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What happens when PE owns all the sports?
“Private Equity is ruining sports.”
Since we pivoted this newsletter to the business of sports, uttering an opinion on this line seems to have become a requirement to signal how much of a fan you are, or how much of a cold-hearted bastard you’ve become.
There doesn’t seem to be any middle ground, either. If you agree with it, you’re a true believer that professional sports should be a democratic institution. If you don’t, you probably claim to know more than the average person and seek to uphold ‘the system of business’ because you took the time to understand it, and therefore, the world HAS to match your understanding of it,
because hey! Youuu took the time to learn business. Good for you.
Call us the former, call us the latter. We’re too curious to care (oof yikes that was cringe).
Although you should know that PE is a piece of shit business model. We went to business school with people who’ve dedicated their lives to their firms. They have turned into abhorrent people.
Abhorrent.
There is another statement, though, that comes before ‘Private equity is ruining sports’. And it’s this one (it’s actually a question):
Why is private equity interested in sports at all?
This is a question we’re going to unravel today and tell you about all the things that will have to come after it.
Let’s go.
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The theme of this week’s newsletter came in the form of a benignly reported business event. CVC Capital Partners, a private equity firm, is consolidating all its sports-related assets into one company called…SportsCo.
If you’re unfamiliar with CVC, don’t worry, we were too. To jog your memory, they were the ones that sold F1 to Liberty Media Group for 8 Billion dollars (2 years before Netflix’s Drive to Survive). You also might have heard their names in the news recently because they also just sold their controlling stake of an Indian Premier League team for around half a billion dollars.
Why is this important?
This singular event? Not important. It’s what the event represents. CVC is basically putting all their sports assets in one place, so they can do a couple of things. Mainly, those things are raiding debt against the value of the sports portfolio, or sell a stake in the portfolio to raise capital.
…Again so why is this important?
Okay good question. Well, it’s basically another signal that pro sports are becoming a yield generating asset class, like real estate.
We’re not only seeing this with CVC, but Apollo global management as well, where they’re trying to launch a permanent investment entity that would look to acquire teams and leagues and various markets.
Lesser known (but just as important) names like Ares Management raised just under 4 billion dollars solely dedicated to sports and media.
Groups like Arctos, Redbird are doing similar things.
Why is PE so horny for pro sports, though?
Professional sport is a great investment, because of 4 things:
- Global fanbases that provide recurring revenue season after season
- Scarcity (not every place in the world has a sports team)
- Cultural relevance
- Resilient cash flows that aren’t correlated with stocks/equities (you’ll watch your team whether you have a job or not)
- Predictability: Media rights contracts. A lot of these media contracts are in place for long periods of time, so you’re not wondering what’s going to happen from year to year.
Fun fact: In the last 5 years, the money spent on sports media rights around the world quadrupled.
Private Equity, however, is just the beginning:
Here’s the thing: We don’t think PE is built to be the end buyer of the ‘maturing’ sports team market. Private equity is designed to buy in, scale, and exit. Their time horizon is defined; firms have certain yields they like to hit. If you frame the conversation that way, professional sport only becomes a temporary investment.
Put it simply: Owning a sports team doesn’t align with the principles of PE.
Why? For these reasons:
Holding periods are long – PE Firms have a defined period of investment
Governance is limited – Limited stakes, limited influence
Deal flow can be very scarce at times
Valuations keep climbing – there are no ‘value’ deals
Eventually, even the biggest PE players hit a ceiling. That ceiling will eventually create a vacuum—and there is a category of buyer out there that is perfectly positioned to fill it…
The sovereign wealth fund (SWF).
You know how PE is backed by large, small, institutional investors? Sovereign wealth funds are backed by entire countries. We’ve explained this before. Here.
These state-backed mega-funds have:
Deep pockets (PIF: $700B+, ADIA: $850B+, QIA: $450B+)
Appetite for long-term, low-volatility assets
Political muscle to navigate international markets
Experience running diversified global portfolios
Here’s what we’re seeing already:
Qatar’s QSI owns PSG and invested in Monumental Sports
Saudi Arabia’s PIF took over Newcastle and launched LIV Golf
Mubadala has made multiple investments in global sports tech
Singapore’s Temasek and GIC are quietly backing sports media and data firms
Feelings, not facts:
We think there are some PE firms who are actively packaging their sports portfolio in a way to sell it off to an SWF eventually.
Another feeling, but not a fact: While no major league American sports allow SWFs to invest directly, we think the NBA will be the first league to have a majority SWF buyer.
Why?
Because of international growth.
Here are some thoughts:
125 international players play in the NBA
When was the last time we had an American MVP?
They’re now playing regular season games overseas
International viewing has a small but growing revenue share (10% right now)
Playing regular season games overseas is an important one big reason. It allows the product to be placed at the feet of the people who manage these funds. Korea, Indonesia, and Singapore all have SWF offices in either London or Paris.
Hold on Hold on…Why Sovereign Wealth funds? I missed that part…
Weren’t we just talking about private equity?
Yeah, we were. Let’s talk it out here:
Thought 1: Pro Sports valuations are skyrocketing. Especially in the last 5 years.
Thought 2: A lot of major leagues have guardrails around who can buy these teams, so the buying pool is kinda small as to who can buy a sports team.
Thought 3: When things become expensive, less and less people can afford them. That means the small buying pool…gets smaller.
Thought 4: So, if I’m a commissioner of a major sports league, and a team goes on sale, but it’s so expensive that no one wants to buy it because it’s too expensive…I would panic. Because the valuation of that team would be jeopardized, and thus, the value of every other team and so on.
Thought 5: What do I do to prevent this from happening? I suggest increasing the buying pool. Hey! Let’s bring institutional investors in! Let’s open the tent to buyers other than wealthy individuals! Let’s relax restrictions on how much groups can invest!
Thought 6: Now, if a team goes on sale, there are mechanisms in place for potential buyers to raise money from multiple sources in order to meet the price.
See? Now you get it!
In Closing…
There’s going to be a day when valuations of Pro Sports franchises will balloon so much, that leagues will have no choice but to bring sovereign wealth funds into the fold.
Today, the buying pool is expanded by allowing private equity firms to invest more. Tomorrow, it’ll be sovereign wealth funds buying up those initial investments.
Have a great week!
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