The pandemic-induced financial distress in the sports industry is clear and apparent. Reduced gate receipts and match day income, and disagreements over the value of sponsorship and broadcast rights, have combined to strain the finances and viability of leagues, federations and clubs.
The need for credit and alternative financing – albeit with varying degrees of urgency and desperation – from private and public sources is evident. There are regular examples of different stakeholders in the sector considering a different profile of investors and lenders to address their financial needs. The length and extent of this pressure will be shaped by our ability to constrain and manage the pandemic, which leaves the longer-term prognosis unclear.
The sports sector and sports clubs in particular have been interesting to private investors for some time, albeit often for non-financial objectives as much as financial ones. Businesspeople, politicians and governments looked to clubs to improve their reputation and to serve as status symbols; as a means to pursue a personal passion; to provide political protection; and as a way of giving back to communities they are from.
In more recent years, interest from more professionalised institutional investors has grown, with private market funds of different types seeing an opportunity to create value from strategic, operational and commercial adjustments to business models that were ripe for change. The financial distress of the industry has only accelerated this trend in the past year.
The change in the profile of private buyers from those with non-financial goals to those with a laser focus on financial objectives means that investing and lending decisions are evaluated in a different way. Opportunities need a clear investment thesis about how to secure returns, with buyers required to conduct diligence on the regulatory, reputational and political considerations attached to assets given the potential for these factors to weigh on their investment thesis, the transaction’s valuation and their exit plans. Our experience supporting investors with diligence and risk assessments of clubs, leagues and federations has taught us a few key lessons.
Scrutinise the profile and legacy of the owners and those who have been making decisions
The owners and directors of clubs are as diverse as the fans their clubs represent, though at times potentially as divisive. If you take a sample of clubs in Italy’s Serie A you find self-made businesspeople with interests in renewable energy, waste management, construction and other sectors. There is a good sample of former and current politicians and families of various political persuasions, and several have faced investigations or prosecutions over the years for a range of financial crime misconduct.
My colleagues have also reviewed the great and the good of British clubs in a separate article that shows the range of personalities there too. Understanding the profile of who you are buying from, and how they have used the club for any number of financial and non-financial objectives, is always a key diligence consideration.
It can be challenging, though, to unpack whether these issues are attached solely to the individual and their interests independently from the club, or to the club itself, so care should be undertaken to understand the specifics of any allegations, investigations and enforcement action, and their status at the time of purchase. Care should also be taken to avoid the temptation to overlook legacy issues by saying that “this is how things are done” in a country or context, or that someone has turned a corner with their behaviour.
You should always consider whether and how further regulatory action could follow at home and overseas. Regulators will continue to look closely at sports given the track record and perceptions of the sector, so even if something feels geographically remote from the US or now well in the past, it is still valuable to consider “what if?” scenarios and how they could unfold.
Sport is political and politics is sport
The political considerations around a league or a club are wider than the profile of the owners and directors. Investing in sports is an inherently political investment given the wider set of stakeholders that clubs, leagues and federations need to represent and be accountable to. The cultural differences between countries and between different regions leave their mark on how different stakeholders expect clubs to be managed, with the cultural identity of many towns and cities in Europe, particularly former industrial centres, tied to their sports clubs.
Investors need to spend time understanding these dynamics and the stakeholders that influence them. Buyers should also consider how stakeholders around a club, including local politicians, might seek to raise political obstacles to their investments. Many economies that are otherwise open and receptive to foreign investment have extended and tightened the rules to review and block foreign investment in response to shifting geopolitics and greater sensitivity to technological and culturally significant assets being sold to foreign investors. Sports might seem an unlikely target, though the spirit of these regulations – and in some cases the letter – may provide the space for unexpected challenges. Look out for interest groups opposed to your investment finding ways and means to block it.
It is worth dwelling on the implications of this point beyond the immediate investment. New owners and rights holders will find their interests clashing with the interests of other stakeholders once a deal is signed, particularly if fans, clubs and other interest groups feel that commitments have not been upheld. Investors need to consider the influence and disposition of stakeholders before, during and after an investment, and the extent to which their interests will change.
Ownership issues extend to land and players
Land ownership and stadia development feature in the investment theses of many investors in sports because of the potential for improved infrastructure to drive revenue, or indeed a simple financial return from the sale of an asset or its naming rights.
There are many cities around the world – including many with successful or underperforming football teams – that have complicated laws and legacy issues, and at times corrupt and unethical practices, around the ownership, development and use of land. These challenges often extend to the permitting and licensing process required to develop land and to construct certain types of infrastructure. The need to partner or contract with various third parties to develop and execute a project also generates additional risk considerations. These are both negotiations and relationships that can present political, financial crime and reputational risks if not handled appropriately and with care.
The ownership discussions and challenges do not just stop at land, though – they extend to knowing who owns the rights to your players. This can be difficult to have certainty about without a detailed review of legal contracts, which is in turn reliant on having access to documentation and sufficient time to independently review them and to work through any atypical structures. If the dynamics of the deal afford you the time to be able to do this then it should be a priority.
Professionalisation drives should extend to risk management
The commentary on how investors create value from clubs, leagues and federations often focuses on how they can professionalise the organisation they are acquiring through strategic and operational adjustments, and the professionalisation of corporate functions to mimic how successful companies are run. However, to do this, investors should also keep in mind what successful companies also do well, and that is to carefully think about and manage risk.
The sports industry has been plagued by regulatory and financial crime failings in recent years, demonstrating that buyers also need to professionalise corporate governance and the management of financial crime. There are numerous ways for buyers to approach this depending on the context and profile of their investment. However, a particular lesson stands out from the past failings of sports organisations and that is the need to professionalise the management of third parties that work on their behalf.
The management of players and other staff, broadcast and media rights, entertainment and hospitality, development spending, and sponsorship, is often managed through complicated third-party relationships, which have been exploited on numerous occasions for personal gain at the expense of the sport.
Companies have learnt how to do this to the benefit of their investors, employees and broader industry stakeholders, and sports organisations will need to too if the interest in the sector is to generate the returns that investors hope. Indeed, private equity firms are accustomed to including governance and compliance enhancements in their post-acquisition plans for newly acquired interests.
Sports investments should be no different, but in many cases they will require a level of effort that is greater than required in other industries. The sports sector has generally paid more attention to risk on the pitch than in the boardroom, though any successful investment will need to focus on both.