By Mark Skertic and Lindsay Nicholls. This article was originally published in Sportico (9 November 2023). Reproduced with permission. © 2023 Sportico Media, LLC.
Even diehard sports fans may have missed the trend that the ownership structure of many professional teams has undergone a dramatic shift in recent years. Just as a first-round draft pick or a new coach brings hope and optimism, new owners can inspire visions of greater success. Recent rule changes that allow private equity firms and institutional investors to purchase stakes in professional sports clubs around the globe warrant a closer look at what can go right—and wrong.
The new rules are a potential gamechanger, bringing in fresh injections of capital and new influences on team management. The changes also mean the potential for new risks—for investors, owners and leagues.
The influx of new money raises the value of clubs, provides cash that can be spent on players and operations, excites fans and brings new faces—and opinions—to an organization’s boardroom. However, it is key to remember that new investors bring uncertainty and risk.
For generations, owning a sports team has been a sign of wealth, prestige and influence. It means owning something important to a city and its identity. Still, running a team or a league is a business. Before investing or welcoming a new investor, smart and prudent business decisions need to be made. A key is pre-investment due diligence that can help identify potential issues before problems arise.
New Players Enter the Ownership Ranks
Professional teams have long been owned by high-net-worth individuals and corporate interests, but until recently league rules in many sports, particularly in the United States, had prevented PE firms from owning part of a team. Now, with one notable exception, that has changed.
In 2019, Major League Baseball changed its rules, allowing private equity and institutional investors to take a stake in multiple teams. Other professional sports leagues followed suit. The National Basketball Association, the National Hockey League and Major League Soccer all now allow some degree of private equity investment. The lone holdout is the National Football League, where some teams have been family-controlled for generations. League rules currently prevent investment firms from owning part of a club, although the NFL recently appointed a committee to review the subject.
The U.S. was late to the game. In Europe, PE firms have been investing in major sports teams, leagues and organizations since the early 2000s. Some of the globe’s largest investment firms have taken ownership roles. In 2018, Elliott Management purchased Italian football club AC Milan, and in 2022 sold it to a group led by PE firm RedBird Capital Partners, which also has sports investments in the U.S. and U.K. The largest deal ever recorded in soccer was the recent leveraged buyout of Chelsea FC in 2022, with 62% of the club being sold to PE firm Clearlake Capital.
Many firms have made sports a key element in their portfolios. CVC Capital Partners, based in Luxembourg, has holdings in the Women’s Tennis Association, Fédération Internationale de Volleyball and the largest professional soccer leagues in France and Spain. U.S.-based Arctos Partners LP’s holdings include stakes in the Premier League’s Liverpool FC, as well as several MLB, NHL and NBA teams.
Sports are a big money maker, and investors don’t have to own a team or organization outright to make an investment pay off. Leagues and teams have guaranteed sources of revenues, with broadcast and streaming deals, stadium revenues, merchandising agreements and rabid fan bases worth billions annually. A team doesn’t have to win championships to guarantee its owners a good return on their investment.
Play Good Defense to Mitigate the Risks
The questions teams and leagues need to ask should transcend concerns about the financial stability of the investors. While crucial, so are questions about reputation. Financial due diligence and integrity due diligence should be carried out in parallel to gain a full picture of any potential partner or investor.
Due diligence involves more than searching for lawsuits and criminal filings and a review of financials. A thorough pre-investment investigation looks for undisclosed business interests, conflicts of interest, controversial or unsavory business associates, histories of potentially problematic or unethical behavior (think “Me Too” concerns), and corrupt activity. The reason for the deep-dive review is risk identification and threat prevention.
In addition, previous behavior should be assessed. Will new investors be comfortable in a minority role where their input into operations will be limited? Outside of sports, where else has the investor taken a minority position, and what was the experience for the companies where that investment was made? Is the PE firm or institutional investor, and the people behind them, reputable? And are the individuals representing the new investors in the boardroom themselves people with good reputations?
There are often other unanswered questions. There is no legal requirement in the U.S. or the U.K. for a PE firm to reveal the identities of those who have invested in a fund, which can be problematic if transparency is a priority. Through targeted investigation, organizations can sometimes learn who has invested in a fund.
One more thing to consider: Investors regularly do investigations on their investment targets and the people who run them. Shouldn’t teams and leagues be taking similar steps to understand their new business partners? An effective due diligence could be the difference between an investment being a winner or a loser for all sides.
