Deal Dynamics in 3 Private Equity Sports Transactions

Over the past five years, private equity’s interest in sports investing has surged across Europe and North America. Covid-related financial struggles, liquidity needs for majority owners, and the demand for growth capital have driven private equity to pursue attractive opportunities in the sports sector. This article explores notable post-pandemic private equity deals in sports, highlighting several trends across the landscape, such as the rise of women’s sports, the uncertainty of exits, and PE’s unique role in providing liquidity and growth capital to sports teams.

Arctos and Fenway Sports Group

Sports-focused private equity firm, Arctos, recently closed its second fund at $4.1 billion. Attracting investments from major institutions like pension funds, endowments, and insurance companies, the fund is the largest pool of institutional capital dedicated solely to professional sports.

However, the landscape was quite different when Arctos launched in 2019. Only one US sports league had relaxed ownership restrictions, and the industry faced massive disruptions from the Covid-19 pandemic. The first investment from their initial fund, which closed in 2021, involved acquiring part of the Yawkey Trust’s minority stake in Fenway Sports Group (FSG). The FSG deal is particularly noteworthy because, despite the uncertainty at the time, Arctos’s approach exemplified the core tenets that would define its distinguished sports investment thesis and strategy.

Data-Driven Approach

During Arctos’ assessment of their investment in FSG, the sports sector was mired in uncertainty. With games suspended and no vaccine available, questions hovered over the future of sports and the trajectory of media contracts in a post-Covid landscape. These factors paved the way for private equity to enter the sports arena, as many teams, facing substantial revenue and cash losses, needed capital. However, from an investment standpoint, underwriting sports deals presented challenges due to these unknown variables at play.

Arctos’s approach to due diligence for FSG underscores what would become a hallmark of their sports investment strategy: a rigorous reliance on data. When diligencing FSG, they constructed probabilistic models to forecast vaccine distribution timelines quarterly, analyze pre-Covid ticket demand against potential post-Covid scenarios, and assess state-specific probabilities for when fans would return. 

Liquidity and Growth Capital Oriented

Ian Charles, Arctos’ Co-Founder and Managing Partner, has highlighted how his background in secondaries and GP stakes has shaped Arctos’ strategy. The firm focuses on providing liquidity solutions to minority owners and partnering with top ownership groups to fund growth initiatives, and Charles has spoken about how the sourcing, diligence, and deal execution he employed in the secondaries and GP stakes worlds have proved valuable in a sports setting. In the FSG deal, Arctos collaborated with the Yawkey Family to create a minority stake arrangement that aligned the interests of the different parties involved.

Further, the growth capital provided by Arctos has allowed the ownership group to accumulate meaningful dry powder on the sidelines to opportunistically act on value-added accretive acquisitions in blue chip, large assets that move the needle on enhancing their revenue-generating engine.

FSG Was the Perfect Candidate for Arctos’ First Sports Investment

In a Capital Allocators podcast, Charles describes FSG as the ‘perfect candidate’ for the first investment in their debut fund. The deal allowed them to access leading brands across different sports and leagues and gain ownership across ancillary live entertainment venues and media platforms — all in one holding company with a very sophisticated ownership team. Several aspects of FSG as a ” platform company” broadly characterize many characteristics of  sports investing and merit closer examination:

• Revenue-first mentality. FSG prioritizes long-term equity value creation by reinvesting revenues into its assets. The ownership group is focused on bolstering on-field performance and venue infrastructure, heavily investing in player payroll, scouting, analytics, and more. This approach aligns well with PE’s ability to provide growth capital.

• Profitability is generated outside of individual team assets. Partnerships, real estate ventures, and media rights form the core profit drivers within the holding group. Annually, approximately 40-50% of revenue derives from media rights, with another 25% generated through long-term sponsorship agreements and the remaining 25% from ticketing and premium seating. This revenue distribution closely mirrors that of direct ownership in a sports team but as a platform, it enables Arctos to capture these revenues at a larger scale.

• Diversification benefits. As a platform company, FSG boasts strong revenue, growth, and profitability, but drilling down into the individual sports assets themselves, the sports teams have up, down, and break-even years. However, since the assets within the portfolio aren’t correlated, it creates valuable synergies across the platform. For example, losses from one entity can offset gains or mitigate losses elsewhere. Additionally, cash flow from real estate and media contracts allows the group to create a baseline of free cash flow that can support high payrolls or seasonal underperformance.

Sixth Street and Bay FC

In April 2023, Sixth Street and a consortium featuring US women’s soccer legends Brandi Chastain, Leslie Osborne, Danielle Staton, and Ally Wagner committed $125 million to launch Bay FC, the 14th team in the NWSL. The move into women’s sports complements Sixth Street’s robust portfolio of sports-related assets, including stakes in Real Madrid, FC Barcelona, and the San Antonio Spurs.

Several factors stand out to make this deal particularly noteworthy:

• Size: The deal marked one of the largest institutional investments in a women’s professional sports franchise to date. 

• Step-Up: The investment included a $53 million expansion fee, a significant increase from the $2-5 million entry fees paid for NWSL teams in 2020. Jessica Berman, the league’s commissioner, told CNBC, “I don’t think there’s a single better indicator of the league’s health than this purchase price of $53 million. That will reset the minimum standards of what we expect from the investors in how they approach the NWSL and our growth.”

• Buyout: Sixth Street acquired majority ownership in the transaction, a rare move in North American sports investing, which typically favors minority stakes.

The deal arrives at a critical juncture for women’s sports, which are poised to surpass $1 billion in global revenue for the first time in 2024. Specifically, soccer viewership is on the rise. In the UK, the Women’s World Cup final attracted 13.21 million in 2023, and in 2022, the NWSL championship game ratings rivaled those of the MLS championship. 

These viewership gains have been achieved with much less marketing and media exposure than what’s given to men’s sports. Today, roughly 80% of purchases and “purchase influence” are made by women. Yet, simultaneously, the overwhelming majority of advertising, sponsorship, and media dollars are directed toward men’s sports. As Waxman wrote in a memo released after the firm’s Bay FC investment, “The economic potential of women’s sports hasn’t caught up with the underlying data. The gap doesn’t make sense.” 

“Every single indicator of what makes a good investment flashed green. I kept asking, what are we missing? It’s literally the most undervalued thing we’re seeing not only within the sports landscape but across everything.”

Alan Waxman, CEO and Co-Founder of Sixth Street

Sixth Street has discussed intentions to retain its investment in Bay FC over an extended hold period, allowing sufficient time for revenue streams to ‘catch up” with the underlying value. Signs are already promising: following the launch of Bay FC, the NWSL secured a four-year media rights contract with CBS, ESPN, Prime Video, and Scripps Sports. Valued at $60 million per year, the $240 million deal represents a significant increase from the league’s previous $4.5 million agreement.

Silver Lake and Endeavor

In April, Silver Lake announced its take-private deal for Endeavor Group Holdings — a sports and entertainment holding conglomerate. This marks a new chapter in a long relationship between Silver Lake and Endeavor, dating back to the firm’s original investment in 2012 and subsequent involvement in several of Endeavor’s roll-up acquisitions. Speaking on the transaction, Egon Durban, Co-CEO of Silver Lake, expressed strong confidence in Endeavor’s leadership, noting the company’s growth from $350 million in revenue when they first invested in 2012 to nearly $6 billion today.

In many ways, this deal encapsulates broader trends in the private equity landscape. Take-privates have become a favored strategy for PE investors to acquire assets at discounted prices, and Silver Lake’s valuation of Endeavor, including its stake in TKO, at $25 billion, represents one of the largest sponsor-backed public-to-private deals in over a decade. The financing, a blend of new and reinvested equity from Silver Lake, anchored with capital from Mubadala, Lexington Partners, and others, further underscores a growing affability among sponsors to leverage co-investors to support substantial equity commitments and double down on existing relationships and assets amid high interest rates. However, most notably it also illuminates potential challenges ahead for private equity firms navigating sports exit strategies in public markets.

Endeavor’s Take-Private Draws Intrigue Amid Open-Ended Exits for Sports Entities

Do public markets understand sports? Endeavor’s brief stint on Wall Street raises an interesting look at the challenges sports entities may encounter as publicly traded assets. When Endeavor first attempted to go public in 2019, the IPO struggled to gain traction, leading the company to eventually withdraw. At the time, An IPO adviser even remarked that one investor, who had “attended hundreds of IPO roadshows,” found Endeavor’s business model the most complex they had ever seen. 

Even when the entertainment and sports conglomerate made it to ‘The Street’ in 2021, investors could never seem to quite understand the connective tissue and synergies driving value across its wide array of assets. The unusual mix of a top-tier talent agency, sports and lifestyle brands, and WWE and UFC tournaments created challenges for the stock despite the company’s strong financial performance.

In September 2023, Endeavor attempted to combat investor confusion and boost stock performance by merging UFC with WWE into a new publicly traded company, TKO, retaining a 51% controlling stake. While intended to attract investors interested in a solely sports-focused entity and address concerns over Endeavor’s disparate holdings across various media sectors, Endeavor’s stock continued to decline.

During Endeavor’s time on Wall Street, CEO and founder Ari Emanuel was vocal about his frustrations with the disconnect between the company’s stock price and its revenue and profitability gains. When Endeavor’s stock ultimately hit an all-time low of $17.65 in October 2023, the company announced it was exploring strategic alternatives, with Emanuel commenting in a statement, “Given the continued dislocation between Endeavor’s public market value and the intrinsic value of Endeavor’s underlying assets, we believe an evaluation of strategic alternatives is a prudent approach to ensure we are maximizing value for our shareholders.”

And many argue that Emanuel’s frustrations are warranted. In an Evercore research note, Kutgan Mral highlighted the meaningful valuation disconnect between Endeavor’s portfolio of high-quality assets and its share price. A Sportico analysis similarly discussed that if Endeavor were valued like the average U.S. stock at 1.95 times price-to-sales, including its TKO equity holding, it would be worth $32.29 per share, a premium to Silver Lake’s purchase price of $27.50. For Silver Lake and its co-investors, this likely resulted in acquiring Endeavor at an extremely attractive discount. 

Ultimately, valuing sports assets is a complex undertaking — a challenge noted by many investors in the space. Yet, as many privately held sports entities achieve multi-billion dollar valuations and significant growth, questions about their viability as publicly traded assets intensify. Endeavor’s stock headwinds highlight the challenges sports investors might face in public pursuits. As investors consider long-term exit strategies for their sports entities, centralized and aggregated data can help craft compelling exit narratives, showcasing synergies within teams or across portfolios of sports assets.