Opinion | 4 classes for dealmakers investing in sports activities
The financial hardship in the sports industry caused by pandemics is clear and obvious. Reduced matchday revenue and revenue, as well as disagreements over the value of sponsorship and broadcast rights, have combined to weigh on the finances and viability of leagues, federations and clubs.
The need for credit and alternative finance – albeit with varying degrees of urgency and desperation – from private and public sources is evident. There are regular examples of different stakeholders in the industry taking into account a different profile of investors and lenders to meet their financial needs. The length and magnitude of this pressure will be shaped by our ability to contain and manage the pandemic, leaving the longer-term forecast unclear.
The sports sector, and sports clubs in particular, have been of interest to private investors for some time, albeit often for both non-financial and financial purposes. Business people, politicians, and governments sought clubs to improve their reputations and serve as status symbols. as a means of pursuing a personal passion; provide political protection; and to give something back to the communities from which they come.
In recent years the interest of more professional institutional investors has increased, with private market funds of various types seeing the opportunity to create value from strategic, operational and commercial adjustments to business models that were ripe for change. The industry’s financial plight only accelerated this trend over the past year.
Changing the profile of private buyers from those with non-financial goals to those with a laser focus on financial goals results in investment and credit decisions being valued in different ways. Opportunities require a clear investment thesis to secure returns. Buyers must carefully consider the regulatory, reputational, and policy considerations associated with assets as these factors can weigh on their investment thesis, transaction valuation, and exit plans. Our experience in helping investors with the diligence and risk assessment of clubs, leagues and associations has taught us several important lessons.
Review the profile and legacy of the owners and those who made decisions
Club owners and directors are as diverse as the fans who represent their clubs, albeit potentially divisive at times. If you take a selection of clubs in the Italian Serie A, you will find homemade business people interested in renewable energy, waste management, construction and other sectors. There is a good sample of past and present politicians and families of various political beliefs, and several have been investigated or prosecuted over the years for a range of financial crime misconduct.
My colleagues have also discussed the great and good qualities of British clubs in a separate article which also shows the range of personalities there. Understanding the profile of who you are buying from and how they have used the club for any number of financial and non-financial goals is always an important due diligence.
However, it can be difficult to unpack whether these topics are solely dedicated to the individual and his or her interests regardless of the club or the club itself. Therefore, care should be taken to understand the details of the allegation, investigation 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 it is done” in a country or context, or that someone has turned a corner in their behavior.
You should always consider whether and how further regulatory measures at home and abroad could follow. Regulators will continue to scrutinize the sport closely given the track record and perception of the sector. Even if something is geographically distant or in the past, it is still valuable to ponder “what if”. Scenarios and how they could unfold.
Sport is political and politics is sport
The political deliberations about a league or club are broader than the profile of its owners and directors. Investing in sport is an inherently political investment given the larger number of stakeholders clubs, leagues and associations represent and to which they must be accountable. The cultural differences between countries and between different regions shape how different stakeholders expect clubs to be managed, with the cultural identity of many cities in Europe, especially former industrial centers, linked to their sports clubs.
Investors need to spend time understanding these dynamics and the stakeholders who influence them. Buyers should also consider how stakeholders in a club, including local politicians, might try to create political barriers to their investments. Many economies that are otherwise open and receptive to foreign investment have expanded and tightened the rules for screening and blocking foreign investment in response to changing geopolitics and greater sensitivity to the sale of technologically and culturally significant assets to foreign investors . Exercise seems like an unlikely destination, although the spirit of those regulations – and in some cases the letter – can leave room for unexpected challenge. Watch out for stakeholders who oppose your investment and find ways to block them.
It is worth exploring the implications of this point beyond the immediate investment. New owners and rightholders will find that their interests conflict with those of other interest groups once a contract is signed, especially if fans, clubs and other interest groups feel that commitments have not been met. 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.
Property issues extend to land and players
Land ownership and stadium development play a role in the investment theses of many sports investors as the potential for improved infrastructure to increase revenue or 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 subpar soccer teams – that have complicated laws and legacy issues, and sometimes corrupt and unethical practices regarding the ownership, development and use of land. These challenges often extend to the permitting and permitting process required to develop land and build certain types of infrastructure. The need to work or contract with various third parties to develop and execute a project also introduces additional risk considerations. These are both negotiations and relationships that can harbor political, financial crime and reputational risks if not handled appropriately and with care.
However, the ownership discussions and challenges don’t just stop on land, they also extend to knowing who your players’ rights belong to. This can be difficult to do without a detailed review of the legal contracts, which in turn depends on having access to documents and having enough time to independently review them and deal with atypical structures. If the dynamics of business are giving you time to do this, it should be a priority.
Professionalization campaigns should extend to risk management
The comment on how investors create value from clubs, leagues, and federations often focuses on how they can professionalize the organization they acquire through strategic and operational adjustments and professionalize the corporate functions to mimic how successfully businesses are run. To that end, however, investors should also consider what successful companies are also good at, and that means carefully thinking about and managing risks.
The sports industry has been plagued by regulatory flaws and financial crime in recent years, showing that buyers also need to professionalize corporate governance and financial crime management. There are numerous ways for buyers to achieve this, depending on the context and profile of their investment. One particular lesson, however, stands out from the mistakes made by sports organizations in the past and this is the need to professionalize the management of third parties working on their behalf.
The management of players and other staff, broadcast and media rights, entertainment and hospitality, development spending and sponsorship is often administered through intricate relationships with third parties that have been used multiple times for personal gain at the expense of the sport.
Corporations have learned how to do this for the benefit of their investors, employees, and broader industry stakeholders, and sports organizations must do so too if the interest in the sector is to generate the returns investors hope for. Indeed, private equity firms are used to incorporating governance and compliance improvements into their post-acquisition plans for newly acquired interests.
Sports investments should be no different, but in many cases they require more effort than other industries. The sports sector has generally paid more attention to risk on the field than in the boardroom, although any successful investment must focus on both.