Will less control impede private equity investing in sports teams?

Deal activity in professional sports “presents unique risks and challenges that differ from traditional investments,” a Deloitte report issued this week said.

While private equity’s appetite for increasingly plentiful sports opportunities is on the rise, there are challenges, including the industry’s complex – and still unfamiliar – dynamics.

This was discussed in a Deloitte report issued this week. Private Equity in Sports Playbook said deal activity in professional sports “presents unique risks and challenges that differ from traditional investments.” Among them is the “limited control” private equity firms have over investments once they acquire a stake in a team.

In many cases, the report said, “controlling shareholders retain decision-making power,” leaving minority investors “with limited influence.”

This is relevant to the recent spate of investing in North American leagues. Over 2019-21, Major League Baseball, Major League Soccer, the National Basketball Association and the National Hockey League adjusted their rules to allow select private equity firms to acquire minority stakes in teams.

In dollar terms, more investing of late has instead been focused on European soccer leagues, where control deals are often permitted. One of the largest transactions on record is the $3.1 billion acquisition of Chelsea FC led by Eldridge’s Todd Boehly and Clearlake Capital in 2022.

Another issue raised in the Deloitte report is the “lack of control” minority investors have in determining exit strategies. At the moment, private equity firms “typically must obtain approval from both the majority owner of the team and the league commissioner prior to exiting.”

This circumstance is not entirely outside of private equity’s experience. In North American leagues, the current preference for passive non-controlling investments tailored to long-horizon ownership structures is not unlike GP staking, for example.

In addition, the Deloitte report said, there is the potential for “fierce” competition among investors. This owes to the “scarcity of sports assets” – which drive up values, making it difficult for firms “to acquire stakes in desirable franchises at reasonable valuations in anticipation of private equity-like returns.”

Despite the challenges, the “allure” of investing in professional sports “remains strong,” the report said.

It’s hard to argue with that. Private equity investing in sports deals has intensified since 2021, with unprecedented billions pouring into acquisitions of stakes in teams, leagues, assets (for example, media rights) and multi-asset holding companies on a global basis.

For most of this period, dealmaking has been countercyclical. The all-time largest deployment of dollars was in 2022, according to Pitchbook data, the first year of the market slowdown.

This trend is readily explained. Commanding premium values, sports only recently opened up to private equity, as the industry has traditionally been the preserve of the super-rich. In the past few years, owners have found reasons to lift bans on outside capital – such as access to liquidity and growth financing.

And opportunities seem set to expand further. The National Football League, the sole North American major league to keep a ban, is exploring new rules, with a committee of owners slated to deliver recommendations. Progress has been made, Bloomberg reported this week, though a vote has been delayed until later in 2024.