The business of sports has never been hotter. Once upon a time sports ownership was considered a trophy asset for local bigwigs, who purchased the team to see and be seen as much to generate a return. While there are still plenty of vanity ownership projects out there (Dallas Cowboys fans can certainly attest to Jerry Jones’ proclivity to make himself the center of attention), the ownership of major sports franchises has become considerably more professionalized over the past decade. After the NFL announced that it would allow private equity funds to purchase stakes in teams a few months ago, it completed a clean sweep of major American leagues who allow funds to invest minority growth capital into teams.
Why are investors interested?
It comes down to eyeballs, which drive dollars. Over the past couple of decades, the rise of streaming and smartphones has sent traditional TV viewership spiraling downward. Only 45% of TV watching households in America still subscribe to cable or satellite, down from a peak of almost 90%. This shift to streaming (which recently topped 40% of TV usage for the first time) depressed viewership for traditional cable, and importantly for advertisers puts a large chunk of viewership out of reach given the no or limited ad models preferred by streamers like Netflix. The result is that sports broadcasts now stand alone as the most viewed TV windows that are open to advertisers, averaging over 91 of the 100 most watched telecasts in 2023 and 2024.
Advertisers are unsurprisingly willing to pay top dollar for this rare content. That in turn means that networks pay the leagues an ever-increasing amount for content, for example NFL rights increased more than fourfold from 2006 to 2022 (the first year of the current contract). These broadcast rights are split amongst the teams, meaning that those team valuations have shot up alongside a bumper crop of revenues. The University of Michigan’s Ross School of Business tracks an index of Sports Franchises in concert with investor Arctos, and they estimate team values have risen at 14% annually over the past 20 years, doubling the annualized return of the S&P 500.
Why are existing owners willing to sell?
If the assets are so great, why are existing owners willing to part with them and make it easier for Private Equity to buy in? Part of the reason is succession planning. As many older owners pass away their children might not be able to or want to continue in a lead ownership role. Another is increased capital expenditures. As stadiums get more and more expensive (the NFL now has 7 stadiums that cost over $1B), existing ownership groups might not have the capital to afford new stadiums without institutional backing. Finally the valuations on teams are getting so high that even the wealthiest individuals don’t have the bankroll to purchase teams on their own or with a limited number of co-investors. Institutional pools of capital are required, hence the multi-billion dollar private equity fundraises.
Is there another way to play it?
While plenty of groups have lined up to take minority stakes in longstanding enterprises, others have sought to avoid the high valuations by purchasing stakes in teams from upstart leagues or creating new competitions from scratch. Monarch Collective and Ariel Investments are great examples of the former, investing exclusively in women’s sports at valuations in the hundreds of millions rather. New leagues abound, from TGL in golf to King’s League in soccer, often using the transformative celebrity of a founder like Tiger Woods or Gerard Piqué to draw eyeballs to a new league offering a less formal wrapper to a well-known sport. Other leagues like LOVB have attempted to put professional structure behind sports that usually receive significant attention around the Olympics, often using social media and behind the scenes footage to connect with fans directly. Plenty of ancillary businesses have benefitted from the rise in sports enterprise values, like data-driven sports marketer Two Circles who has been able to expand into a global sports marketplace. As valuations continue to increase and more professional ownership groups seek to drive value at these teams, it seems likely that outsourced specialists will gain market share from internal franchise by franchise efforts.
Any way you choose to view sports investing, what seems clear is that the business of sports has never been bigger and seems unlikely to slow down anytime soon. Given the dearth of public market opportunities to invest in the sports ecosystem, we remain believers that private markets should be an instrumental part of any sports investor’s toolkit.