Five Questions with PJT Partners’ K. Don Cornwell on investing in sports data

K. Don Cornwell is a partner at PJT Partners, focused on media and entertainment, specifically sports and gaming. Most recently, Cornwell led the PJT team that represented Perform and its parent, DAZN Group, on its sale of Perform to Vista Equity-backed STATS.

Cornwell spoke with Buyouts about regulatory changes in the sports-betting space and new investing opportunities at the crossroads of tech and entertainment.

How goes deal activity in sports data and sports betting?

The general environment is quite active, particularly in the sports-data space. Sports teams have become so valuable because they are good at monetizing their content. Data is the next area of significant growth. Consumers, broadcasters and betting companies want to know next-level data like how fast Tom Brady is throwing the ball in the fourth quarter — not just how many passes he made and how many he completed. Sports-data companies like Perform will take and collect that data from sporting events, analyze it, package it and sell it to media companies and gaming companies.

How might new regulatory changes around sports betting affect deal activity?

We are seeing a lot of activity around sports betting and data generally because there is a lot of change in the regulatory environment following the Supreme Court’s repeal last year of the PASPA law that limited sports betting. States are legalizing sports betting and it is creating more opportunity for M&A. New Jersey has legalized and [several states are] putting bills forward, too. Pennsylvania [which is now online with sports betting] is a large state with a lot of sports fans where we would expect a significant market opportunity. New York is also considering a bill.

A significant driver for why laws are changing is that states are looking to find ways to generate additional tax revenue. Additionally, some sports leagues themselves are also looking to receive royalty fees, which compensates them for wagers placed on their content.

We are also watching the mix between mobile sports betting, where we believe the world is going, and traditional brick-and-mortar sports betting, where you go to the casino to make a bet. The regulatory environment may impact this as well. Some M&A deals are being driven by one of the parties having significant mobile acumen.

How can this environment in the sports industry be a compelling investment opportunity for PE firms?

PE firms historically have been attracted to sports. It’s an area where you’ve got real customer traction, but the challenge has always been, ‘how do I play the space’?

PE firms have done well in owning businesses that are good at monetizing sports content, whether it’s Silver Lake with its investment in William Morris Endeavor or TPG and its ownership of Creative Artists Agency. We’ve also seen success with PE ownership of Formula One, Dorna (Moto GP) and others.

Consumption patterns are changing and with change comes opportunity. Ten years ago, consumers sat and simply watched TV. Now we have our TV, tablet and phone in front of us. We are consuming differently — perhaps with the game on TV, a betting or fantasy app on a tablet and our favorite social-media app open on our phone, all driving the need for more data. Also, younger people engage with sports content differently: They want more data. If you want to keep them engaged, you have to give them more information.

This need for data creates an opportunity for smart investors.

Where do you draw the line between technology and sports multiples when it comes to valuations?

We are in a period of transition. The way we typically think about valuations in sports is that the most valuable part is the content itself. Owning a team in a league is going to have the highest multiple. For example, Formula 1 and Manchester United are trading at very high multiples relative to other things in the entertainment world.

As you get further away from the content, valuation multiples decrease. Sports-data businesses in particular are trading at very high multiples, mainly because they are close to the content, but also because data is becoming more and more important.

However, one of the things we have discussed is if we can look at some of these businesses from a software-as-a-service perspective and try to see if these sports-data companies are providing an application to their customers and clients that can be viewed through the lens of a traditional software company. When you get to that world, the valuations are quite different. You are no longer talking about this sports-data company having a premium to the broader sports industry. It turns into a technology company with different, higher multiples.

What are some challenges the sports-data space may face going forward?

In the next five-to-10 year period, we expect to see significant change in this industry. [To] understand sports, you must understand how people are consuming entertainment and everything else around them.

Regulatory changes have the potential to slow down growth. For example, online poker in the U.S. has struggled from a regulatory perspective, so the growth of the poker community has stagnated.

However, given [that] the number of constituents in the broader sports arena is much larger and has more regulatory and legislative experience, this doesn’t seem as likely. But it is still something we have to think about and be prepared for.

Action Item: K. Don Cornwell’s bio: