Sporting franchises across the world have traditionally been owned by wealthy individuals. This has largely been because of the fact that sporting franchises have been viewed less as financially viable investments and more as vanity toys. However, all this has started changing in the wake of stellar returns provided by sporting franchises in the recent past.
The past few years have seen an increased proliferation of private equity firms when it comes to the ownership of sporting franchises all over the world. It has now become common for private equity firms to make investments in sporting franchises.
In this article, we will have a closer look at why private equity firms have started investing heavily in sporting franchises as well as the pros and cons of doing the same.
Why Have Private Equity Companies Started Investing In Sports Franchises?
There are a couple of reasons why private equity investments were not that common in sports franchises earlier and have become increasingly common now. These reasons have been listed below:
- Rising Valuations: The valuations of sporting franchises have now risen to astronomical levels in the recent past.
It is not common for sporting franchises to be worth more than a billion dollars! Even though there are a large number of billionaires in the world, there are still not many people available who can simply invest a billion dollars in a sports franchise. It is for this reason that a large number of private equity firms have started entering this space.
- Change in Rules: The rules regarding ownership of sporting franchises have undergone a change in the recent past.
Earlier, most leagues across the world had rules preventing any kind of institutional ownership of sporting franchises. However, now these rules have been relaxed in most parts of the world. As a result, it has become possible for private equity funds to obtain ownership of sporting franchises.
Benefits of Private Equity Investments in Sporting Franchises
The investments being made by private equity in the field of sports are increasing at a rapid pace because they derive certain benefits from some investments. The details of these benefits are as follows:
- Increased Valuation: Private equity firms generally have deep pockets and they are looking to invest huge sums of money in industries where there are high barriers to entry.
Now, since the supply side of sporting franchises is controlled by the league, such investments appear lucrative to private equity players. Since they are not short of funds, private equity players are known to bid huge sums of money in order to obtain control over certain franchises.
The end result is that the valuation of the sporting franchise has increased significantly. Not only does this benefit the particular sporting franchise but it benefits the others as well since it creates a benchmark which is then used for future valuations.
- Specialized Services: It is important to note that not only do private equity firms provide funds to sporting franchises, but they can also provide other assistance in the form of specialized services. This is because there are many private equity firms that have also invested in other firms that specialize in services such as media spend management, technology-related services, and even event management services. Hence, private equity firms are able to provide expertise as well as investments.
- Reduced Debt: There are limitations to the amount of funds that an individual investor can invest in a sporting franchise even if the investor is a billionaire. Hence, the end result is that sporting franchises end up in a lot of debt.
Some of the most famous sporting franchises in the world are in a huge amount of debt today. In such situations, the ability of private equity firms to inject huge amounts of cash makes it possible to reduce the amount of debt that a sporting franchise has on its balance sheets. This is very important for sporting franchises since their cash flows tend to be sporadic and irregular.
- High Returns: Private equity firms are usually flush with cash. They are generally on the lookout for business opportunities that help them generate a higher-than-usual rate of return. This is where sporting franchises fit perfectly into the plans of private equity firms.
Sporting franchises are known for earning higher than average rates of return because of the stellar capital appreciation opportunities that they provide. Hence, these investments are a symbiotic relationship that also benefits private equity firms.
- Diversification: Last but not least, private equity firms tend to invest in a lot of different businesses. It is therefore beneficial for them to invest a certain sum of money in sporting franchises. This is because the business of sporting franchises does not have any direct correlation with other businesses.
Hence, it fits better in the overall portfolio of the private equity firm since the returns earned by the private equity firm tend to be stable and predictable when they invest in businesses that are not closely correlated with one another.
Hence, the fact of the matter is that private equity firms have started eyeing sporting franchises as investment opportunities. They are also being welcomed by the franchises themselves since the resultant deal provides benefits to both parties.
