Amidst a global decline in M&A activity, one sector continues to thrive - sport, says Mike Preston, partner at Cleary Gottlieb's private equity practice. 

As sporting franchises grow into global businesses, private equity investors are increasingly targeting the sector, with sports teams and franchises providing new opportunities to unlock sources of revenue - often using digital media - through broadcasting and marketing rights. 

Despite the threat of recession, sporting investment continues to offer lucrative returns as demand for digital access to sports broadcasting and data shows little signs of subsiding. Private equity firms spent $51bn on sport investments globally in 2021, with $22bn spent in Europe alone, according to PitchBook. 

Cricket, in particular, is enjoying a surge in activity, with European private equity firm CVC Capital Partners spending $736 million in October 2021 to acquire the Ahmedabad franchise in the Indian Premier League (IPL). More recently, we've seen stakeholders including Viacom18 and Disney pay more than $6bn to secure the broadcasting rights to the franchise, which boasted over 229 million viewers in the first week of this year's tournament.

Lucrative Media Rights

Media and broadcasting rights to sporting events have proved to be a major pull for private equity investors. According to The Times, the Premier League told clubs that income from broadcast rights is expected to top £10bn during the next three seasons as the global appetite for sports viewings continues to grow. 

As streaming and digital viewing models continue to grow in popularity, private equity investors are also attracted by opportunities to capitalize on the convergence of sports with digital media, which allows providers to expand their online content audiences and drive revenue. Silver Lake's $4bn investment in the Ultimate Fighting Championship, for example, generated some 2,000 hours of viewing, mainly through its Fight Pass streaming service. Mixed martial arts and cage fighting made the jump to mainstream, opening the sport to a wider audience. 

A Resilient Sector and a Growing Appetite

The sport sector demonstrated its relative resilience during the challenging market conditions that hit many businesses hard throughout the pandemic. Whilst restrictions on gatherings impacted major live events and cut revenues for many sports and leagues, demand for remote sports viewings swelled. 

With recessionary fears and the impact of inflation putting a squeeze on discretionary spending, a reduction in time spent on pastimes outside the home may well drive consumers to spend more time watching television at home. Similarly, the ability of sports franchises and leagues to lock in long-term media deals somewhat insulates investments from short-term downswings, particularly given the diversified revenue streams within the sector. 

Impressive growth has also been seen in women's sport. As the world took note of top female talent including tennis' Emma Raducanu and UEFA champions The Lionesses, so too has private equity. According to The Times, The Women's Tennis Association (WTA) was poised to sell a 20% stake to private equity players CVC Capital Partners in a $150m deal, whilst The Daily Mail reported that the FA had rejected a $180m private equity bid to form a Women's Super League.  

However, the greatest example of growing opportunities in women's sport comes amidst news of a women's Indian Premier League. Given the appetite for cricket in India, with a fiercely passionate fanbase, the League is almost certain to prompt investor interest. 

Tackling Opposition

Whilst private equity investment in the sports sector may be fairly well-insulated from many market risk factors, it must also contend with setbacks and challenges. 

A representative body at the top of a sporting league often has the power to negotiate media rights and distribute proceeds among clubs, but those clubs also have the power to influence and even block deals. For example, European football leagues like the Bundesliga rejected plans for an injection of private equity in return for a share in a new rights management company. Leagues may also be hesitant to allow investment from existing stakeholders in member franchises, over fears of conflict of interest. 

The impact of the emotional element of sport is also hard to anticipate. Underperformance by a sports team following the exit of a manager, the injury of a player or a relegation to a lower league can quickly damage a franchise and its value. As a result, specialized due diligence must precede any investment to understand what public relations and ‘crisis management' strategies are in place. 

Private equity is increasingly becoming a key stakeholder in sports, as sponsors home in on opportunities opening up at an institutional level.

Despite the overall decline in M&A activity in the face of rising interest rates and recessionary concerns, there seems little doubt that demand for digital and streamed sports viewings will continue to accelerate. Whilst lucrative long-term media deals provide some protection, private equity firms must also be prepared for the scrutiny and setbacks that come with investing in sport.  

By Mike Preston, partner at Cleary Gottlieb's private equity practice.