How private equity came to dominate the sports world (and why it could all end in tears)
Long-standing supporters of Chelsea FC are more than familiar with the vicissitudes of billionaire ownership.
Roman Abramovich, the Russian energy tycoon and former friend of Vladimir Putin, has been at the helm for almost two decades during which managers and coaches have been changed with great abandon and silverware, including the Champions League in 2021, has piled up.
For those clubs owned by Middle- Eastern potentates and overseas billionaires with near unlimited resources, the current ownership structure suits very nicely.
Valuable: The All Blacks perform their sacred Haka dance. There is an awareness that TV sports rights are a hugely valuable source of income, with annuity-like qualities
Less well-financed Premier League and European clubs have simply become props for their grandeur or greater political purposes.
In many ways, the recent much heralded £310million purchase of Newcastle United by the Saudi Arabia Public Investment Fund, is a back-to-the-future deal, coming years after other major clubs such as Manchester City and Paris St Germain in France fell into the hands of Gulf region autocrats.
There is an awareness that TV sports rights are a hugely valuable source of income, with annuity-like qualities because of their recurring nature.
As ever more viewing globally switches from terrestrial and satellite broadcasting to streaming services, with relative newcomers such as Amazon Prime and Netflix seeping onto the field of play, private equity and big finance view sport as an undeveloped asset.
It was no accident that Wall Street’s biggest bank, JP Morgan, was the £3billion investor behind the currently shelved (but not dead) European Super League.
Michael Kenworthy, the head of sports investment banking at Goldman Sachs, says sports assets do not necessarily behave in the same way as the broader market.
Football teams were, he points out, ‘selling for record values through the 2008 financial crisis and Covid-19’.
Recognition of this by private equity, tech barons and hedge fund buccaneers is slowly but surely changing sport.
Few elite sports remain untouched, ranging from the plutocrats of F1 motor racing to that former bastion of amateurism, Six Nations rugby, to baseball in the United States and even to Premier League football.
Talent: British teenage tennis sensation Emma Raducanu
One suspects that the fans on the terraces of Anfield, cheering the exploits of goalscoring genius Mo Salah, think that Liverpool FC is safely owned by Boston sports enthusiast John Henry.
What will have escaped notice is that in March 2021, New York-based private equity firm Redbird Capital Partners acquired a 10 per cent stake in the company that controls Liverpool and the Boston Red Sox baseball team.
Stake-building is part of the new deal in sports franchise ownership which is allowing traditional owners to cash out, or pass on long-standing debt burdens, in exchange for private equity access to income streams.
Among the pioneers and market leaders in the private equity assault on sports is £125billion CVC Capital Partners, part of the consortium which bought department stores group Debenhams in 2003, setting the scene for its eventual demise as a force on Britain’s high streets, and its closure this year.
The most noteworthy financial foray for CVC’s sports franchise, based in London, was the purchase of F1 from Bernie Ecclestone for £1.4billion in 2006.
Unusually for private equity, which so often seeks the quick flip, it held on to F1 until 2017, extracting an estimated £3.5billion, some of which could arguably have gone into investment in the sport. In 2016, CVC parachuted in as chairman Chase Carey, formerly Rupert Murdoch’s right-hand man at 21st Century Fox.
His background in TV was instrumental when it came to selling the enterprise to ‘cable cowboy’ John Malone’s Liberty Media for an astonishing £6billion. A great British sports creation had ended up in overseas hands.
More seriously, motor racing analysts bemoaned the lack of spending by CVC on promotion and investment in attracting a younger audience, and the failure to engage on social media.
In 2016, the drivers were openly critical of CVC, arguing that decision-making was ‘obsolete and ill-structured’. It has been left to Liberty to put Humpty Dumpty back together again.
In its determination to inject some drama into F1 there have been allegations from Mercedes, among others, that the rules were stretched so that Dutch driver Max Verstappen was able to snatch the F1 world championship from title rival Lewis Hamilton on the final lap of the season in Abu Dhabi.
The goal for the owners was to bring the curtain down on a procession of wins for the British driver, demonstrating it was still a competitive sport.
The shoddy F1 history has not put sports franchises off private equity, and CVC especially.
The most noteworthy financial foray for CVC’s sports franchise, based in London, was the purchase of F1 from Bernie Ecclestone (pictured) for £1.4bn in 2006
Of particular relevance to followers of Six Nations Rugby is that CVC has bought a stake in the tournament for £365million. The deal was agreed as the UK emerged from lockdown in March 2021 and revenues were scarce.
Six Nations Rugby said the transaction would be a key step to investing and growing the game on the world stage. But having allowed a skilled predator to breach the citadels of the English union at Twickenham, fans should worry what happens next.
When it comes to acquiring sports assets, CVC is demonstrating an eye for buying into franchises going through hard times.
Its most recent swoop came this month when the Spanish football clubs of La Liga approved a £1.7billion deal with it.
CVC will release £339million to the cash-strapped top Spanish league almost immediately in spite of forceful opposition from serial Champions League winners Real Madrid and Barcelona.
In spite of their own financial difficulties, the two leading Spanish clubs recognise that allowing the fox into the La Liga chicken coop is a bad idea.
Both still believe that the financial way forward for them must be some form of European Super League, in spite of the collapse of the JP Morgan-backed proposal in the face of fan hostility at Chelsea, Manchester United and other English clubs.
Under the deal, La Liga has committed to handing over 8.2 per cent of the Spanish League to their CVC masters for the next five decades.
Given that the average life span of private equity ownership is in low single-digit years rather than decades, it looks to have trapped itself in an arm-lock from which it will be hard to escape.
Efforts by Barcelona and Real Madrid to defeat the transaction mean they will not have any CVC funding. However, they retain the ability to do their own deals, away from vulture capitalism.
But it is not just in Europe that private equity barons are making their mark. In the southern hemisphere, Silver Lake Capital managed to buy itself a stake in the most valuable rugby union franchise in the world when it agreed to take a 12.5 per cent share in the All Blacks for £205million.
The New Zealand Rugby Players’ Association is concerned the new investors might seek to market the sacred Haka tribal dance performed before each match.
In the US there is increasing involvement of private equity and other financial players in Major League Baseball, Major League Soccer and the National Basketball Association (NBA) after rules disallowing investors from owning stakes in more than one club were swept aside.
The values of franchises are soaring. The family which controlled Utah Jazz in the NBA recently sold out to Qualtrics tech entrepreneur Ryan Smith for £1.2billion, more than 66 times its valuation in the 1980s when it was bought for just £18million.
The latest target for CVC is tennis. It has seized upon the US Open success of British teenager Emma Raducanu to propose sweeping changes by unifying the men’s and women’s tour calendars. It proposes injecting £451million into the professional tour.
Smart private equity and tech capital is flowing into sport as if there was no tomorrow.
Sellers would be advised before they sign on the dotted line to look at the record of an industry which operates behind closed doors, uses debt to boost profits and is largely interested in investor returns.
In this universe supporters, players and the broader sporting interest risk being on the losing side.