How Institutional Investment is taking the world of Sport to Greater Heights

Written by Shreyas

A. Introduction:

Over the past fifteen years, the world of sport has grown exponentially. Back in 2011, global revenues in the sports industry were $121.4 billion. This number has nearly quadrupled in 2022, where the sports market generated revenues of $403.08 billion globally, and is projected to generate close to $700 billion by 2028.This skyrocketing value has made this a very lucrative market for investors to put their money in; and it is not ordinary investors like you or I, private equity firms and sovereign wealth funds have taken a keen interest in investing in sports franchises and teams of late. One of the earliest instances of this is when Paris Saint Germain (PSG), a football club playing in the topflight division in France was acquired by three private equity firms- two in the United States and One in France. Back then, PSG was sold for $49 million—a rather meagre figure in today’s sporting world.

In 2011, Qatar Sports Investments, the sporting investment wing of Qatar Sovereign Wealth Fund acquired PSG for a majority stake and became the sole owner a year later. Major sports leagues such as the NBA and the MLB have already opened doors to institutional investment, recognising the huge potential influx of cash this could inject into their leagues and help them grow. NFL owners, after much deliberation, have finally voted in favour of allowing private equity investments. This article will briefly explore why private equity firms and sovereign wealth funds are targeting sports franchises and teams for their investments, why this could be a good thing for the global sports market, and how this can shape the road for this industry in the years to come.

B. From the City of Light to the streets of Newcastle: The trend catches on:

Back in 2006 when three private equity firms acquired a controlling stake in PSG, this was a path that investors hadn’t trodden on yet. No one knew if this would be an investment that would set the ball rolling for institutional investment in sport, or if it would set a dangerous precedent for anyone who dared to walk down this same path. To be fair, it did neither, but one could argue that it definitely leant more towards the former. Fast forward to just five years later, they managed to almost triple their investment when they sold PSG to Qatar Sports Investments for a whopping $130 million. Although this didn’t exactly open the floodgates for other private equity firms and sovereign funds to join the pursuit, it certainly made a statement.

i) So, what exactly do these firms and funds do?

They essentially invest huge amounts of capital in different companies (sports franchises/clubs for the purpose of this article) that they think have the potential to give them a significant return on their investment. They pool in a large capital base from other investors, usually high net-worth individuals and financial institutions, and usually take over other companies or acquire a controlling stake in them. Investors choose to put their money in private equity because in the long run, they try to beat the returns that the stock market gives you. A good example of this would be Newcastle United, a football club in the Premier League, which was taken over Saudi Arabia’s Public Investment Fund in 2021 for a value of around $400 million. In 2024, Newcastle United is valued at around $1 billion after the PIF bought out its partner’s stake and now holds a 100% stake in the club. Although the ultimate beneficiaries in this case won’t be investors as in the case of a private equity firm, the underlying idea is that investing in these teams and leagues generate a significant amount of revenue for investors.

C. Why now?

There really isn’t a better time for private equity investment in sport. With the valuation of teams all over the world soaring, this is the perfect time for them to jump on the bandwagon and reap their fortunes. Another reason is because women’s sport is reaching its peak growth, with women’s elite sports projected to reach $1 billion in global revenue for the first time in 2024. Sixth Street Partners made history in two aspects last year by becoming a major investor in Bay F.C, a football club in the United States’ National Women’s Soccer League (NWSL): first, by becoming the first private equity firm to own a controlling stake in a U.S sports league franchise, and second, making the largest institutional investment in a women’s professional sports franchise. Reign F.C., Seattle’s Women’s football team for the NWSL attracted investment from the Carlyle Group, one of the largest private equity firms in the world.

Its previous owners sold the club for $3.5 million, and after the acquisition of the team by the Carlyle Group and Adrian Hanauer (who owns the Seattle Sounders, the men’s team from Seattle in the MLS), Reign F.C. was valued at $58.5 million. One reason why the women’s league in the U.S. is attracting more investments is because it allows these firms to have a controlling stake in the teams they invest in, unlike the men’s leagues, which have been wary of institutional investment. This will be discussed in the next part of this article. However, even the men’s leagues have made significant strides to allow private equity investment. At the time of writing this article (August 27th, 2024), the owners of NFL teams have agreed to allow private equity investment subject to certain conditions. As the value of these leagues is growing at a rate faster than owners are able to inject money into their teams to keep up, they have realised the benefits of having access to the kind of capital that private equity can bring in. That being said, a major cause for concern amongst them is allowing private equity firms or sovereign wealth funds to have a controlling stake in their teams, but how bad could it really be?

D. Zero to hero: Should institutional investors be allowed a controlling stake in their own teams?

It is only in major sports leagues in the U.S. that institutional investors are not allowed to have a major/controlling stake. Most of these leagues have their investments capped at 10%. However, if you look at it around the world, teams that have access to the funding and resources that private equity or sovereign funds can provide have proven to have a good track record. Take the example of PSG, which, before the takeover in 2011, were nowhere to be seen in the Ligue 1 table. For users on mobiles, you quite literally have to hide your browser’s toolbar to be able to see them in the table. In 2012, just a year after the takeover, they placed second in the table and went on to win the league in 2013, and haven’t looked back since, domestically at least. Newcastle United, although a club with rich footballing history, hadn’t tasted any success in quite some time, even being relegated to the Championship in the 2015/16 season. Two years after the takeover by the Public Investment Fund, they finished fourth in the Premier League last season, securing a spot in the Champions League, the most coveted trophy in club football. Several reports also say that morale among the staff and the team has improved drastically after the takeover, with the owners also taking active steps to improve different aspects of the club, such as paying their employees a rate above the minimum wage in England.

It would be criminal to not mention Manchester City, which in 2008 was taken over by Sheikh Mansour, who is the owner of the Abu Dhabi United Group, which is a private equity company based out of Abu Dhabi. Sheikh Mansour is also a member of the Abu Dhabi Royal Family and is the Vice President of the U.A.E. Prior to the takeover, it could be argued that Manchester City were nowhere in the scene of English football. Sixteen years after this takeover, they have become a force to contend with in world football, and just recently became the only team in Premier League history to win four titles consecutively.

These are just a few examples of how institutional investors with a controlling stake have been able to turn the fortunes of their teams around. With the valuations of these leagues projected to only keep growing, team owners have to come to terms with the fact that private equity investment in sport is the way forward. The access to capital that private equity firms and sovereign wealth funds have (the PIF has a brand value of $1.1 billion and is on track to reach $2 trillion in assets under management by 2030) can take sport to the next level globally, and those who reject this idea are going to be left behind. Often called the ’barbarians at the gate’ because of their approach to acquiring companies, (Barbarians at the Gate, by Bryan Burrough and John Heylar used this term in their book, referring to a takeover by KKR, one of the leading private equity firms now) recent history has proven that institutional investment in sport is definitely the way forward.

*The Author is a legal Scholar from India

(The Image used here is for representative purposes only)

References:

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