Leagues and federations are being approached by a number of parties promising to alleviate Covid-19 short-term induced cash flow problems, from advanced payments on contracted receivables – season tickets, media rights payments, sponsorship deals and player transfer commitments – to securitisation of yet to be contracted commercial rights income which then can create a credit facility for the sport to draw down upon.
All such proposals designed to bring future cash flows forward probably come with an implicit cost of finance. None are designed in themselves to help build the sport for the future or make specific requirements of the sport on how the monies received should be used. Private equity proposals may also help alleviate short-term cash problems, but they are all about building the sport for the future and may make very specific requirements on how the money should and should not be used.
To get the most out of any potential deal with private equity all leagues and federations need to follow seven steps:
Step 1: Understand why investors might be interested in sports, and your sport/league in particular
Sport is an attractive sector for investors and becomes more attractive in a digital age with an increase in competition for people’s time and attention. In so far as sports are driven by historic and almost tribal affinities and passions, they can become premium assets for media outlets and platforms in an age of attention fragmentation. Sport is also something societies spend more time and money on as they become wealthier and more developed so sport is likely to benefit from the generally rising income levels and greater leisure time across the globe.
Investors not only believe that the long-term value prospects for sports are positive, many also believe that sports outside USA have a way to go in the professionalisation and optimisation of their commercial execution strategies. Non-US sports emerged from amateur pursuits and were not designed as commercial entities. While the non-profit purpose of sports associations themselves is likely to remain, a clearer separation and professionalisation of the commercial activities can lead to a step change in value.
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Added to these value drivers more specific developments such as the acceptance of sports
betting in USA, and the feasibility of digital direct to consumer global offerings that can directly engage and understand the fan, and sport is seen by investors as having both long-term fundamental growth prospects and the potential for substantial medium-term value uplift if the right management and strategy can be put in place.
However, up until recently, investors still had major reservations about sports outside USA, related mostly to limited routes to invest in the sector and the specific risks associated with the routes being offered.
Club/franchise-based investment outside USA has always brought with it the risks of relegation/non qualification, which tends to frighten investors off. Only the largest clubs in the most popular sports such as football are seen as relatively safe investments.
Investments in leagues – and their commercial revenue streams – are less risky, although there are always the long-term issues around the future ecosystem in any sport and the place of a league or competition within it. Global or regional federation investment can seem the least risky as such bodies have the ultimate power to create and reform the competitive landscape, but only if the investment is across all the commercial activities of a federation. If tied to a specific competition and format, such an investment can be as risky as a club investment.
Until recently, the lack of opportunities to invest in leagues and across federations outside USA, and the scarcity of truly robust global club franchises, meant the main focus of investors in global sports was the agency sector. IMG, Sportfive and Infront have all had private equity investors over the last 20 years (and O&O has advised on all such investments). Over and above that, investment has focused on top European soccer clubs and those few leagues/tournaments where it was possible to invest in the competition itself – Formula 1, Formula E, UFC – and where the league or competition itself is able to generate profits after any redistribution of revenues to the participating athletes or clubs.
So investors are very keen on sports in general in the long term, see the potential for medium-term value uplift from greater professionalisation and use of digital opportunities, but need the right vehicles, with the appropriate
levels of risk, to invest in.
Investors are attracted by the added value they can generate and sports should be able to distinguish between the genuine added value they might bring versus what might occur in any event.
Step 2: Have a realistic view on what could be achieved with or without private equity backing
Any sport assessing an approach from an investor needs to be crystal clear about what the future could bring without an investor and in particular what the sport could do for itself in driving growth and value. Investors are attracted by the added value they can generate and sports should be able to distinguish between the genuine added value they might bring versus what might occur in any event.
But sports also need to be realistic about themselves. Investors can bring risk capital, talented and incentivised management teams and the impetus to drive growth as fast as possible. They can also bring a target sport a potential network of brand sponsorship partners and commercial service providers through the other companies they own in their wider portfolio. In addition, the investment structures they create can bring new clarity to the role of commercial activities by separating them out from the day-to-day stakeholder politics of the league or federation.
Step 3: Have a clear view of how the partnership might work and where a partnership may lead
Sports need to pay particular attention to how the commercial and governance issues interrelate in any proposed deal structure, how separation of the two might work in practice and how it might respond to major challenges to the commercial business plan over time. The precise areas under the control of the investor versus control by the sport itself need sense checking and stress testing.
The exit path for the investor and any change of control provisions and buy back ‘call’ and ‘put’ options for the sport itself need thinking through. Also, any specific requirements on how the sport can, and cannot, use the investment monies received need to thrashed out. There is often a distinction between investment monies that can be used by the league for its own purposes, for example distributions to the clubs to improve player squads, player development and stadium facilities. and those targeted at specific commercial developments such as investment in a new direct to consumer digital media service.
Lastly, the perimeter of any deal needs to be clear – i.e. what is in the deal and what is not, and how the partnership might handle a change to the league or federation’s competition structure need to be thought through even where such changes have not been the catalyst for the initial investment.
Step 4: Set up a formal process of engagement
The need to get so many elements of the deal right for the sport suggests that a formal process is needed, no matter how appealing the investor and what they can bring seem in first discussions. A timeline for a decision needs to be put in place so discussions do not drag on and become too expensive in terms of time and money, while a very clear process for involving different stakeholders at different points in any deal-making is vital.
Professional advice is needed not just on the basic legal and financial structure, but also to sense test the likely investment levels needed and the uplift in value the investor expects and the risks of not achieving these targets.
It is often the case that a sport needs to appoint a specialist M&A adviser to access the widest possible network of potential serious Investors and help with a like-for-like comparison of a number of deals that might vary in terms and structure.
Step 5: Decide if you want to manage a wider ‘beauty contest’, and whether to engage specialist M&A advisers
one-to-one discussion with an investor who has approached the sport may not be sufficient
to leave the sport, and its stakeholders, feeling the terms of any deal are the
best they can be. In which case, the best course of action is to invoke an open
tender invite to all interested parties to assess the opportunity. If this
course of action is taken, it is often the case that a sport needs to appoint a
specialist M&A adviser to access the widest possible network of potential
serious investors and help with a like-for-like comparison of a number of deals
that might vary in terms and structure.
However, even this appointment needs to be made with care, as M&A advisers vary in the extent of their ability to reach out to relevant investors, their knowledge of the sports sector, their track record of similar deals, their pre-existing and potentially conflicting relationships with investors and other sports and the fees they require for their services.
While M&A adviser fees often involve a low level of upfront commitment as they are largely paid only if a deal happens, they do leave the adviser with a very specific interest in getting a deal to happen at the highest headline value possible, leaving the sport itself to say no to a deal, or no to the highest value deal. Sports may require independent advice on the appointment of an M&A adviser and the structure and size of any fees involved.
Step 6: Bring stakeholders with you
most demanding and challenging task facing a sport considering an investment is
the management of stakeholder expectations and interests throughout the
need to be given clear decision points and the benefits and risks need to be
made as clear as possible to them. Any concerns the stakeholders have with the
deal need to be addressed internally and preferably not played out in the pages
of the national press. And any discussions between investors and stakeholders
need to be facilitated and managed through the league or federation to prevent
multilateral negotiations and misunderstandings.
Step 7: Be prepared to engage with complexity rather than using it as an excuse to do nothing
Sports ecosystems, politics and stakeholder interests can get very complicated. But a
knowledgeable and experienced investor will know this, and be prepared to try to accommodate complexity in any final deal. In fact, the willingness of an investor to engage with, and solve, such complexity should be seen as one of the necessary characteristics of a preferred investor.
Good sports investors understand issues around rescheduling calendars, player welfare, the
need to maintain competitive intensity and jeopardy within the game, historic areas of difficulty, sports integrity challenges, as well as the financials and commercial revenue drivers. Do not be afraid to push investors hard on these issues and to accommodate them.
Overall, investors can help sports not just solve immediate financial challenges but build a better more robust sport for the future. But all sports need to have a plan to engage with such investors in a positive, constructive and professional way if they are to get the most from a partnership and make it work.