SportsPro SmartSeries - Smart investment
Investment is the lifeblood of any business and in sport, the movement of money has reflected profound shifts in everything from geographical power bases to consumer behaviour. The way big and small funds work in sport has changed, too, settling into the rhythms and demands of the industry.
By far the most influential form of investment in the sports industry in recent years has been from sovereign wealth funds. State-backed organisations have looked beyond the traditional soft-power outlets of hosting major events and building physical infrastructure to buying up key properties across the world of sport.
For most of the last decade, the most visible examples of this have come from the Middle East. Just as Qatar won the right to host the 2022 Fifa World Cup in 2010, the government-backed Qatar Sports Investment sought to align itself with significant teams in Europe. A massive sponsorship deal with the then all-conquering Spanish side FC Barcelona was first up, before attentions turned to France – a significant political ally – and serial underachievers Paris Saint-Germain. A full takeover has yielded the most successful period in the club’s history and, whatever the wavering popularity of the wider Qatari sports project, PSG are now a significant internationally facing asset to rank alongside the Al-Jazeera media network and building developments like London’s Shard.
Before that, the ruling family of Abu Dhabi pursued a similar project through its purchase of Premier League soccer team Manchester City – a move that has since been augmented by investment in facilities to the benefit of the club’s academy and the local community.
The redirection of state money into sport in this way has allowed governments to coordinate diplomatic, promotional and developmental goals. No movement in international sports investment has been more significant than the massive redirection of Chinese state and corporate funds into its own domestic soccer teams.
While major Chinese businesses operate independently, large-scale economic manoeuvres are directed from the centre. So it was with the colossal investment, beginning in 2016, into Chinese Super League (CSL) clubs. Effectively, President Xi Jinping’s administration was sanctioning or even encouraging the release of considerable financial resources by companies that owned CSL clubs to spend on player purchases and wages, targeting the soft underbelly of the transfer market in Europe and South America to bring in players of the profile and quality to improve the audience and standards on the field. All of that is in support of a huge grassroots push on the part of Xi’s government, with the aim of producing a World Cup-winning national team by 2050, and private investment in other sporting sectors elsewhere.
By its very nature, state investment is typically large-scale and, despite its dramatic impact, relatively slow-moving. Some sovereign funds, however, are taking a different approach. Last year, Singapore’s US$242 billion Temasek Holdings made an eight-figure investment – via the Heliconia Capital Management vehicle – in the ONE Championship mixed martial arts promotion. From the ONE Championship’s perspective, the partnership was as much about the opportunities opened up by Temasek’s vast network as about the capital injection.
Among Temasek Holdings’ other equity interests is a stake in Fanatics, the leading e-commerce and retail platform whose partners include the four major US sports leagues as well as event operators and teams across the world.
Consolidation and recirculation
When the giant Hollywood talent agency William Morris Endeavor (WME) completed a takeover of sports and entertainment group IMG in a US$2.3 billion deal, with the support of private equity firm Silver Lake Partners, it not only revitalised a mainstay but also set in motion twin trends within the industry.
The first of these is consolidation. IMG already had a series of interests in a number of sporting events, properties and individuals but the arrival of WME has changed its horizons. For one thing, it has allowed for the cross-pollination between its activities in sport and entertainment. IMG Media, for example, now markets original dramatic programming as well as sport.
Meanwhile, WME | IMG has absorbed further investment: US$55 million from mutual fund Fidelity Management and Research Company and US$250 million from SoftBank in 2016. That money has gone into a string of outlays – including The Wall Group, Professional Bull Riders and Miss Universe – as well as joint ventures like the Eleague competition it launched with broadcaster Turner. Then, of course, it bought the Ultimate Fighting Championship (UFC), spending a reported US$4 billion of the world-leading MMA series last August.
That looks set to spark another chain of investment. Frank and Lorenzo Fertitta, the brothers who bought an ailing UFC in 2001 for just US$2 million, have used their proceeds from its sale to set up Fertitta Capital, a new private investment firm seeded with US$500 million of their own money. Its focus will be on consumer-facing companies in the technology, media and entertainment sectors.
“There is tremendous opportunity in the market for a firm that combines patient capital with this unique team of experienced investors and operators,” said Lorenzo Fertitta, who will act as chairman of Fertitta Capital, on the fund’s launch in early May. “Our long-term view enables us to avoid mandated investment timelines and instead focus exclusively on what really matters – understanding the needs of the companies we partner with and helping them achieve their operational and financial objectives.”
Mirroring the advance of WME | IMG has been China’s Dalian Wanda group, whose investments in sport and entertainment have seen it emerge almost as an eastern counterpoint. Wang Jianlin’s conglomerate has made its own series of eye-catching acquisitions in sport since paying US$1.2 billion for Europe’s Infront Sports & Media in February 2015. It has since picked up the World Triathlon Corporation (WTC), owner of the ultra-length Ironman series, and is playing its part in China’s soccer push through its sponsorship of Fifa and its support of a China Cup tournament that could yet lay the groundwork for more substantial challenges to the game’s global order. Alongside that, it completed a US$3.5 billion takeover of film studio Legendary Pictures last year – the biggest sum ever spent by Chinese investors on an American company.
Wanda is also at the forefront of a wider investment by Chinese companies into sport that is, again, trickling into other areas of the industry. Last May Shanghai Jin Xin, a joint venture investment fund between internet entertainment and technology company Baofeng and financial services firm Everbright, bought a 65 per cent stake in rights agency MP & Silva. The deal gave the agency a valuation of just over US$1 billion and its implications have been felt far and wide in the subsequent expenditure of co-founder Andrea Radrizzani. The Italian has ramped up the activities of Eleven Sports Network, the international broadcaster he launched in 2015, and has bought a 50 per cent stake in English soccer club Leeds United, with a full takeover reportedly set to follow.
Sports investment funds
Former IMG and Nascar executive George Pyne was leading a new wave in early 2015 when he launched Bruin Sports Capital, a sports-dedicated investment fund. The initiative secured early backing from WPP to the tune of US$250 million, and subsequently set about finding projects into which it could successfully sink its resources.
At the outset, these were largely mature, profit-making entities, several of them traditional service providers. The first buy was the National Football League’s (NFL) premium events and hospitality business, NFL On Location. Bruin expanded the company to create On Location Services, and hired former National Hockey League (NHL) chief operating officer John Collins to run it.
Last year’s purchase of digital broadcast specialist Deltatre was a move more or less in the same vein, even if it came in a sector with greater upside. But by then, the group was being approached by more and more early-stage companies looking for what executive vice president and principal David Abrutyn – speaking at SportsPro Live in March – calls “smart money”. The upshot of that was the creation of a US$35 million New York-based fund called Courtside Ventures. Backed by Bruin, WPP and Dan Gilbert, owner of the National Basketball Association’s (NBA) Cleveland Cavaliers, its focus is on diverse technology companies at the intersection of sports, media and gaming. The companies targeted have typically passed the startup and accelerator phase, may not yet be profitable but can articulate a vision for what will make them profitable, and require capital investment from the low six-figure range into the low seven figures.
The advantage for specialist funds like Bruin is the understanding of how companies in the sports industry can find a route to growth and profitability.
“If you’ve built a great business,” Abrutyn said, “someone’s probably going to buy it from you.”
With that in mind, the “financial discipline” of a well-run balance sheet is only as important as the “business discipline” of understanding how and why your company will succeed, and specialist knowledge and contacts can only help that company to flourish.
“If the cultural fit is there and the strategic fit is there, in our experience, you can get to a point where the economic deal makes sense.”
There are more opportunities and more reasons than ever for sports teams to become investors in new companies. In some cases, acquiring companies can lead to improvements in performance. Premier League soccer club Arsenal, for example, bought StatDNA for US$4 million in 2014 to augment their in-house recruitment team.
Another incentive for clubs to invest is the chance of reaching new markets. An increasing number of teams and ownership groups in European soccer and US major league sport have gone beyond the tokenistic PR hire of an eSports player to make wholesale investments in teams and properties. Last September aXiomatic – led by Golden State Warriors co-owner Peter Guber and Ted Leonsis, owner of the Washington Wizards and chief executive of the city-wide Monumental Sports and Entertainment group – took a controlling stake in Team Liquid. That was a prelude to the formation by the NBA and developer 2K Games of an NBA 2K eLeague, the highest-profile of many recent moves by a traditional sports property to establish a material interest in the eSports market.
The rise of other properties in digital sports is creating its own opportunities but the logical progression for some teams seeking either a performance or business return is into seed and accelerator funding. For the past two years, product development and marketing agency R/GA has worked with Major League Baseball’s (MLB) LA Dodgers on the Dodgers Accelerator programme.
As well as funding, it aims to provide startups with access to “tangible benefits and tangible outputs”, according to R/GA executive director for business transformation Rick Williams. This includes advice on establishing a new brand identity, new marketing, market analysis, lowering cost per acquisition and seeing the business grow. Williams notes that for the Dodgers, this accelerator programme is a chance to see “how they can experiment in the space”. Some of the investments that provide interesting opportunities have little to do with the team’s core business, such as its recent support for deodorant brand Renegade.
A similar model is now being established by Portuguese soccer club Benfica. It has set up KickUP Sports Innovation, whose focus is on companies at the intersection between sport and technology in areas ranging from sports performance, health and fitness to media, fan engagement, event management and smart venues.
The fund is small, with seed money of around €100,000 invested in the first round of recipients. 20 companies were selected for an inaugural boot camp.
“From those,” co-founder and chief executive João Gonçalo Cunha explained at SportsPro Live, “50 per cent are focused on Benfica’s performance or Benfica’s objectives, and the other 50 per cent are mainly for investment and to have revenue in the future.”
This feature originally appeared in Issue 94 of SportsPro magazine.
About SportsPro SmartSeries
SmartSeries is the new venture from SportsPro looking at where the industry is going next. It will explore topics like near-future technology, investment, innovation and emerging best practice in a range of fields, bringing in opinion from those on the cutting edge and finding out how the sports business can prepare for the change that is coming tomorrow. This series will offer a new perspective across print, digital and events.
Check out the previous features on Smart Cities, Smart Data and Emerging Sports.