, where firms see the potential to create additional revenue streams by hosting events such as concerts or even NFL games in Europe. Barlow cites the example of Sixth Street, a firm that the author advised on their investment in Barcelona, as an illustration of this trend. "They may look at a particular club or franchise in a major sport, such as soccer, and see a potential real estate play. Perhaps a stadium could be redeveloped to host, say, a Taylor Swift concert or the NFL when they come to London or to Frankfurt. They hope to create opportunities to amplify the commercial impact of those teams in terms of what they are doing abroad."

Navigating the Regulatory Landscape

While the potential for operational opportunities is vast, private equity firms must navigate a complex regulatory landscape when it comes to sports investments. Barlow explains that the rules around financial fair play and player acquisitions can be particularly challenging, and that there are also strict limits on the size of stakes that can be owned in certain leagues, such as the NBA and NHL. "While the NFL is opening up to private equity investment, there are stringent rules in the NBA and the NHL around owning minority stakes." This regulatory environment requires private equity firms to be strategic in their approach, often focusing on adjacent opportunities rather than outright club ownership.

The Rise of Media Rights

One area where private equity firms have found success is in the acquisition of media rights. Barlow explains that this can provide a reliable stream of revenue for sports organizations, while also offering private equity investors a relatively stable and predictable return on their investment. "The ability to provide liquidity or capital is readily realized when you say, 'Let's buy a certain percent of your broadcast revenue over the next 10 to 20 years. You can use this money to reinvest in your squad, your facilities, or your coaching and staff.' And the private equity investor has a pretty confident stream of revenue that is on an upward trajectory over a certain period."

Competing with Nation-States

The influx of private equity investment in sports has not gone unnoticed by nation-states, who have also been actively involved in the acquisition of sports franchises and the development of sports infrastructure. Barlow acknowledges the challenge of competing with the deep pockets of sovereign wealth funds, citing the example of the PGA Tour's struggle to merge with the LIV Golf league, which is backed by Saudi Arabia's Public Investment Fund. "To quote PGA Tour Commissioner Jay Monahan, when you're up against a nation-state to fund a project, you have to make strong decisions around how you operate the business." This dynamic has led to the development of more stringent regulations, as leagues and governing bodies seek to ensure fair competition and protect the integrity of their respective sports.

Lessons for CFOs and the Importance of Preparation

The rise of sports finance has also provided valuable lessons for CFOs and finance professionals. Barlow emphasizes the importance of being organized and prepared, as private equity firms often demand rapid turnaround times for financial data and forecasting. "A number of portfolio companies are asked by their owners to move into exit mode at a rapid speed. Sometimes an owner thinks, 'Now's our time. Let's go.' And I think CFOs have had to really grapple with how quickly they can produce the data, the budgeting, the forecasting and the financials." To navigate these challenges, Barlow suggests that CFOs build a strong rapport with their private equity owners, anticipating potential exit cycles and preparing the necessary information in advance.

The Importance of Culture and Reputation

As the sports finance landscape continues to evolve, Barlow highlights the growing importance of culture, relationship, and reputation for private equity firms. With increased scrutiny from regulators and stakeholders, the track record and reputation of the private equity investor have become crucial factors in securing deals and maintaining trust. "There is a huge premium on culture, relationship and reputation. The track record of the private equity investor, especially with regulators in different parts of the world, is hugely important."

The Allure of European Sports Clubs for American Investors

The influx of American investors into the European sports market is another notable trend in the world of sports finance. Barlow attributes this to a combination of factors, including the relative weakness of the euro and pound sterling compared to the US dollar, as well as the tiered league structure in Europe that allows for easier entry points at lower valuations. "If you look at the leagues in Italy, England, Scotland, Ireland—there are multitudes of leagues that allow an entry point at a much lower valuation, like Ryan Reynolds got with Wrexham in Wales." This model presents an attractive opportunity for private investors and family offices to acquire and professionalize these clubs, with the potential for significant value appreciation as they climb the league ranks.

The Global Expansion of Sports Finance

While the focus has primarily been on the European and North American markets, Barlow sees the potential for sports finance to expand into other regions, particularly in Latin America. "There has been less movement in South or Latin America because the revenue streams and leagues are less developed. However, that doesn't mean it won't happen. We are seeing clients looking especially multiclub models, where you own different clubs in different jurisdictions and you create synergies. There is a huge interest in those opportunities, particularly in countries like Mexico, Argentina and Brazil."

The Outlook for Sports Finance

As the sports finance landscape continues to evolve, Barlow remains cautiously optimistic about the future. He anticipates that the current momentum will likely continue through the end of 2024 and into the first quarter of 2025, as both private equity firms and sports organizations recognize the need to act quickly to capitalize on the opportunities. "I think there is a lot of momentum behind people realizing that they need to get on and do something. And I think people have started to either get ready or think about the potential for IPO-ing a businesses." However, Barlow also acknowledges the challenges that lie ahead, particularly in terms of navigating the complex regulatory environment and competing with deep-pocketed nation-states. Nonetheless, the allure of the sports industry's global appeal and untapped potential continues to draw the attention of savvy investors, ensuring that the sports finance revolution is far from over.