Much of the discussion about sports investment centres on its strong revenue growth prospects and its robustness in the face of business cycle downturns – if not twice-a-century pandemics.
But while opinions differ on the extent and source of these growth prospects across a range of sports, probably the most important differentiator investors should have in mind is the sport’s ability to reform and pivot to adjust to the challenges and opportunities in the next decade.
Go deeper with GlobalData
In that respect, many traditional sports events outside the US are very constrained. This may mean it’s best to invest in either new sports with streamlined governance structures or new events in traditional sports that avoid the unwieldy decision-making and slow execution of the past. The former may attract venture capital and sovereign wealth funds with either a higher appetite for risk or longer-term return horizons while the latter should be the main focus of private equity and structured debt providers.
Much of our recent work supporting investments in sports has focused as much on assessing a sport's ability to reform and adapt as the likely future revenue growth drivers.
Two contrasting views of future revenue prospects
Recently, two seemingly different views have been expressed on the prospects for sports revenues over the next 10 years. From data-led sports agency Two Circles – a projection of 5% commercial income growth per year for the next 10 years, leaving sport larger than traditional TV by 2034. And then in Roger Mitchell’s book “Sport’s Perfect Storm” a warning of a sports asset valuation bubble about to burst on the back of unrealistic revenue assumptions. This view is backed up by PTI’s Benchmark survey of league and competition heads, suggesting only 2% of sports expect their media rights to grow significantly in the next few years – media rights have been the main engine of growth for the last 30 years.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataWhich view might be right? Are we forced to be either Cassandras or modern-day versions of Voltaire’s ever-optimistic Dr Pangloss? For real insight though we need to look not at where they disagree but where they agree.
One common message
Two Circles predicts much greater polarization in the future between successful sports and the rest. Mitchell believes in opportunities for value investing in specific assets whose fundamentals are strong – and for him, that’s often new and disruptive events. For both, the best sports are going to be those that can reform and pivot. For Two Circles, that’s an operational challenge mainly for established sports and competitions – no surprise really, that’s where Two Circles' business focus is. For Mitchell, it’s also a political challenge, often made worse by early investment partnerships (most often the challenge being the politics of the sport itself, sometimes the big Politics of nation-state aspirations).
Where they meet head on is the crucial role of format and product reform. For sport there is no longer a rising tide that will float all boats. And in this area, there may be more to Mitchell’s observations than Two Circles'. That agency believes growth comes from three areas: (1) understanding and engaging fans better (2) getting better at monetisation/commercialisation and (3) reforming formats to embrace Generation Z, the developing world and women.
Two Circles attributes each factor more or less equal weighting in driving future growth and sees more upside for the top sports and events – as fans, sponsors and media all focus more time and money on the top assets.
Mitchell’s analysis by contrast identifies the third of these factors – product governance and the ability to reform – as the true source of value enhancement in the next decade, as without it even a top global sport event can undermine its appeal and face disruption. With it, currently small and emerging sports can see spectacular growth and returns.
The ability to reform may be the great differentiator
Many established sports lack the governance structures or levers to accept and then execute meaningful reform. They are not businesses, but political ecosystems which often need voting super majorities across vested interests to execute meaningful change. Their potential value is often trapped within an ecosystem that cannot reform itself properly, hence the real opportunity may well be in disruptive business models or in new sports where decision-making structures are not yet ossified.
That implies investors who target the superficially safe bets of commercial JVs with established sports may in the end have chosen badly if they have tied themselves to a sport that cannot reform itself. Even worse, in some cases, the structure of those investment vehicles may actually prevent reform requiring the sport to effectively buy-out its financing partner in order to pivot properly or face disruption from a new entity that is not constrained by a JV agreement.
Rugby may not have helped itself
Perhaps the best but by no means the only example of this is rugby union. It has been quick to embrace a number of commercial income-focused investment JVs across its club and international game – with CVC in Europe, Silver Lake in New Zealand and perhaps with the Ackerley Sports Group in South Africa – with World Rugby also supposedly looking to access outside capital to grow the sport in the USA and boost 7s and the women’s game.
However, having so many separate financing JVs may provide further barriers to the reform the sport needs to grow its appeal or even improve its commercial performance. The negotiating table now not only includes 10 powerful national unions and 4 leading club leagues fighting for commercial survival but also up to four powerful investors requiring a good rate of return. Some have reluctantly concluded that the only answer – especially for the struggling club game – may be to blow the whole thing up and start with a blank sheet of paper. Others see an opportunity in the weakness of others – based on current structures and trends France and South Africa will emerge as the dominant rugby nations if nothing changes.
The Hundred may be best seen as an exercise in self-disruption
For a sport seen as the epitome of old-world conservatism, cricket has proven its ability to reform ever since the threat of the Packer cricket circus in the 1970s. Many of us have looked on in amazement at the very public comments by Lalit Modi (founder CEO of the IPL) on the “totally unrealistic” projections in the ECB’s offer document for The Hundred teams currently looking for outside investment.
But the value of The Hundred teams may be less about their own cash flow projections and more about the option value they represent as English cricket effectively disrupts itself in order to embrace the challenge from Indian dominance of the game and changing consumer tastes.
More specifically, investing in a Hundred franchise today may well represent a better longer-term bet if the growth of the Hundred eventually leads to a merger with the T20 Blast and the 50-over county competitions. This, accompanied by a reduction of first-class teams from 18 to, say, 12 – with four additional Hundred teams with enlarged stadiums over time based in the North East, the South West, Essex and Kent – might well make for an elite county/team structure across all formats that is both long term sustainable and valuable, with The Hundred shareholders in prime position to benefit from this change.
It’s the potential path to reform not the business plans that might underpin the bids – which rumours suggest are currently nearer ECB expectations than Mr Modi’s observations.
Women’s soccer may need to avoid the rigidity and history of the men’s game
Women’s soccer has seen significant growth and development over the last 5 years but its ability to grow further and move towards becoming a tier 1 asset may require it to adopt different and more flexible structures to the men’s game.
Currently, the heavy involvement of leading men’s clubs in the development of the women’s game may be helping the sport in terms of cost and revenue synergies and expertise. But the adoption of the same structure as the men’s game in Europe – 53 leagues and a pan-European Champions league – might be a mistake. A better path might be (1) to adopt regional league structures – especially outside the top 5 markets – (2) to shift the season to ensure a unique playing window for the sport, (3) to embrace and encourage clubs not associated with top-flight men’s teams into the top tier to differentiate the narrative from men’s team rivalries, and (4) to look at more regular inter federation club competitions, especially given North America’s larger role in the women’s game. While the men’s game finds it difficult to make space for FIFA’s club competition ambitions, the women’s game might not. Differentiation in structure and formats, and an absence of constraining historic legacies may be its path to success.
F1’s success comes from its structure
At the other end of the spectrum is motor racing's Formula 1, perhaps uniquely placed in world sport outside the USA – as a strong central entity capable of driving change and reform. It was this unique governance structure – a 100-year independence mandate from the Federation, and the relationship with the teams – where arguably only Ferrari has any leverage – that made it such a good investment. Certainly, it has benefited from getting better at commercial exploitation, and engages better with its fan base, but its ability to do all this and its attractiveness as an investment came down to its structure and its ability to carry through reform. A shift to a North America-based grand prix series and the introduction of meaningful cost controls pushed from the centre created a more competitive race day and strong season-long narrative.
The lessons for investors are pretty clear
For investors of all types, private equity, corporate or sovereign wealth funds, having control of a sports structure and governance that works effectively must be the ultimate prize. The difficulty of achieving that within many current sport bodies creates a bias towards creating new events or even new sports. No doubt this has been some of the thinking around the restructuring of Endeavour group, where one of its main assets – TKO – becomes a body that owns and operates sports from end to end, not just an agency that commercialises them.
The next best option is to buy a small piece of a sport that is already structured efficiently to respond to future challenges. Here franchises within the US team sports become attractive over their global and European counterparts – powerful central commissioners, clear decision-making procedures, a level of exemption from competition law helping to support cost caps and collective selling of rights and a still competitive domestic media market.
The lessons for sports are more complex
For sports who hoped to enlist outside finance to shore up existing teams and formats and effectively buy off their existing stakeholders, a starker truth may be awaiting them. To benefit fully from investment capital needed to embrace the greater competition for attention and money ahead, they may have to make the changes to structure and formats they were hoping to avoid. How to do this within existing voting structures becomes problematic, and reform of those voting structures might only come once an existential crisis is upon them. This gives the disruptors the upper hand – reinforced by recent European court judgements that prevent established bodies from punishing those within the sport who engage with the disruptors.
Ironically embracing the disruptors at the right moment might be the way to square the circle with existing stakeholders – “deal or die”- as the ECB is doing with the Hundred and the PGA is doing, if slowly, with LIV. That’s as long as pre-existing financing arrangements don’t create inflexibility as may still be the case with rugby. And things can still get very messy before the “deal or die” point is reached.
And finally, what about the fans and the politicians?
This may mean more sports and more competitions within sports will operate outside the traditional federation, national association, league and club decision-making pyramid. Without the slow-moving but somewhat pluralistic, if not democratic, processes that these old structures yielded, what new levels of accountability to fans – and elite participants – might be built in beyond a transactional relationship?
And for many governments who were happy to leave sports governance alone when it operated largely as a not-for-profit ecosystem, what should their stance now be? They will need to ensure sports look after their cultural legacy and social obligations as disruptive competitions grow and traditions disappear. We got an initial clue of how they might react with the aborted European Football Super League. But that is unlikely to be the end of the matter.
Investors, sports bodies and politicians all need to focus a bit less on growing income in a steady state and instead wake up to the shake-up ahead.
Oliver & Ohlbaum Associates is an independent strategic advisory firm operating in the media, entertainment, and sports sectors.
