Institutional Investors’ New Power Play: Expanded Sports Opportunities

Art by Gus Scott

Sports investing has caught the eye of institutional investors, prompting asset owners to acquire teams, invest in sports leagues and provide debt financing to fund the construction of stadiums and venues.

“There is no question the digital age has altered the landscape for professional sports and attracted new capital as well as splashy headlines,” wrote Shehriyar Antia, vice president and head of thematic research at PGIM Inc., in a white paper.

The sports sector does not include just owning a team, but opportunities across different parts of the business model, according to a white paper from middle market direct lender Andalusian Credit Partners.

“The definition of sports has expanded to encompass new revenue opportunities across the value chain, such as smart venues, e-sports, mobile gaming, data analytics, and the increasing spend on youth and club sports,” the white paper stated. “This broad ‘sports ecosystem’ offers more investment opportunities, but it also makes it critical for investors to understand where the industry is heading and to determine where they want to play on this dynamic, multi-dimensional playing field.”

Sports investments are also non-cyclical, which Blake Fortune, managing partner in Hamilton Capital Partners, cites as a specific advantage.

“I think a lot of that comes from the emotional aspect of fans,” says Fortune, noting that ticket sales remained robust during the global financial crisis of 2007 and 2008. “When you have fans that are passionate about something, a brand’s value can be quantified in many ways.”

Who Is Investing?

The acquisition of and investments in sports teams were once activities limited to a handful of extremely wealthy individuals and families who could spend hundreds of millions on a team, often holding them for decades.

Steve Cohen, chairman and CEO of Point72 Asset Management, purchased Major League Baseball’s New York Mets for $2.4 billion in 2020 from the Wilpon and Katz families, who had owned their stakes in the franchise since the 1980s. Appaloosa Management’s David Tepper purchased the National Football League’s Carolina Panthers for $2.2 billion in 2018 and purchased Major League Soccer team Charlotte FC for $325 million a year later.

But as the valuations of sports teams rise to billions and even tens of billions of dollars, the number of individuals who can afford these kinds of investments dwindles, and that is where institutional capital steps in.

“With high-profile teams routinely valued in the billions, the set of individual investors who can write a $200 million check for an illiquid minority stake is not very large,” Antia wrote. “By contrast, institutional investors may have access to larger pools of capital.”

Institutional investment in sports was minimal until recently. According to a white paper from PGIM, the total venture, private equity and private credit investment in Europe’s top five soccer leagues rose to $4.943 billion in 2022 from only $67 million in 2018.

Private equity firms that invest in sports, including Ares Management, Sixth Street and Arctos Partners, count among their limited partners investors such as the California Teachers’ Retirement System, Caisse de Dépôt et Placement du Québec, Maryland State Retirement & Pension System and the Oregon Investment Council for their sports-focused funds, according to data from PitchBook.

The Texas Permanent School Fund, a $56 billion sovereign fund,  recently took a stake in and invested $200 million in a fund from sports investor Velocity Capital Management, which counts action sports events owner X Games as a portfolio company.

“We believe there will be continued disruption and innovation of intellectual property within the sports, media and entertainment industries,” said Robert Borden, CEO and CIO of the Texas fund, in an announcement of the investment.

Sovereign wealth funds in the Middle East have also become prominent sports investors, as countries in the region seek to diversify their economies away from oil.

Saudi Arabia’s Public Investment Fund is the most prolific of the bunch, spending more than $2 billion to launch LIV Golf, a men’s professional golf league, and take a controlling stake in English Premier League soccer team Newcastle United and in four Saudi Pro League soccer teams. 

The PIF regularly offers top sports figures large contracts to play for Saudi teams, paying Portuguese soccer player Cristiano Ronaldo more than $200 million per year to play for Al Nassr, of which the PIF owns a 75% stake. French striker Karim Benzema was given a 100-million-euro-per-season contract to play for Al-Ittihad, of which the PIF also owns a 75% stake.

Teams, Leagues and Venues

Much of the private equity investment in sports comes in stakes or whole acquisitions of sports teams, with the former more common among U.S. leagues.

“We believe that ownership of professional sports franchises in the big five North American leagues and the associated [intellectual property] that fuels the sports ecosystem is an attractive investment opportunity with unique risk-return characteristic,” says Jordan Solomon, a partner in Arctos Partners. “Recurring revenues, coupled with strong operating leverage and low loan-to-value ratios in major North American sports franchises, have typically resulted in long-term revenue growth and low volatility relative to other U.S. equity sectors.”

Arctos was one of seven funds recently selected by the NFL as approved to purchase private equity stakes in the league’s teams; the others were CVC Capital Partners, Ludis Capital, Ares Management, Dynasty Equity, Blackstone and Sixth Street.

MLS, MLB and the National Women’s Soccer League all allow private equity firms to take up to 30% stakes in teams.

The Ross-Arctos Sports Franchise Index, which tracks the valuations of NFL, MLB, National Basketball Association and National Hockey League teams, reports that franchise values have compounded at 13% annually for more than 60 years and that the index returned 12.8x since December 2000. In contrast, the S&P 500 has returned 6.5x.

Teams, of course, need modern stadiums to maximize their revenue. To finance the construction of new stadiums, teams—and, sometimes controversially, municipalities—often tap into the municipal finance and private credit markets.

“Some of the largest [operating] and [capital] expenditures are currently offloaded primarily to cities and municipalities,” Fortune says. “If we look at professional sports from a lens of modernization, that means you have to go build multi-billion-dollar stadiums.”

That financing can mean the difference between a profitable club and one trying to stay afloat, so teams will explore all options.

“Few banks understand and serve sports as a target industry, opening the window for private lenders with expertise in the industry to provide credit as well as strategic advice and guidance to help their borrowers succeed,” according to Andalusian Credit Partners’ white paper.

While significant value is attributed to the franchise itself, many teams own some combination of the land and the operating rights of their stadium or arena, Solomon says, opening up additional revenue beyond the regular sports schedule.

“The most sophisticated owners in sports are investing in improving their existing arena, venue-adjacent real estate developments, including event centers, hotels, restaurants, etc.,” Solomon says.

Broadcasting and Licensing Rights

Investors have also taken significant interest in the broadcasting rights of sports teams and leagues. According to PGIM’s presentation of data from Ampere Analytics, spending on sports broadcasting rights increased to $8.9 billion in 2023, up from $1.5 billion in 2019.

These rights give a broadcaster, often backed by an investor, the right to broadcast and distribute media of a team or league, often as part of multi-billion-dollar contracts.

“North American leagues are global IP businesses that sell media rights, sponsorship, data streams, and other licensed properties and then send a dividend to its owners every year on a pro rata basis, regardless of on-field performance or market size,” Solomon says.  “The regional license allows owners to monetize at the local level in the most important markets in North America—whether through tickets, sponsorship, merchandise, concerts and other live events, a real estate portfolio or digital engagement.”

According to PGIM and S&P Global Market Intelligence, U.S. broadcasting revenue rose to more than $25 billion in 2023 from slightly less than $15 billion in 2015. In Europe, broadcasting revenue rose to nearly 9 billion euros ($9.73 billion) in 2023 from slightly less than 5 billion euros ($5.39 billion) in 2015.

Risks

There are fears that some sports teams are becoming overvalued, PGIM’s Antia wrote. As valuations of sports teams have soared and some large investors have engaged in trophy hunting for the most coveted teams, “There is growing sentiment the price for these teams may be stretched already with prominent sports investors voicing concerns that valuations are frothy and may be a ‘bubble.’”

There are also risks that fans of a sports team could be opposed to an investment or an acquisition. In February, Blackstone Inc. dropped its bid for the media and broadcasting rights to German soccer’s Bundesliga amidst backlash from fans who would continuously interrupt and delay sporting events in protest of the rumored investment deals.

Another risk is that, like many private markets assets, quality data can be hard to find, Solomon says.

“In illiquid markets, price, data and data frequency are valuable, but often scarce,” he says. “Assets are not homogenous, and there are phases when price discovery does not happen for an extended period of time.”

“One of the constraints for institutional investors exploring professional sports as an asset class is that they have not traditionally had benchmarking data to look at,” Solomon says, connecting this absence to the RAFSI Index developed by Arctos and the Ross School of Business. “Our hope is that RASFI will allow for a more nuanced analysis of risk and return in professional sports investing relative to existing methods.”

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