It was AC Milan’s first win of the Scudetto, Italy’s Serie A soccer championship trophy, in 11 years.

In May, the team defeated rival club Sassuolo by a score of 3-0, causing thousands of Milanese to pour into the city’s Duomo Square to celebrate with songs, flags and fireworks.

Deep in the roaring sea of people – many decked out in AC Milan’s red-and-black colors – was RedBird Capital Partners founder Gerry Cardinale. Hours away from announcing the firm’s $1.2 billion acquisition of the team, alongside the New York Yankees, he was also celebrating, swept up by the warmth of passionate fans.

“I’d never seen anything like it,” he says.

Milan’s wild scenes reminded Cardinale of the uniquely fan-driven, live-event nature of sports that is at the heart of the industry’s appeal to private equity.

“Sport is the best must-carry content in any community – locally, regionally or nationally,” he says. “What I saw in that square is a form of human interaction, drama, euphoria and community that you just can’t replicate. It’s why sports has the premium value that it has.”

AC Milan is part of a recent surge of investing in professional sports that is ushering in an entirely new global strategy. An emerging category of PE funds is today doing deals at a vigorous pace, buying stakes in teams, leagues, assets (media rights, player IP, real estate) and multi-asset holding companies.

Over 2021-2022, funds have done 74 deals valued at $12.5 billion, according to Pitchbook. Relative to comparable prior periods, that casts a shadow taller than Los Angeles Lakers forward LeBron James.

“Sports team ownership used to be hobbies for very wealthy people. Then, all of a sudden, these things exploded and became mini-Disneys. Somewhere between being a hobby and a mini-Disney is a transition that needs to have occurred and that in many instances has not occurred” Gerry Cardinale,
RedBird Capital

Further, at a time when economic uncertainty is curtailing PE deal activity, sports-focused flows of institutional capital are holding their own. So far this year, $6.2 billion has been invested.

The torrent of money owes much to deals in Europe’s soccer leagues. Along with AC Milan, there is the acquisition led by Eldridge’s Todd Boehly and Clearlake Capital of Chelsea Football Club, reportedly for $3.1 billion. And Sixth Street bought into FC Barcelona’s TV rights and Real Madrid’s stadium operations, said to total about $900 million.

The transactions overseas are being boosted by unprecedented investing in North American sports, enabled by the opening of Major League Baseball, Major League Soccer, the National Basketball Association and National Hockey League to partnerships with funds.

Begun in earnest last year, US dealmaking continued into 2022 led by early movers, such as prolific investor Arctos Sports Partners, which since January has closed 10 deals, among them interests in the NHL’s Minnesota Wild and Tampa Bay Lightning. Blue Owl Capital’s Dyal HomeCourt Partners also made a third investment, acquiring a piece of the NBA’s Atlanta Hawks.

Rising values

Private equity’s attraction to sports is not hard to fathom. As Cardinale notes, the multibillion-dollar industry commands premium values, the growth of which has steadily outrun public indices.

“They’re not making any new teams, and it’s rare when teams come up for sale” David Blitzer, Blackstone

Between 2002 and 2021, the average price return for an NBA team was 1,057 percent, while MLB, NFL and NHL franchise returns were 669 percent, 558 percent and 467 percent, respectively, Forbes, Sportico and Pitchbook data show. In the same period, the S&P 500 return was 458 percent.

Valuations rise partly because they are governed by the law of scarcity, David Blitzer, a Blackstone executive and co-owner of the Philadelphia 76ers and New Jersey Devils, says: “They’re not making any new teams, and it’s rare when teams come up for sale.”

In addition, valuations are underpinned by lucrative assets and sources of recurring revenue – pre-eminently, long-term rights to broadcasting and streaming live games.

“Sports is a content creation business, and monetization of that content is a critical relationship with media and media rights,” Drew Laurino, co-head of Dyal HomeCourt Partners, says. “I think we are in relatively early innings in the continuing development of this.”

There are also revenue streams stemming from pricey ad and sponsorship contracts, plus future upside in the form of sports betting and non-fungible tokens, as well as advanced ways of monetizing player IP.

Innovations in how fans consume live events and engage with their favorite teams and players are creating still more opportunities. “While I sit and watch a game on TV,” Blitzer says, “my kids are watching the game on their phone or iPad.”

Private equity paid closer attention to sports in the wake of the pandemic, which canceled or postponed games. Despite this, values continued to expand, as they had in previous downturns, indicating resiliency and low correlation to other types of assets.

“Covid gave investors a window on how these assets would perform under a stress scenario, particularly around media rights,” Eric Deyle, a managing director of Stifel’s Eaton Partners, says.

Keys to the kingdom

What makes the budding love affair between private equity and sports so astonishing is that only a few years ago the connection was negligible to non-existent.

Instead of funds, pioneers were mostly GPs using their personal wealth to invest in sports franchises. One was Blitzer, who with Josh Harris, co-founder of Apollo Global Management (and, recently, 26North Capital), built Harris Blitzer Sports & Entertainment, anchored by the 76ers and Devils. Another is Steve Pagliuca, co-chair of Bain Capital and co-owner of the Boston Celtics.

“As businesses have become more and more valuable, owners have brought in more sophisticated managers” Sam Kennedy, Boston Red Sox CEO

An early PE investment was YES Network, led in 2001 by Cardinale, then with Goldman Sachs, in partnership with the New York Yankees and Providence Equity Partners. The ground-breaking regional sports network was sold in 2012 to News Corp for $3 billion, generating a 4.5x to 5x return, PE Hub reported.

YES signaled the strategy’s potential, Cardinale says: “From that moment, it was apparent to us that institutional capital could help rights holders, teams and leagues evolve to a new paradigm of controlling more aspects of their IP and making content king.”

The reason why there has been – until recently – scant dealmaking since YES is that sports was generally off-limits to external investors.

That is because club ownership has historically been the exclusive realm of super-rich families and individuals. For years, they had little to no need for institutional capital and therefore no incentive to reduce barriers to entry by adjusting restrictive league ownership rules.

In the closed ecosystem of sports, these rules exist to maintain stability and keep a grip on decision-making. “What leagues like is continuity,” Blitzer says. “They like to see ownership for extremely long periods of time, which makes sense.”

$9.8bn

Value of Fenway Sports Group, anchored by the Boston Red Sox and Liverpool Football Club

Deyle agrees, noting that leagues are “very protective of their brand.” The more control they give up, “the more susceptible they are to having outside influence that may not be aligned with their goals.”

In regions outside of North America, prohibitions are often less strict. This explains the intense investing in European soccer, where ownership is largely unencumbered. Offsetting this, however, are significant risks, such as relegation (performance-based transfers of teams between leagues).

Gradually, investors are blazing trails elsewhere. Silver Lake this year invested more than $120 million in New Zealand Rugby. And RedBird in 2021 bought into Indian cricket team Rajasthan Royals and co-led an $840 million investment with TPG and others in Indian sports tech company Dream Sports.

Whole new ball game

A veritable revolution in North American sports ownership took place over 2019-2021, when the MLB, MLS, NBA and NHL all changed their ownership rules to allow select PE funds to make minority investments in one or more teams. Only the National Football League continues to remain aloof.

The four leagues were motivated to take this step because they wanted fresh sources of liquidity and growth capital, David O’Connor, an Arctos managing partner, says.

“Control owners are in many circumstances looking for growth, and they’re cash-constrained by these syndicates they’ve built,” says O’Connor. “You have this very inefficient landscape that is filled with liquidity traps, especially for minority owners.”

US leagues want “to create a much more efficient marketplace,” he says. “What you’re seeing today is they’ve opened the aperture and they’re experimenting with this and, so far, the experiment has gone well.”

Some argue that professional sports is on an evolutionary path that is resulting in increasingly business-like financial and operational management. If so, a role for private equity – even if, in some jurisdictions, it is a narrow one – might be a catalyst.

“Sports team ownership used to be hobbies for very wealthy people,” Cardinale says. “Then, all of a sudden, these things exploded and became mini-Disneys. Somewhere between being a hobby and a mini-Disney is a transition that needs to have occurred and that in many instances has not occurred.”

“Being the embedded partner is of tremendous value to these ownership and operating groups” David O’Connor, Arctos

“It’s almost like the industry needs to catch up with itself,” he says. “You’ve had this massive escalation in asset valuations – supported by a flood of capital – but a lot of the people, a lot of the infrastructure, hasn’t kept pace.”

This is also the view of Boston Red Sox CEO Sam Kennedy, who says institutional capital is “a game-changer for the sports industry.”

Over the years, he says, sports “has changed dramatically.” The advent of certain technologies, for example, “has been hugely accretive, taking the sports industry to a global level.”

“As businesses have become more and more valuable,” Kennedy says, “owners have brought in more sophisticated managers.” For Major League Baseball, this is now being coupled with the loosening of once “tightly controlled investments,” a move which should “support growth and increase value.”

Adjustments to league rules, he says, were “fortuitous” in mostly happening before the pandemic, during which team owners “suffered tremendous losses,” with some having “to take on debt.”

Early movers

Though nascent, sports private equity has emerged as a distinct niche strategy. Pursuing it is a mix of dedicated vehicles, sector specialists and large-cap firms investing opportunistically.

Buyouts counts 20 to 30 active investors. Together with those already cited, they include Ares Management, Bridgepoint (owner of Private Equity International), Bruin Capital, CVC, Galatioto Sports Partners, KKR, MSP Sports Capital and Vista Equity Partners. Others are said to be in the offing, such as Dynasty, headed by Providence founder Jonathan Nelson and PJT Partners’ Don Cornwell.

As leagues and team owners determine who can invest in the industry – and on what terms – they are also framing sports PE’s dynamics and the range of investment styles in use.

Outside of European soccer, this does not usually include the classic buyout strategy with its orientation toward control acquisitions and active portfolio management. Instead, “most of the institutional capital that is coming into the space right now is coming in a minority context,” Blitzer says, often without governance rights.

1,057%

Average price return for an NBA team between 2002 and 2021

In North American leagues, there has to date been a preference for passive minority investing tailored to existing long-horizon ownership structures.

One approach that seems to speak these requirements is GP staking. That was the thinking of the NBA when it initiated a dialogue with Blue Owl’s Dyal, prompting the 2020 founding of Dyal HomeCourt Partners, co-heads Laurino and Andrew Polland say.

“The league was grappling with ‘We want to start something new; we want a partner that is comfortable with being a passive minority owner – with a reputation for being strategic and constructive when called upon but otherwise comfortable staying out of the way,’” Polland says.

“Sports is a content creation business, and monetization of that content is a critical relationship with media and media rights”
Drew Laurino, Dyal HomeCourt Partners

Writing checks of $50 million to $200 million at entry, Dyal is approved to acquire interests in any or all of the NBA’s 30 franchises, with a primary emphasis on full or partial cash-outs, mainly for minority owners. Its first two investments were the Phoenix Suns and Sacramento Kings.

By maintaining a continuous NBA presence, Polland says, Dyal will become a regular go-to source for liquidity solutions.

“Over time, we give the control owner the ability to pare back their capital stack and consolidate the team’s ownership ranks,” he says. “We provide minority owners with the ability to obtain liquidity if and when they want it.”

Arctos – founded in 2019 and led by O’Connor, ex-CEO of Madison Square Garden Company, and Ian Charles, a former Landmark Partners executive – has an approved investment template similar to Dyal’s. It, however, focuses on supplying both liquidity and growth capital to some 120 MLB, MLS, NBA and NHL clubs.

“We’re thought of as strategic capital,” O’Connor says.

For example, Arctos’s 2021 investment in the NBA’s Sacramento Kings helped liquidate the minority holding of retired star player Shaquille O’Neal. A deal in the same year for the Golden State Warriors provided covid-related operating capital and financed the completion of a mixed-use real estate project.

“Being the embedded partner is of tremendous value to these ownership and operating groups,” O’Connor says. “You’re there at the ready with capital that can execute quickly with new opportunities.”

Typically deploying $20 million to $400 million, Arctos also invests in multi-asset holding companies. They include the $3-billion-plus Harris Blitzer, and Smith Entertainment Group, owner of the NBA’s Utah Jazz and MLS’s Real Salt Lake, both of which sold stakes this year.

Much like a growth equity investor, Arctos has an operating platform from which it lends value-added support to owners. One of its deliverables is a President’s Summit, where club representatives gather annually to network and share best practices.

RedBird, founded in 2014, has an investment style that is nearer to traditional PE. Structuring deals flexibly, it acquires a control or hefty minority interest in partnerships with rights holders – leagues, team owners and sometimes players – to “solve for something,” Cardinale says.

The model, originated with the YES Network deal, “isn’t just buying something,” he says. “We are business-builders in our core DNA.”

In addition to purchasing outright franchises like AC Milan, RedBird engages in “de novo company creation,” Cardinale says, where it helps partners “monetize what they bring to the table in the form of rights and IP.” Making initial outlays of $100 million to $200 million, the goal is to scale and add value to the startup to “create a multi-billion-dollar business.”

“We’ll only make an investment where we have an aligned partnership with the rights holder and a hand on the steering wheel,” he says. “And, in most cases, the rights holder brings us in because they very much want us to do that.”

“We provide minority owners with the ability to obtain liquidity if and when they want it”
Andrew Polland, Dyal HomeCourt Partners

RedBird did this in the 2015 launch of hospitality company On Location Experiences, a collaboration with the NFL. Something comparable was done in last year’s transaction alongside LeBron James and businessmen Maverick Carter and Paul Wachter with Fenway Sports Group, a $9.8-billion sports empire anchored by the Red Sox and Liverpool Football Club.

Also backed by Arctos, FSG has since been on the acquisition trail, this year buying the NHL’s Pittsburgh Penguins from owners, including ex-Penguins captain Mario Lemieux, reportedly for $900 million.

The RedBird partnership is about fueling FSG’s “big ambitions,” the Red Sox’s Kennedy says. “It’s like having our own in-house strategy and business development team. We’ve never had that capability before.”

RedBird in 2021 closed its third fund on $2.6 billion and is now targeting roughly the same for a fourth, Buyouts reported. After raising a $2.9 billion debut vehicle last year, Arctos is reportedly seeking $2.5 billion for Fund II, while Dyal is said to be targeting $2 billion for an inaugural pool. All three firms declined to comment.

Early investors

The promise of sports PE to investors is clear enough. It provides access to a once out-of-reach industry with singular assets and revenue streams that are swelling values and hint at further expansion. With this comes novel opportunities for diversification.

This being said, the strategy is in its infancy, with deal activity of size only just begun. The track record is insufficient for benchmarking purposes, due to few illustrative realizations beyond YES Network.

Passive, long-dated minority investing in sports implies less risk and volatility, with capital appreciation and income the basis of performance. For this approach, a 15 percent to 20 percent gross return target, cited in a 2021 Pitchbook report, sounds right. For higher risks, the norm in control deals, higher targets would be anticipated.

Where does this leave LPs evaluating fund proposals? The answer, Eaton Partners’ Deyle says, is sports private equity “will appeal to a select universe of investors.”

“With a more established strategy it is easier to discuss – there is a larger body of work for expected returns, expected outcomes, expected growth,” he says. “This strategy is still quite nascent.” For some, it will appear “very similar to first-time fund investing.”

$5.2bn

Sports-focused global investment of institutional capital this year, as of the end of August

On the other hand, Deyle says, a wide variety of LPs – including US pension systems and other large institutions – are already committing capital to sports vehicles, attracted by the “low correlation, mid-teen returns and predictable cashflows.”

“Where LPs have gotten comfortable is they’re able to underwrite some form of relatable experience,” says Deyle. In the absence of a performance history, they look at factors which experience shows investments of this type will be successful, such as domain expertise and an ability to price and structure risk.

Many investors are using the “uncorrelated and opportunistic allocation sleeve” to commit to sports funds, Deyle says. That is because the prevailing minority context of investing “has a lot of the structured downside protection that you would see in an alternative credit portfolio.”

Skeptical or not, LPs expect GPs to “prove out” the opportunity set and performance, including the full scope of liquidity options, he says. “Over time, as we see more realizations in sports private equity, you’ll likely see further institutional backing in the space.”

More room to grow

In light of recent dealmaking trends, the prospects of sports private equity seem auspicious. The opening of North American leagues – albeit to a small handful of funds – combined with robust activity in Europe and the pursuit of opportunities in other spots around the world, point to not only more investing in the near-term, but investing of greater breadth.

As the industry’s gatekeepers, team owners have given PE funds a foothold. It is not yet apparent, however, whether, or by how much, that will expand.

“Where LPs have gotten comfortable is they’re able to underwrite some form of relatable experience” Eric Deyle, Eaton Partners

Purchasing stakes in clubs has sometimes met with resistance. This was the case with Silver Lake’s investment in New Zealand Rugby, opposed by some out of concern for the country’s beloved All Blacks franchise under foreign ownership. In addition, not long after the Chelsea FC transaction, England’s Premier League was reportedly mulling a ban on leveraged buyouts.

In considering this, it is important to recall the integral link between a team and its fanbase. “There is a social contract between sports and the community,” RedBird’s Cardinale says.

If institutional capital proves an effective and responsible partner, there is reason to expect its role in the sports industry to increase. In the US, follow-on changes in league ownership rules will “move slowly and require a high threshold of support,” Arctos’ O’Connor says. “Any iteration or evolution will be over time and in the support of more liquidity and growth capital.”

Ownership rules “will continue to evolve,” the Red Sox’s Kennedy says. “We’re in very early days – so, far, so good.”

Cardinale agrees, noting leagues are as good stewards “not rushing” to lift ownership restrictions. “They’re going to be patient and they’re going to watch.”

Change will nonetheless be necessary, he says, to help professional sports tackle challenges and exploit opportunities. This is key to ensuring “valuations continue on the kind of sloping trajectory upwards that we’ve seen in the past.”

“There needs to be a sense of urgency among these teams and leagues to continue to reinvent themselves and to be leaders in all these areas,” Cardinale says. “That’s going to require scalable, sophisticated capital for business-building.”

 

Real Madrid and FC Barcelona: the passion

Sixth Street’s purchase of an additional 15 percent of FC Barcelona’s domestic league TV rights in July was the latest move in a flurry of private equity interest in European football, writes Craig McGlashan of PE Hub Europe.

While some country’s rules make it difficult for private equity firms to get into football ownership, there are plenty of other ways to profit from the sport, such as TV rights deals. A more traditional way for fans to engage – and one that is unlikely to go anywhere soon – is to watch their team on television. That tends to remain constant even if the players are not performing well.

Barcelona has had difficulties on the pitch and financially in recent years, which led to the sale of several of their top players. But none of that stopped Sixth Street from buying a 10 percent stake of Barcelona’s domestic league TV rights for €207.5 million in June, then following up with an additional 15 percent stake in July. The second deal used the same valuation as the first, PE Hub Europe understands.

One of the most interesting things about the timing of this deal – and something that might well make the traditional football fan spit out their halftime pie in shock – is that just a month before the first Barcelona deal, Sixth Street inked an agreement with Barcelona’s greatest rivals: Real Madrid.

The deal meant that Sixth Street, alongside events company Legends, will provide €360 million that can be invested across any of Real Madrid’s activities. It gives Sixth Street the right to participate in the operation of certain new businesses at Madrid’s stadium, the Santiago Bernabéu, for 20 years.

Despite the animosity between the two club’s fans, Sixth Street managed to get exposure to both, which are by far the largest clubs in Spain and two of the biggest in the world.

That the deals do not involve ownership means that Sixth Street can get that dual exposure without falling foul of ownership rules, which generally forbid people or businesses owning two clubs in the same league.

That is not even to mention that despite being sworn rivals, Real Madrid and Barcelona have a symbiotic relationship, with enmity towards one in many ways defining love of the other.

Florentino Pérez, president of Real Madrid, was once quoted as saying: “If Barcelona didn’t exist, we’d have to invent them.”