For many sports fans, the world of high finance and private equity seems far removed from the blood, sweat and tears seen in professional sport. However, the global pandemic has acted as a catalyst to the relationship that ties the two worlds together. The days of sports enterprises relying solely on individuals with deep pockets, such as Russian oligarchs and business moguls (read James Montagu’s The Billionaires Club) may be behind us, but cash-strapped clubs and leagues are desperate to find new ways to fill COVID shaped holes in their balance sheets.
There has been an exponential growth in private equity in sport in the last few years, shown recently with CVC Partners’ acquisition of a stake in the Six Nations. Private equity should be classified as capital investment made into companies that are not publicly listed (Investopedia) and “the appetite and incentives of most private equity investors are firmly focused on achieving capital gains” (ICAEW). Especially for rugby, where the financial backing is often from rich owners, Steve Lansdowne and Bruce Craig in the Premiership, for example, the emergence of private equity offers a very different opportunity.
Even before 2020, when sport felt disproportional pressure due to the majority of its income streams reliant on sport events going ahead (TV rights and matchday hospitality), there had been a global shift to the welcoming arms of institutional investors. The interest of private equities in sport first hit the headlines with CVC Partners investing US$2 billion in 2006, which returned an equity value of US$4.4 billion in 2016; returns that left them desperate for more and their VII Fund has since gone searching for. The Economist’s article identified four key attractions of sport for investors: (i) it is one of the few spectacles that fans consistently watch live, (ii) sport offers the chance to build synergies with alternate revenue streams (betting, esports, and fantasy leagues), (iii) ownership offers the opportunity of fame and notoriety and, (iv) sport is run inefficiently, so offers private equity their ideal opportunity.
A practical example is CVC Partners’ investment into Premiership Rugby of £200m for a 27% stake in the league, with each of the 13 clubs reportedly receiving £13.5m back at the end of the 2018/19 season, which surely provided all clubs with the capacity to survive 2020. These financial benefits are clear, but at what price? An article in The Guardian tells of CVC Partner’s “pursuit of profit at every possible level” in a scathing rebuke of CVCs involvement with Formula 1. There is a stark contrast between the ruthless corporate world associated with private equity and the fans who see sport as an essential and intensely emotional aspect of their lives; the threat of private equity is the removal of this enigmatic essence of sport. This is despite CVC’s assurances that they will “have no involvement with sporting and regulatory decisions” (CVC representative in Rugby World), which does little to ease fans’ fears.
However, private equity involvement offers far more than a boost to the balance sheet for sport, with an opportunity to increase efficiency with experienced business leaders. Since CVC Partners acquired their stake in Premiership Rugby Zoe Clapp and Mark Brittain have joined as CMO and CCO respectively, both of whom have a wealth of experience in their respective fields that will hopefully improve the end product delivered to the fans. This contrasts with the ex-professionals who regularly fill senior positions at sports enterprises based on their sporting experience, as opposed to their commercial aptitude. Although sport may often be portrayed as an idealistic phenomenon fuelled by passion, the pandemic has reminded those involved with sport that many people’s livelihoods hinge on their commercial success, which has accelerated the need for solid corporate finance more than ever.
Private equity, in general, allows the realisation of capital that, in turn, can be reinvested into the business. Sport is the same in this regard, with vast opportunities to grow into Over The Top streaming services providing a better product for the consumer, and potentially bridging the divide with Esports. This last opportunity is rapidly rising, with Newzoo reporting “esports audience growing to 495m people globally in 2020.” These growth markets are viable in all manner of sports, but crucially need capital investment to succeed.
Linking back to Premiership Rugby, although there are few requirements on clubs reinvesting, it is hoped academy pathways will be strengthened in order to raise the quality of talent in the future and to improve the product for fans. However, critics view the same scenario as football playing out where cash injections lead to wages spiralling out of control. Specifically in the case of rugby, the gap between the Premiership and the Championship will only grow wider (added to this is the decrease in RFU funding to the Championship) and may hamper the sport as a whole. It is important to note these issues are specific to rugby and, due to the breadth in characteristics of sport, it is hard to draw direct comparisons as CVC’s legacy in Formula 1 has seen Formula E becoming the fastest growing form of motorsport.
Only time will tell of the long-term consequences of institutional investors continued exposure to sport. But for now, there is no denying that the fans all over the world are glad that sport has so far survived the global pandemic. And more transparent and more efficient sporting entities can only be a positive for its growth, especially when this provides further enjoyment for the fans who make sport what it is.
By Fergus Hamilton