Private Equity: Sport’s Newest Fans

The global sports industry is estimated to be worth between $400-500bn, having grown steadily at c.6% per annum prior to the pandemic. Whilst Covid has seen some winners (e.g. the rise of domestic fitness solutions such as Peloton, or other household-appropriate activities such as darts, snooker and eSports), the broader market has been heavily affected (c.15% decline overall) by the lockdowns and social distancing measures which have led to event cancellations, empty stadiums, a hiatus in many amateur sports, and a reduction in certain sports retail sales. However, market headwinds appear temporary, with the pandemic unlikely to adversely affect the strong structural foundations of the sports industry; a return to growth is forecast in a post-restriction environment, estimated at 3% in 2021 and 8% thereafter, through to 2023.

Figure 1: Global Sports Industry – Estimated Market Size [$bn]

SOURCE: NPD Group, Fairgrove Partners

The Sporting Ecosystem

Segmenting the sports industry is notoriously challenging; the interconnected nature of stakeholder involvement, and the continued professionalisation and commercialisation of sport, provide a depth of complexity to an ever-evolving sector. Broadly speaking, revenue streams can be seen as serving two core sets of consumers: rights holders, (comprising facilitators and sports clubs/teams), and individual participants (including active participants – athletes – and passive participants – spectators and supporters).

Figure 2: Sports Industry – Market Map [Click to Enlarge]

NOTE: Technology is active in most revenue streams (e.g. ticketing software, eCommerce software, data analytics etc.). For illustrative purposes it has been included alongside other sub-segments, but it could be worthy of a market map in its own right.

Private Equity Involvement

Historically, private equity has approached the sporting landscape with some caution, particularly at the upper-end of the market. The volatility of sporting performance has seen investment in teams largely restricted to the vanity or passion projects of high-net-worth individuals, whilst organising bodies steeped in decades of tradition and heritage have generally been regarded as overly complex to navigate.

However, recent years have seen a notable uptick in M&A activity, as stakeholders on both sides of the equation – investors and sporting entities – have begun to recognise the partnership opportunities available both in the higher-profile market segments discussed above, and in the associated ancillary revenue streams across the broader sporting ecosystem outlined in Figure 2.

The pandemic is only likely to have heightened these interests, with temporary market headwinds (e.g. event cancellations and empty stadiums) leaving many sporting organisations cash-strapped in the immediate-term, at a time when PE is benefiting from a low interest rate environment and significant levels of dry powder (estimated at $1.9tn globally).1

Figure 3: European PE Deal Activity in Sports

LHS: Deal Value (USDbn); RHS: Number of Deals (#)
SOURCE: PitchBook, Fairgrove Partners

Recent M&A Examples

As PE investment in sport has gained increasing traction, much of the public literature and thought leadership in the space has naturally trended towards the mega-deals in the sector. It is important to note that whilst such high-profile deals will always understandably generate attention, the fundamental drivers of increased PE involvement hold throughout the industry, with macro-trends trickling down to many peripheral subsegments of the market.

Indeed, Fairgrove has seen significant deal activity at the lower/mid-market sizes, supporting investments in sports marketing (perimeter advertising), sport eCommerce (football, darts and water sports resellers), and temporary stadia solutions (in sports and music) in recent times. As the table below shows, favourable structural factors persist throughout all levels of the industry, creating real scope for value creation at all ticket sizes.

Table 1: Selected Recent UK M&A Transactions in Sport

Target
Company
PE
Investor
Date of InvestmentCompany DescriptionRevenue
Latest Year
EBITDA
Latest Year
ES Global*Flywheel PartnersMar 2021Demountable structures for eventsn/an/a
Sigma SportsPrimary CapitalFeb 2021Retailer for cycling and triathlon-related products£33.8m£1.5m
McLaren RacingMSP Sports CapitalDec 2020Operator of Formula 1 team£185.7m£(69.4)m
Darts Corner*Key Capital PartnersNov 2020Online darts retailern/an/a
City Football GroupSilver Lake PartnersNov 2019Network of football clubs and other football operations£631.4m£76.6m
Fox InternationalMayfair Equity PartnersAug 2019Fishing equipment retailern/an/a
FSB TechnologyClairvestJul 2019Developer of sports betting softwaren/an/a
ClubSparkForesight GroupFeb 2019Developer of sports management softwaren/an/a
Premiership RugbyCVC Capital Partners***Dec 2018Rugby union club leaguen/an/a
Genius Sports GroupApax PartnersJul 2018Developer of sports data software platform£65.8m£8.6m
RurocBGF VenturesMay 2018Wearable sports protection gearn/an/a
Futbol Emotion**Meridia CapitalMay 2018Multi-channel football retailer£18.7mn/a
Alston ElliotInflexionJan 2018Provider of television sports graphics to broadcasters£9.2m£0.3m
TeamSport RacingDuke Street CapitalOct 2017Operator of go-karting tracks£27.2m£1.2m
Wetsuit Outlet*Mobeus Equity PartnersJul 2017Online water-sports clothing retailer£16.4m£0.0m
PlayerLayerForesight GroupNov 2016Designer and retailer of sports clothingn/an/a
InCrowd SportsAlbion VenturesFeb 2016Mobile fan engagement and sports marketingn/an/a
Cyclesport NorthTrue CapitalNov 2015Online cycling retailer£9.5m£1.2m
SportPursuitScottish Equity PartnersNov 2015Operator of sports flash sales website£31.9m£0.2m
Tushingham Sails*Mobeus Equity PartnersJul 2015Windsurfing and paddle boarding retailer £11.6m£1.2m
Sweaty BettyCatterton PartnersFeb 2015Retailer of women’s sportswear£72.9m£5.4m
Note: Revenue and EBITDA values per statutory accounts.
* Fairgrove provided commercial due diligence on these transactions.
** Futbol Emotion headquartered in Spain with commercial due diligence undertaken by Fairgrove Partners.
*** CVC has since added to its rugby union portfolio with investments in the Pro14 (an international league of clubs, May 2020) and the Six Nations (a nations league, March 2021), both headquartered in the Republic of Ireland.

The Attraction of Sport to PE

Many of the sport industry’s core characteristics create favourable investment conditions, with opportunities to generate significant, yet sustainable returns, over a medium-term horizon. Fairgrove has identified five key attractive fundamentals below:

Brand Loyalty

The emotional connection between athletes/teams and spectators/supporters has the power to create an unparalleled bond between customers and vendors, which often lasts through a consumer’s entire lifetime. It is not uncommon for sports brands to represent entire communities, offering a level of authenticity that is difficult to replicate elsewhere – there are no suitable substitutes. This often provides significant first-mover advantage (e.g. a football club may monopolise fans in a previously unpenetrated territory), with segments of the industry typified by high customer lifetime values, low customer churn, and low customer acquisition costs as traditions of fandom are often passed on through families and friends.

The devoted nature of these customer relationships is also the primary driver of many key ancillary revenue streams. Sponsors, broadcasters, and other media partners are attracted by the global reach and incredible levels of engagement many sports brands can offer; few other industries of a similar scale can boast such active user-bases.

Our association with football is all about brand building. Being associated with big football clubs makes a lot of sense. You are getting your brand in front of 70,000 people at a game, but also the millions who are watching on TV. It is superb global exposure, and this has been growing over the past ten years. The return on investment will differ by brand, and measurement tools are still evolving. Some companies will be able to track results more instantaneously – how did sales spike during the 8pm Monday night kick-off – whilst others that rely on more gradual accumulation of brand awareness may find it harder to isolate cause and effect.”

Senior Marketing Executive at a Long-Term Premier LEAGUE Football Club Advertising Partner

Predictable Revenue Streams

Recurring and contracted revenue are highly attractive to PE, as they generate a stable base of guaranteed income. The nature of the sports industry means there are considerable opportunities for both; match/event-day revenue, seasonal merchandise, repeat sales of consumables, and long-term partnerships with sponsors, broadcasters or host cities (e.g. for venue delivery) ensure a significant proportion of income can be categorised as predictable.2

Untapped Commercial Potential

a. Growth Opportunities in Established Sports

Despite the scale and growth of the sports market, there remains significant scope for continued expansion in existing segments. The global digital reach of sports is only just beginning to be effectively monetised (e.g. through content aggregating platforms like Dugout [now part of OneFootball] and The Athletic), whilst evolutions in technology are still in the early stages of adoption within the industry (e.g. within performance sport and consumer data analytics). There has also been an increasing trend towards the disruption and revamping of established competitions and game-formats (e.g. The Hundred, the International Swimming League, the Davis Cup etc.) to target the next generation of fans and viewers.

Case Study 1: The Kosmos Tennis investment plan for the Davis Cup

Increasing international penetration of major sports has also created opportunities for new partnerships (e.g. public investment) and commercial growth into new territories (e.g. Middle East).

b. Commercialisation of Highly-Practiced Amateur Sports

Many sports are failing to commercialise high participation rates. Netball and basketball are the second and fourth most played team sports in the UK respectively, after football (first) and cricket (third). However, despite the gradually increasing prominence of netball, neither have really been able to capitalise on these activity levels from a business perspective, with both being heavily reliant on public funding for their continued existence.

Figure 4: Selected UK Sports – Adult Participation Rates (November 2019)

Thousands of Adults Participating in Sport at Least Twice in Last 28 Days
SOURCE: Sport England, Active Lives, Fairgrove Partners

c. Emerging Sports

Two of the most exciting global trends are the rise of women’s sport and eSports. 1.3bn people watched the Women’s Football World Cup in 2019 (vs. 3.57bn who watched the Men’s tournament in 2018) and 89% of CEOs in sport highlighted the ‘growth of women’s sport’ as one of the most important trends in the sector,3 whilst eSports audience viewership has been growing at c.10% p.a. since 2018, and prize money grew 42% between 2018-19.4 Investment in both fields has also risen significantly; eSports in particular has seen several notable transactions of VC-backed streaming and gaming platforms (e.g. Twitch selling to Amazon for just under $1bn, or Discord raising nearly $500m), whilst Barclays recently signed a 3-year deal worth over £10m to become the FA Women’s Super League‘s first ever title sponsor. A major attraction is that both sporting segments can benefit enormously from leveraging existing and successful sporting structures (clubs, leagues, fan bases, calendars etc.) which they are able to mirror and run concurrently alongside by establishing mutually beneficial partnerships. Viewed side-by-side with such established markets, the potential addressable opportunity is clearly quantifiable for investors, and the route to scaling-up appears far less daunting.

Structural Opportunities

The complex ecosystem of stakeholders within many sports has often left investors uncomfortable at the prospect of operating with a reduced degree of autonomy than they are typically used to. However, successful recent case studies (e.g. CVC’s investment in Formula 1) demonstrate that it is possible to separate the commercial and custodian duties within a sport. Indeed, the synergistic combination of PE’s strategic expertise and portfolio capabilities, coupled with existing stakeholders’ sport-specific knowledge and experience, can create a platform to accelerate growth and leave a sport or segment of the sporting industry in a healthier place, ahead of any potential exit.

Case Study 2: CVC’s investment in Formula 1 is a blueprint for other PE firms considering the sports sector

Recession Proof

Whilst the pandemic has posed a unique selection of challenges for the sporting world, particularly with social distancing measures preventing event attendance, the industry has historically proven to be resilient through economic downturns. Sports consumption is generally viewed as a necessity, rather than as a luxury good, both from the perspective of active participants (due to its health and social benefits) and passive participants (given the continued rising demand in the experience economy).

Additionally, the industry has demonstrated an admirable flexibility in its response to Covid’s logistical challenges. From Matchroom hosting Boxing events in Eddie Hearn’s back garden, to football broadcasters’ adoption of technology simulating crowd noise, to tennis successfully organising a fan-attended Grand Slam within the confines of one of the world’s most heavily restricted and ‘locked-down’ cities (Melbourne), the sporting world has shown tremendous nimbleness to navigate incredibly difficult times.

Structural Challenges

However, the idiosyncrasies of sport are not without their challenges. Indeed, alongside the difficulties arising from the pandemic, Fairgrove has identified three other key pillars requiring strategic navigation from investors in most subsegments of the sports market. Whilst not all of these pillars are directly applicable to every ancillary revenue stream highlighted in Figure 2, investors across the board must be mindful of the implications and knock-on effects of changing dynamics elsewhere in the sporting value chain:

Covid-19

As mentioned earlier in the article, the pandemic has impacted the sports market significantly. Lockdowns and restrictions on social contact have led to many events either being cancelled, postponed or taking place behind closed doors, whilst general activity levels in certain sports have plummeted, with knock-on impacts being felt further down the industry pyramid (e.g. in sales of related consumables).

Longer-term, the impacts of the pandemic are less clear. Whilst early indications seem to suggest that event-organisers will have little difficulty in enticing fans back to live-action once restrictions on attendance are lifted, the globalised nature of sport means obstacles will remain whilst countries worldwide continue to experience outbreaks. More locally, as the economy begins to open in the UK, challenges will persist here, too; many organisations will attempt to resume operations despite having incurred significant losses over the past year or having lost key partners due to financial difficulties on their end. It is worth noting that not all trends have been negative; the pandemic has accelerated many organisations’ digitisation and direct-to-consumer models, whilst some Covid-appropriate sports have seen significant increases in participation (e.g. darts, snooker, eSports etc.).

Fans

Sports fans are unlike consumers in almost any other industry. The emotional connections fostered through supporting a region, team or individual are unparalleled. Outside investors must be prepared to embrace the strength of fan feeling and understand that investing into certain assets can impact the social fabric of entire regions. In such situations, a systematic exercise of public relations and a carefully constructed communications strategy are crucial to laying the foundations for a successful tenure of ownership. Indeed, nowhere has this been more evident than in the recent fan-reaction which led to the collapse (for now) of plans for leading European football clubs to launch a continental Super League to rival UEFA’s competitions.

Stakeholder Ecosystem and Motivations

In contrast to most traditional PE target companies, many sports organisations were established with the intention of governing, organising, and/or facilitating the sport, rather than with commercial motivations at their core. Their ethos, membership systems, and fragmented ownership structures can create significant hurdles for investors seeking to implement growth strategies; key decisions may require heavy stakeholder voting majorities (>66%), and revenue generation may be limited by existing partnerships, spending controls (e.g. Financial Fair Play or salary caps), policies of revenue redistribution, and a concern over potential tension between sporting organisations’ commercial motivations and their duties as ‘guardians of the game’.

Thorough due diligence is imperative for PE to clearly understand the value chain (sponsors, broadcasters, public organisations, fans, athletes, etc.), and to be able to identify which strategic levers are available, which are ‘off limits’, and which parameters can be evolved, in order to assess the feasibility of identified growth strategies.

Political and Regulatory Landscape

Allied to the fragmented ecosystem of stakeholders, careful due diligence of the political landscape, both internally within sporting organisations and also externally on a more macro-level, is advised.

Many strategic positions within sporting bodies are held by former high-achieving athletes selected for their decorated past, rather than their business acumen. Whilst this creates significant scope for the growth and professionalisation of the industry, understanding the personalities of prominent individuals and the strength of relationships between key bodies is important, to help gauge the levels of potential support and resistance towards an investor’s proposed initiatives.

On a macro-level, this extends to public organisations, too. Given sport’s communal reach and the platform it provides to impact major societal issues (e.g. mental and physical health, educational attainment, sustainability, diversity, and many others), its organisations and bodies can be subject to a higher level of government intervention than PE is traditionally accustomed to. Investors need to ensure revenue streams are protected against any potential changes to regulation (e.g. alcohol advertising constraints), public policy (e.g. programs to increase sports participation rates) and societal trends (e.g. movements to address issues of gambling addiction).

“A ban on gambling advertising would shock the football ecosystem, and sport more generally. Gambling firms are the majority of the [sports advertising] market, and they pay the most. For example, we are currently in negotiations with a FTSE 100 company that is probably a better PR fit for us, but they want to pay 60% less than their gambling counterparts. Everyone in our position is going to take the money. If you take out gambling money, I fear [for the industry]… I just cannot see how you replace that revenue.”

SENIOR COMMERCIAL RIGHTS HOLDER at a Premier League Football Club

Conclusion

For decades, the sporting industry has been marginalised by PE; high-profile, loss-making vanity purchases within elite sport have masked a broader industry with myriad attractive characteristics, including a unique level of brand loyalty, significant opportunities for recurring/repeat revenue, and a breadth of untapped commercial potential within a traditionally recession-proof sector. Recent M&A activity is, however, indicative of investors’ increasing recognition of these opportunities, across all spectrums and ticket sizes in the market.

Nonetheless, the sporting world remains complex and diverse; for investments to succeed, sporting entities must have a defined strategic vision and clearly articulated objectives to ensure they find the appropriate partners – ceding control of governance in a sector with such unique levels of heritage is a sensitive proposition, and ‘vendor’ stakeholders cannot view prospective PE investors purely as capital partners, either in the hope that strategy will align further down the line, or assuming that they will be content with a more passive role. Moreover, incumbent stakeholders should recognise that the nature of PE’s investment agenda means they are only seeking temporary, comparatively short-term, collaboration; the business will need to be prepared for PE to exit within several years, at which point stakeholders will be forced to seek fresh investment partnerships, undergoing a similar (and often taxing) preparatory process once more.

Likewise, PE must recognise the idiosyncrasies of the sporting landscape and take an ‘eyes open’ approach to entering the market; thorough due diligence is of paramount importance for investors to be able to assess the feasibility of their growth strategies, and to recognise where additional diplomacy is required, either to bring customers ‘on-side’ or to align key stakeholders behind a joint mission. Whilst challenges remain, the opportunities within sport are clear, and successful case studies have already begun to validate the investment thesis. Investors and sporting entities will need to be mindful of potential pitfalls, but collaboration under the right conditions has the potential to drive transformative change and growth within the industry.


About the Author

Chris Anguelov is a strategy consultant at Fairgrove Partners, where he has led due diligence and growth strategy projects across multiple sectors over the last three years, developing a specialisation in the field of sport. Recent related projects include conducting commercial due diligence of companies across sports marketing, sports eCommerce, and sports infrastructure. Prior to joining Fairgrove, Chris also played professional tennis, where he represented Bulgaria internationally and achieved an ATP singles and doubles ranking.

Whether you are an investor looking to better understand the sports ecosystem, or a sporting corporate looking for strategic advice, either in preparation for a prospective investment or simply to support the growth of your business, please reach out here, to find out how we can support you.


Footnotes and Sources
  1. S&P Global Market Intelligence, derived from Preqin, as of 5/2/2021
  2. In some segments of the sports industry, revenue predictability can be more nuanced (e.g. where performance factors, such as relegation, can have a significant influence on outcomes, or where participation in a sport spikes due to one-off event drivers such as the Olympics). However, these situations are case-specific, and beyond the scope of this article.
  3. Portas Consulting – UK CEO Sport Survey 2020
  4. Influencer Marketing Hub – The Incredible Growth of eSports [+ eSports Statistics]