PRIVATE EQUITY: WHY SMART MONEY CONTINUES COMING INTO SPORTS
The AISTS is proud to share an article which is quite topical and has been written by our MAS Class of 2014 alumni Hisham Shehabi, OLY. Hisham has been quite triumphant in is his sporting career. Since graduating at AISTS, he worked for the IOC as a Sports Intelligence Manager and thereafter went on to Co-Founding is own company N3XT SPORTS. He now assumes the role of COO and has generously shared the article below with AISTS.
This article was first posted on www.n3xtsports.com in August 2020, the company co-founded by Hisham in 2018.
While the sports industry continues to face the headwinds of COVID-19, cash flow & liquidity challenges are attracting capital from private equity and special purpose investment funds.
Pre-COVID-19, the funds being set up focused on investing in companies, or buying broadcast and data rights. For example, funds such as Sapphire Ventures and Causeway Media Partners invest in sports tech & media companies. From the broadcast side, companies like Eleven Sports (whose CEO we interviewed recently) purchase media rights and assets to bundle into direct-to-consumer OTT offerings. Others, such as SportRadar and Genius Sports, acquire data rights to create a flow for their main business: betting.
As an investment asset class, sports clubs have given healthy returns to investors over time. Up until before the pandemic, valuations of sports clubs have appreciated at a rapid rate in the US whilst the EU sports market still offers significant growth margins. While this is positive, in the US the large sums of capital that need to be tied up for unpredictable lengths of time make sports club investing challenging. The pool of wealthy individuals willing to acquire a non-controlling, illiquid interest in pro clubs has shrunk over time. Added to this, most leagues have strict limitations whereby a person or entity cannot own a stake in more than one team, and there is a cap on the number of investors.
As a result, the U.S. leagues have begun to modify ownership regulations to open up new investment opportunities for funds to acquire minority interests in multiple clubs. For example, in 2019, the MLB modified its rules to allow such funds to acquire a passive minority stake in multiple clubs. Taking advantage of this, a group called Galatioto Sports Partners raised a $500M GSP Baseball Fund from 100 investors. Other leagues, including the NBA and Major League Soccer, are evaluating similar models.
In the European investment landscape, the fundamentals have been driven by different factors. The new rules regarding financial fair-play and the increase in TV rights, as well as emerging sustainable revenue streams such as player trading have made clubs in football profitable. On the other hand, the difficulty of Europe for investors from overseas lies in its dynamic non-closed (promotion & relegation) leagues. Thus, the emergence of new investment portfolios and investment approaches has taken shape in the past few years.
Notably, City Football Group invented a new concept whereby they own a controlling interest in clubs across multiple leagues, a concept that others are trying to replicate (such as Kapital Football Group, led by former FC Girondins de Bordeaux managing partner Joseph DaGrosa, who are endeavoring a similar roll-up concept).
Now, as many sports properties must confront long-term cash flow and capital shortfalls, we expect that new variations on investment funds, including tokenization, will emerge.
This is a particularly interesting development, considering the types of groups that are entering in this latest round. They are backed by institutional funds and “brand name” private equity firms (such as Apollo, Blackstone, Bain Capital, CVC, Silverlake and many more), signalling a more mature investment attractiveness to high-level sport.
The attractive media play is one of the reasons for this flow of capital into sports. As commented by Ahmet Schaefer, CEO of a multi-football-entity platform, during one of our Meetups this Spring the increase of broadcast rights over the last decade has helped attract investors. The revenues from these rights create an effective downside protection for any investment.
We covered this topic in detail at another “What’s N3XT in Sports” online Meetup with Marshall Glickman, CEO of US-based consulting firm G2 Strategic (whose clients include LaLiga and EuroLeague Basketball), and Maheta Molango, recent CEO of LaLiga football team RCD Mallorca. They discussed how the pandemic would be an accelerator for the entry of private equity and new investment concepts (such as GSP’s fund) into sports.
With deep pockets and experienced business executives, these investors will insist on a significant voice in how the properties that accept their cash are governed and managed. As a result, we expect the European sports sector will experience a welcome trend towards financial discipline, operational excellence, proper business planning, data-driven decision-making, customer satisfaction and professional management, that will strengthen the industry as a whole.
This new investment activity is hovering around the top sports leagues at the moment, which is no surprise considering that these properties own content and IP that provide essential content to traditional broadcasters and rapidly-emerging digital platforms. Moreover, they anchor massive real estate and urban redevelopment projects.
Going forward, trends such as direct-to-fan communications, betting deregulation in the US, the entrance of big tech into sports, digital ticketing, contactless payment and a variety of new fan engagement platforms are likely to open up new revenue opportunities in the data space. With a focus on data and digital, sports leagues can unlock new value in upcoming media rights cycles.
To innovate on media, digital & data, sports entities are partnering with startups, accelerating their discovery and solutions development. This was validated by John Kosner, of Kosner Media and Micromanagement Ventures, at a recent installment of our online meetups “What’s N3XT in Sports”. He shared that many sports entities are more open to partnering with startups and that this creates a win-win situation for investors, sports entities and the startups themselves.
While change and transformation are critical for sports entities and investors, this path is not straightforward, especially since the discourse around data monetization and ownership is nascent. Some risks are already apparent, such as with the “Red Card Project” announced last week, which has a group of 400 football players taking legal action against gambling, betting and data processing companies for the use of personal statistics.
The data dialogue and digital strategy that accompanies it cannot start early enough for sports entities looking to make the shift in the next few years. That said, there are risks for sports properties that are unable to negotiate favorable technical details with the big technology companies entering the market, which has resulted in the emergence of outsourced expertise, such as the recently launched 3MS Consulting (a collaborative of N3XT Sports, G2 Strategic and Maheta Molango).
More specifically, this responsible foresight and strategic thinking should be taken on more urgently by federations and leagues. As the rightful governing umbrella for its members, they are tasked with the negotiation of multi-year media & broadcasting deals, and it is here where it can have the biggest impact. The challenge in federated systems is understanding data flows, data architecture, and by extension monetization. A data value chain that clearly shows how data is produced, collected, combined into insights and data products can increase value immensely.
The modernization and professionalization of sports properties, whether by partnering with startups, private equity, investment funds or technology companies, is a positive trend. It strengthens the business proposition of the sports entity and reduces the influence of sporting success on business success. These modern sports teams and leagues will be anchored by solid business plans, data-driven decision making, business intelligence and insights to operate efficiently, and a bias to think like a sportainment offering instead of just a sporting one.
Hisham Shehabi, OLY, AISTS MAS 2014
COO at N3XT Sports Inc.