In recent years, private equity firms have increasingly targeted sports teams and related assets, attracted by the steady rise in team valuations, robust media rights contracts, and the enduring popularity of sports globally. As David Rubenstein, co-founder of Carlyle and co-owner of the Baltimore Orioles, has said when discussing the return potential of sports, “It’s very hard to lose money.” This said, private equity’s foray into sports investing isn’t absent of challenges. Navigating high valuations, long holding periods required for returns, and the complexities of league regulations pose noteworthy hurdles.
Soaring media rights values, loyal fan bases, and premium ad rates for live content offer private equity firms fertile ground to generate attractive returns. The multitude of ancillary investment opportunities, scarcity value, and consistent upward valuation trends further bolster the sector’s appeal.
Disruption from streaming services has escalated sports content as a premier entertainment asset. Amazon, Hulu, and YouTube have upended a half-century status of the cable bundle, leaving live sports as advertisers’ best bet. Today, sports content holds unparalleled value in the media ecosystem as one of the few remaining forms of live entertainment, with broadcast stations and streaming services eager to pay top dollar for game distribution rights.
As a result, for PE, owning a sports franchise has become akin to owning a content studio. At Sportico’s sports investment conference this fall, Gerry Cardinale, the founder and managing director of Redbird Capital, described sports as the new ‘Hollywood’ and teams as ‘multi-billion dollar’ mini Disneys. For private equity investors bullish on long-term content value, this presents a lucrative opportunity to capitalize on some of the world’s most valuable content amid increasing digital engagement trends.
One of the most attractive elements of sports investing is the unmatched stickiness of fans. Sports are the most valuable aggregation of a reliable audience, with endless opportunities to monetize fandom. Sports fans demonstrate a deeply cultural and often generational sense of ownership.
Even if you lose a game or have a bad season, a Celtics fan is still a Celtics fan. If you’re a Giants fan, chances are your children will also be Giants fans, even if they relocate elsewhere. Few sectors can match this loyalty and devotion. Many private equity firms note that these deep emotional ties create formidable moats around their investments, resulting in an unparalleled customer lifetime value.
Sports teams are highly scarce assets, inherently commanding premium valuations. For instance, there are only 151 teams across major leagues like the NFL, NBA, MLB, MLS, and NHL. There are just 98 teams across the Premier League, Serie A, Bundesliga, Ligue 1, and La Liga in Europe. This limited pool, combined with infrequent turnover — many go decades without changing ownership — often drives prices skyward when a team is put up for sale.
Moreover, sports teams operate as effective monopolies, controlling local geographies with stringent rules limiting new entrants. Expansion is tightly regulated, ensuring current owners face minimal competition from newcomers. For example, expansion in leagues like the NFL, NBA, MLB, MLS, and NHL requires approval through owner votes.
Globally, streamers and broadcasters spend 26% of their content budget on sports rights. As advertisers pay premiums for live sports events and streaming services continue to compete in the broadcast arena, the bidding for sports media rights has driven prices higher in auctions. These dynamics mean sports leagues can negotiate lucrative media rights deals.
Amazon became the first streaming service to win an exclusive sports rights package, recently securing streaming rights for Thursday Night Football in a deal running through 2033 that reportedly costs them $1 billion annually. The NFL alone is projected to generate $10 billion annually in media rights revenue from 2023 to 2033, and in 2022, the ‘Big Ten’ (the oldest college football conference for non-Americans readers) secured a seven-year, $7 billion media rights agreement with Fox, CBS, and NBC. Cumulatively, sports rights are expected to reach $84 billion by the end of 2024.
Unsurprisingly, these outsized price tags have caused PE sponsors to flock toward commercial licensing rights and broadcasting opportunities. Today, media rights tend to offer the most lucrative value creation lever within private equity sports investing, contributing to roughly 40-60% of sports leagues’ revenue.
Further, sports media deals are long-term contracts that provide a steady stream of recurring revenues to teams and leagues and, in turn, PE investors. Ted Leonsis, prolific sports investor and the owner of Monumental Sports, has likened the nature of these contracts to “the best SaaS business models out there,” highlighting how similar to subscription software businesses, these contracts provide ongoing, predictable relationships with the ‘bluest chip of customers available.” Further, he has noted that the obvious ‘variable’ in the business (season tickets) is often renewed at over 90%, making sports entities very predictable and durable businesses.
Sports rights unlock a hub and spoke model with access to a robust ecosystem of ancillary spaces. And as the value of sports teams has surged, the supporting infrastructure has lagged, creating prime opportunities for private equity. Several firms are now concentrating on investing in all aspects of sports except team ownership, partnering with rights holders and team owners to build multi-billion-dollar, terminal-value businesses around these rights. As Cardinale states, “owning a sports franchise in a local community offers a call option on various ancillary businesses”: live entertainment, hospitality, real estate, fan engagement, etc. When the fans are passionate, there are infinite ways to milk a brand’s value.
The combination of factors described above — strong fan bases, lucrative media rights, etc.— has steadily increased sports franchise valuations over the past decade. In 2012, Manchester United was the sole professional sports franchise valued at $2 billion. By 2020, over 57 teams worldwide boasted valuations at that level. Today, the average NBA team commands a value of $4 billion, MLB teams average $2.64 billion, and NHL teams average $1.31 billion. The NFL, the crown jewel of sports assets, is the most valuable, with each team valued at approximately $5 billion.
This material valuation growth has elevated sports entities to a blue-chip investment. North American team valuations have outpaced the stock market over the past three decades — a notable feat considering the U.S. stock market has appreciated by 550% over the past twenty years. And for private equity investors, the return prospects are compelling. Typically, owners enter at low-single-digit cash flow yields and aim for double-digit appreciation, targeting annual gross returns of 15% to 20% — or even more. Arctos Sports Partners Fund I, the firm’s first sport’s focused fund, is reportedly operating at an impressive IRR of 41%.
While private equity sports investing offers many enticing attributes, it also presents challenges. Questions linger about whether valuations can maintain an indefinite upward trajectory. Extended holding periods, navigating league regulations, and uncertainties surrounding exits are additional concerns. Moreover, reliance on media rights and fan engagement for revenue exposes investments to market fluctuations and evolving consumer behaviors, necessitating adaptable risk management and value creation strategies.
Do surging sports valuations signal a bubble? The jury’s out on whether the sector can maintain its upward trajectory over the long term. Most veterans in the space seem to remain bullish on the momentum of valuations, pointing to the basic law of supply and demand: supply growth (even with slight expansions) can’t keep pace with increasing investor demand, which will drive continued price increases for these assets. These advocates argue that perhaps the pace of this growth is subject to debate, but the direction is clear — scarcity value will drive valuations up and to the right.
Additionally, many posit that valuation growth is driven by more than just scarcity. At a recent sports conference, Doc Arctos, founder of the prominent sports investment firm Arctos, highlighted the firm’s analysis of valuation growth drivers in their portfolio, noting that valuations had been propelled equally by revenue growth (50%) and profitability (50%).
While the general sentiment is that the risk of valuations not continuing to rise is minimal, not everyone is sold. Fueled by the belief that sports offer uncorrelated returns and have historically outperformed the S&P, institutional investors are increasingly seeking exposure to this sector. Consequently, private equity firms are and will likely continue to up the pace of funneling capital into sports investments. Critics warn that abundant capital flowing into the system could result in artificially inflated valuations, reminiscent of trends seen in venture capital in the years leading up to 2021.
Further, multiple expansion has played a heavy hand in boosting valuations. Some argue there is a need to “professionalize” and take a more proactive approach, as many of these entities lack strong free cash flow metrics — an important valuation driver for exits. Moreover, in an age of “cable cutting” and intensified competition for mindshare among younger generations, the imperative to constantly ‘re-underwrite’ the value proposition to fans proves essential for sustaining increasing valuations.
While private equity funds usually operate on a five-to-seven-year life cycle, sports team investments often require 10 years or more to see significant appreciation. Consequently, PE sports investments typically have longer holding periods, sometimes requiring the use of evergreen fund structures. For instance, CVC’s deal with La Liga involves a 50-year stake in the league’s audiovisual rights.
Extended holding periods are largely due to long-term media contracts discussed above, often spanning 5 to 10 years (or more). Since media rights contracts form a significant part of most sports investments’ revenue, they heavily influence a team’s cash flow and ultimate return profiles. Therefore, buying a team to sell it within five to seven years is often mismatched with the sector’s value creation path.
Concurrently, shared ownership dynamics also bring their own exit risks. For example, in some leagues and minority ownership scenarios, private equity firms must secure approval from the team’s majority owner and the league commissioner before exiting, which requires more collaboration than a traditional private equity investment and can create headwinds to executing a preferred exit strategy.
What are the exit options for firms? Private equity sports investing is in its nascency, and observable exits are scarce. While a few sponsor-to-sponsor exits have taken place, exits at scale remain uncharted territory. However, all eyes are on the prospect of public debut prospects as many sports investment entities chart paths to or demonstrate billion-dollar revenues and double-digit growth. Still, several obstacles remain for these companies to obtain a public ticker.
Some note that sports leagues must shift from valuations based on revenue multiples to cash flow multiples to be ready for public trading, further highlighting the difficulties of getting these entities to a robust free cash flow state. Additionally, others question the optimal strategy for debuting multiple similar assets in a fund on the public markets within a similar timeframe. One concept gaining discussion in private equity circles is merging sports assets into a single company and taking it public.
Private equity’s entrenchment in sports is in the early innings. As valuations in traditional sports continue to rise, there are endless budding spaces waiting to be tapped with institutional capital. ‘Emerging’ sports like pickleball, cricket, etc., are gaining increasing interest from private equity investors. Further, women’s sports have surfaced as an attractive investment opportunity. Chris Long, Co-founder of Palmer Square, likened their firm’s investment in Kansas City’s NWSL franchise to ‘buying the Celtics in the 1960s.’ Firms also realize that athletes represent valuable intellectual property that can be monetized and are keen to explore the concept of an “investable athlete.” With vast opportunities ahead, it will be intriguing to see how private equity investors capitalize on them to drive value creation in the space.
Get updates in your inbox
Learn how Chronograph can streamline your private capital investment monitoring and diligence