Welcome to the big leagues: The rise of private equity in professional sports

As the business landscape of professional sports continues to evolve at a rapid pace, a new player has emerged. From quiet observer to potential key figure, private equity is rewriting the playbook for sports investment in real time.[1] The last 20 years have seen what was once an exclusive industry dominated by ultra-wealthy individuals become a promising land of opportunity for institutional investors – and, with financial burdens continuing to mount within the world of professional sports, the two seem to have struck a mutually beneficial relationship.

On the one hand, these investments pose more than a handful of ideal considerations for private equity firms – professional sports constitute a high-growth, yet uncorrelated asset class with historically steady revenue streams, brand loyalty and long-term potential.[2] On the other hand, private equity appears to have entered the market at a critical time. Fueled by booming franchise valuations, technology-based developments in the business of sports (e.g., the rise of streaming platforms, widespread legalization of sports betting, and monetization of broadcasting rights), and fallout from the COVID-19 pandemic, the demand for capital in professional sports has significantly outpaced the capacity of most high-net worth individuals.[3] This need for liquidity ultimately resulted in certain regulatory changes, allowing professional sports to seek alternative sources of funding, effectively opening the door for private equity.[4]

Yet, despite its recent prominence in the media, the rise of private equity in professional sports did not happen overnight. Instead, institutional investors made their grand entrance into the market back in 2005.[5] That year, private equity firm CVC Capital Partners purchased F1 for a $2 billion price tag.[6] During the following year, three American funds, led by Colony Capital, Butler Capital and Morgan Stanley, bought the majority stake in European soccer team, Paris Saint-Germain.[7] Over the next 13 years, European soccer would see another nine institutional owners.[8] But it wasn’t until 2019, when the MLB decided to allow private equity to own minority interests in franchise teams of up to 30%, that the major U.S. leagues would play catch up with their European counterparts.[9] Once the MLB revised its bylaws, both the MLS and NBA swiftly followed suit, with the latter orchestrating a deal to allow a fund managed by Blue Owl Capital, Inc. to purchase minority stakes in multiple teams the very next spring.[10]

Following those initial investments, at least 63 major North American sports teams – collectively valued at $147.6 billion – have made connections to the world of private equity, and, while the NBA and MLB remain top tier targets,[11] others investors have branched out, with firms like CVC Capital Partners investing $150 million in the Women’s Tennis Association,[12] and a Fenway Sports Group-led collective infusing the PGA Tour with $3 billion.[13] And, with U.S. sports teams’ valuations growing faster than the S&P 500 over the last two decades, the deals show no signs of slowing.[14]

Going for gold

More recently, private equity has begun to take on additional major league franchises. Primary among them is the NFL. Historically, NFL club ownership has typically been a family affair and the NFL has shunned private equity within the ownership stack of its clubs. [15] As valuations for NFL franchises continue to climb, the NFL has taken the stance of allowing not more than 24 individual or family limited partners to join with the primary owner as minority owners of the franchise.[16] In excluding institutional ownership, NFL owners recently voted to increase the debt limit for new club owners, from $1.2B to $1.4B.[17] However, the NFL is not entirely opposed to the idea of private equity involvement in the league; an owners committee was formed in the spring to explore the idea of allowing firms to hold limited stakes in clubs.[18] Over the summer, the NFL indicated private equity‘s entrance into club ownership was on the horizon.[19] On August 27th, NFL owners voted to approve a select group of firms, including Ares Management, Sixth Street Partners and Arctos Partners, to acquire up to 10% of a team with each fund being able to ink deals with up to six teams.[20] With 31 of the 32 NFL franchise owners voting in favor of the measure, this is only the beginning for the most watched sport in America.[21]

Perhaps more interesting than direct ownership of a major league club is the recent joint venture between Sixth Street Partners, Legends (which is majority owned by Sixth Street) and Real Madrid C.F.[22] This joint venture focuses on Real Madrid’s privately owned Santiago Bernabéu Stadium which Real Madrid renovated to the tune of €1.76 billion.[23] The joint venture came about as a part of the capital raise for the renovation and saw Sixth Street invest €360 million, which would go toward any of the club’s activities and granted Sixth Street the right to participate in the business of Santiago Bernabéu Stadium, specifically the rights to certain non-football event revenues derived from the Stadium over a 20-year period.[24] In addition to the joint venture, Legends was selected in January of this year to manage non-sporting events at Santiago Bernabéu Stadium for 25 years and expects to generate revenues between $447 million and $491 million per year, a marked increase from the $168 million reportedly generated per year prior to the pandemic.[25] Legends is due to receive 20% of the revenues as a part of its management deal.[26] Certainly increasing Sixth Street’s return on its controlling share of Legends.

Navigating a new playbook

While club ownership is certainly on the table across many of the professional leagues, as franchise valuations continue to climb, private equity has all but solidified its position as a key player in the sports space and will undoubtedly continue to be instrumental in the growth of professional sports leagues. In fact, investors are already exploring avenues ancillary to ownership, such as sports-related media and entertainment rights and real estate opportunities,[27] and they may have even settled on the next frontier – collegiate sports.[28]

As more private equity firms look to enter the space, there are likely to be even more creative and complex deals to come. Those seeking to maximize investments will need to be equipped with a new playbook, one that provides both a firm grasp on the developing landscape, and a comprehensive strategy to this new sector of dealmaking.[29] If you or your firm are interested in how investment in the sports industry can be structured and accomplished, please reach out to the authors or another member of our Private Equity Service Team.

Chris Brubaker and Miranda Roberts are atttorneys at Frost Brown Todd.