In the spring of 2021, twelve of the most famous European soccer clubs attempted to break away from UEFA, the European football federation and monopolist organizer of competitions across the continent. That failed “coup” – it soon became known – had been backed by JPMorgan Chase with a potential war chest of between $3.8 billion and $5 billion.
While the news that several European soccer clubs – with the largest fan bases and thus media appeal – were set to create their own league monopolized headlines, little attention was paid on JPM’s role as the provider of capital.
The role of institutional investors in sports has been traditionally limited, as sport franchises and teams were historically owned by wealthy, passionate individuals – often driven by a love of the sport more than business motives, with the occasional scandal – and were not typically seen as a viable investment option. Sports franchises had trouble accessing flexible capital or equity solutions, and mostly financed themselves via low-rate bank debt or high-cost equity. But as sport became increasingly lucrative, business decisions more complex, and additional capital necessary in order to make bold investments (as the JPM example shows), asset managers have begun paying attention.
It is likely that pandemic-driven demand for capital – to cope with short-term losses from diminished attendance – was the trigger, with investor interest driven by low entry points and potential for increasing revenues. By February 2022, private equity investments in sports teams had crossed the $2 billion mark, with the NBA leading the pack on returns.
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Sports teams need capital to support different types of projects – to fund and finance stadiums, to cover some of the advertising and marketing costs upfront, and to finance the rising trend of DTC SME streaming and content delivery.
Fund investments can have various structures, and can include debt, equity or a combination of both. Some funds aim to buy exposure to a combination of growth and cash flows, others may see opportunities in asset appreciation.
Some American leagues have set up specific rules. The NBA doesn’t allow institutional ownership of more than 30% in a single team, with a maximum of 20% ownership for one fund. The MLS also has a specific framework, with funds only allowed to invest if they raised at least $500 million, with no more than 10% of the fund invested in one team. Funds are also limited in the number of teams they can invest in – no more than four – and in the size of their investment in a single club – more than $20 million, but with an equity share of no more than 20%.
Additional downside protection is provided through the sports leagues’ rules on the maximum amount of indebtedness allowed per team.
In Europe, the regulatory framework is lighter. Funds can own soccer teams, and are starting to invest in certain leagues despite the pushback. In the Italian Serie A, US-based funds fully own two teams – AC Milan and Genoa. A potential success story is Elliot Management’s purchase of AC Milan in 2017, as the former owner defaulted on a $300 million loan to the US-based firm. The club has been the target of competitive offers from RedBird and Investcorp that value it at approximately $1 billion.
Funds investing in sports – be it in franchises, leagues, or race car teams – are raising capital among qualified purchasers, as the type of investment may be considered to have an elevated risk-return profile. This means minimum commitments from investors – wealthy individuals or institutional investors – are typically above $1 million.
On the other hand, retail investors with a brokerage account can invest in Juventus FC, which is publicly traded. Those who did lost 56% of their capital in 2021 alone.
1. Some European soccer clubs went public, such as Juventus in 200x and Manchester United in xxx, but these experiments have for the most part failed, as trading was extremely volatile and prices often followed announcements rather than financial fundamentals.
2. In late 2019, NBA commissioner Adam Silver sent a memo to league owners proposing a new investment vehicle that would allow private equity investors to purchase minority ownership stakes in NBA teams. As of January 2021, a structure has been put in place to increase the total number of eligible franchise buyers.
3. Between 2002 and 2021, the average price return for an NBA team was 1,057% compared to 458% returns on the S&P 500, according to estimates from PitchBook.
4. In the instance that a team does go under, some professional leagues facilitate the sale of the sports team, such that a financiers principal is not all at risk.
5. From an investment strategy point of view, AC Milan may look more like a distressed deal, but other investments have targeted more established teams with less volatile cash flows.
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