Private Equity and Sports – An Interesting Combination

Introduction

Over the years, notable names in the private equity industry have made personal investments in sports franchises in major sports leagues around the globe. These unique investments provide bragging rights and entertainment and, in some cases, a sizable return.  Most veterans of the private equity game view these teams as underperforming assets and believe that they can enhance value given their business acumen and strong ties to the community. However, you have seen very limited situations of the fund taking on the role of a lead investor in any deal involving a professional sports team. Instead, you’ve primarily seen—and can expect to see -- funds investing in other parts of the capital structure including mezzanine debt or preferred stock.  Investing in sports franchises does have a considerable level of risk. All the stars need to line up – right team, right market and right terms and conditions.

Major League Teams are Big Business

Today, sports teams and the leagues are big business. The National Football League brought in $13 billion in revenue in 2015/2016 and was followed by Major League Baseball with $9.5 billion, the English Premier League with $5.3 billion and the National Basketball Association with $4.8 billion. In 2016, the most valuable sports franchise was the Dallas Cowboys, valued at $4 billion. The next two teams on the list were two soccer clubs, Real Madrid and FC Barcelona, valued at $3.65 billion and $3.55 billion, respectively.

Investing in Sports Technology Is Booming

Even if you do not have a billion dollars to invest in a team, there are certainly other ways to invest in the sports business. Investments in the sports technology ecosystem by venture capital and private equity are booming. Since 2012, investments in sports-related startups have been growing nearly 30% year over year. In fact, investors put over $1 billion into sports-related startups in 2015 and investments in this space are not expected to slow down anytime soon. Technology in sports is dramatically changing how athletes train for competition, how fans view sporting events and the ways that fans engage with their favorite teams.

Why Should Investments in Sports Remain Frothy?

Sports is far more than a niche leisure activity. The annual global spend across all sports consumption is $145 billion. Globally there is an incredible appetite for all things sports and sports-related content. For the major networks, dollars allocated exclusively to sports programming have increased dramatically. From a social media perspective (although maybe that has changed recently due to the political climate), 60% of Twitter’s traffic is sports-related. Vast technological improvements in how sports are viewed in the home coupled with high prices for live sports entertainment have even resulted in many teams and leagues experiencing attendance problems at the gate. Teams and leagues need to continually innovate and embrace new technologies to create a more engaging live experience for their fans.

Defining the Sports Technology Ecosystem

Sports is a global industry and quickly becoming one of the most intriguing markets for venture investing activity. From wearable devices, to gaming, to fantasy sports leagues, sports technology is changing. Investor dollars are being put into innovation in stadium technology, customer (fan) relationship management, digital content and analytics on athlete on-field performance.  Here is a common breakdown of the sports technology ecosystem:

• Analytics  - both for athletes and fan engagement
• Wearables – used by the athlete to improve performance
• Virtual Reality/Augmented Reality – changing how live sports are viewed
• Drone Technology – competitive leagues and action photography
• Media – content creators
• eCommerce/ticketing –models for maximizing the B2C market
• eSports – competitive and professional gaming
• Fantasy sports – platforms for fantasy sports leagues
• Fitness applications – mobile fitness and companion applications

What Makes Sports Technology Such an Attractive Area to Investors

The sports industry in the U.S. alone is projected to reach $75 billion by 2019. Sports fans are obsessed with their favorite teams and spend long hours and significant dollars watching and tracking performance. As a result, technology that allows fans to more easily track team and player performance comes with an automatic user base with high retention rates. In the sports business, the customer is easily identified, extremely passionate and spends significant dollars to support that passion. Fantasy sports and eSports have become a significant piece or the sports ecosystem. Technologies that allow fantasy league participants to compile and analyze in-depth statistics are truly valuable. In fact, in 2016, more people watched the eSports World Championship than the NBA Finals. Sports is characterized by major events each year such as The Super Bowl, World Series, NBA and Stanley Cup Playoffs, and March Madness, to name a few. There is an incredible and increasing demand for content around each of these events.

Athletes Are Investors Also

Sports-related venture capital has attracted many celebrity investors, including the athletes themselves. These athletes understand how the innovation can be applied in their craft and can actually provide the company with access to potential customers, which ordinarily might not be achieved so quickly.

Closing Thoughts

Sports is a huge business and the sports technology space is rapidly becoming an intriguing market for investment. New innovations are changing how athletes train, how games are played, how data is accumulated and analyzed and how sports are viewed both live and remotely. Activities that we define as sports are even changing. Whoever thought that we would see the present levels of competition in eSports and fantasy sports? What’s next? I am not sure that anyone really knows.

Note: If you found this article of interest, please mark your calendars for the EisnerAmper NJ Business Summit on October 24, 2017. The keynote speaker is Rick Reilly, one of the truly great sportswriters of our generation and a member of the National Sportswriters and Sportscasters Hall of Fame. If you are interested in attending the Business Summit, please contact Alan Wink.