Private investment into sport - what governing bodies need to know

Published 04 December 2018 | Authored by: Lydia Zakrzewski, Chris Smith

Transformational private investment deals in sport are big news not only for the target club or event, but for the sport as a whole and are likely to remain part of the landscape as the industry continues to mature and globalise. Transactions such as the sports investment group Kosmos’1, a ground-breaking agreement2 with the International Tennis Federation (ITF) in relation to a 25-year, US$3 billion project to revamp the Davis Cup competition and create an annual season-ending Finals event, involve a wide range of corporate, commercial, financial, sports governance and regulatory issues. Finding a balance between the investor’s commercial interests and the wider sporting and regulatory interests of a governing body is a complex challenge.

This article considers the sports sector from a private investor’s perspective, why they are investing more now than ever, and looks at different models for investment. It then examines external investment from the sports’ point of view and considers some common legal and commercial issues that sporting bodies could address in order to make their sports more attractive to external investors. Specifically, it looks at:

  • The sport investment landscape: why and how private investors are investing

    • Equity deals

    • Asset purchases

    • Partnerships and collaborations

    • Creation of “new generation” events

  • Legal and commercial considerations for sports governing bodies seeking investment

    • Commercial control vs regulatory independence

    • The necessary balancing act – relationships, tensions and public perception

    • The ability to identify “assets

    • Key conditions – early stage considerations and long-term strategy

    • Exit plan

Sport investment landscape: why and how private investors are investing

The “business of sport” has seen a period of unprecedented growth and diversification in recent years. This has been driven by a combination of innovations including greater broadcasting opportunities offered by disruptive digital technology, such as OTT platforms, which enable sports to adapt to the changing viewing habits of their fans and learn more about them in the process, the revolution of sports betting including the legalisation of sports betting in the US3 and the growth of mobile betting applications and websites, the growing popularity of e-sports and the general enhanced branding opportunities available to an increasingly global marketplace.

These developments have helped raise the profile of sports themselves and have been instrumental in their evolution from recreational leisure activities to global businesses. Sport is increasingly seen as complimentary to and influential in adjacent markets including healthcare (for example fitness and performance tracking technology), retail, gaming and entertainment, to name a few. In summary, the sports sector has become an attractive option for investors who are not interested in just acquiring “trophy” assets, but are more interested in realising a sizable return on investment within a growing and increasingly influential sector.

We are seeing more and more investments into sport and the methods of investing are also evolving in interesting ways.

Equity

This is a common form of investment whereby the investor acquires shares in a company operating the target sporting entity in return for its investment. Obvious examples of such equity investments have come in the form of purchases of football and other sports clubs by private owners, with varying degrees of success.

Less common has been equity investment into an entire sporting competition, such as CVC’s investment into Formula One, which it has subsequently sold to Liberty Media for a large profit4. The success of that investment was in large part due to Formula One being structured in a way that allowed commercial considerations to be at the forefront of the sport’s development; investor friendly corporate structures within sports are explored in the “commercial control vs regulatory independence” section below. However, investment into a sporting competition or governing body can be more difficult and often controversial when multiple sporting stakeholders are involved; CVC experienced this when it had to revise its offer (from £275m for a majority share to just over £200m for a minority share) to run the commercial arm of Premiership Rugby which is owned by its member clubs. Investor-friendly internal structuring of the sport is examined in more detail in below.

Asset purchase

Another means of investment into sport, and one which has hit the headlines recently, is where the investor buys a specific sporting asset which will generate the return on its investment, such as a sports stadium. Shahid Khan’s £600 million bid for Wembley5, although failing at the last hurdle, shows an increased appetite for the acquisition of sporting assets by private investors.

Partnership / Collaboration

An interesting development in this area is the rise of "partnerships" between the investor and the sporting governing body, such as the aforementioned Kosmos/ITF collaboration in respect of the Davis Cup. Typically, rather than resulting in the investor owning equity in a sporting entity or owning a sporting asset, such collaborations essentially involve contractual arrangements between the investor and the relevant sports body under which certain commercial elements of an event are licensed by the governing body to the investor in return for a fee paid to said governing body. The investor can develop the event to increase revenue generation (for the benefit of the investor), whilst the governing body can use the guaranteed income paid by the investor for the commercial rights to further other key strategic goals for the good of the sport.

Creation of “New Generation” events

Instead of seeking investment into their established events, some sports are creating innovative new events to attract fresh audiences and to tap into new income streams. In most cases, a new legal entity will be created to own, organise and manage the event and to receive external investment. Structuring a new event in this way can "ring-fence" it from the traditional formats of the sport in question and can also make it more attractive to potential investors.

The investor can focus its funding and attention on developing the new event and, given that it is likely to be a riskier proposition than established events, it may be able to negotiate a higher level of equity and control over the commercial aspects of the event than would otherwise have been available without this structural separation of the new event from traditional formats of the sport.

Examples of recent “new generation” events include:

  • the T10 League, the first internationally approved professional ten-over cricket league launched by a private entity called T10 Sports management and held annually at the Sharjah Cricket Stadium in the UAE. It’s matches are 10-overs-a-side and the duration of a match is 90 minutes;

  • the Next Generation ATP Finals, created by the Italian Tennis Federation in association with the Italian Olympic Committee as a new ATP tournament featuring the world’s top 21-and-under singles players of the ATP World Tour season. The first five editions of the Tournament will be hosted in Milan, Italy from 2017 to 2021. The competition introduces new rules including shorter sets, no-ad scoring, no lets, electronic line calling and the shot clock;

  • the Hundred, the working title of a proposed professional 100-ball cricket league run by the England and Wales Cricket Board which will offer faster matches with 15 traditional six-ball overs and a single 10-ball over to complete each innings. The league will consist of eight city-based franchise teams, each of which will field both a men's and women's team; and

  • the International Swimming League (ISL), a four-day event in association with the Italian Swimming Federation which was to feature eight international clubs each made up of 12 male and 12 female swimmers to take place in Turin, Italy in December 2018. They would have competed over two days of races across all swimming events in a short course pool before the four teams to have gained the most points progress to a grand final over the following two days. Citing short notice, the International Swimming Federation (FINA) did not approve the event and threatened to impose sanctions resulting in the event being cancelled. However, despite this, ISL has outlined plans to run a full series of events from late 2019 which have been warmly welcomed by the athletes within the sport6.

From an investment perspective these new format events, which attract new and younger fans, often have shorter, more intense matches and allow for a greater number of commercial breaks, can be seen as having increased revenue generating potential. From the sports governing bodies’ perspective, creating such new events allows the traditions of their sports to be protected from the investor’s influence and so lessens the risk that fans will view that investment as a "sell-out" of the sport as a whole.

Legal and commercial considerations for sports governing bodies seeking investment

Commercial control vs regulatory independence

Investments into and collaborations with sports governing bodies are on the rise. However, every sporting body is different and the ease with which investment can be injected into a sport or sporting event will largely depend on the internal structuring of the sport itself.

For private investors, the degree of control is fundamental. However, on the whole, sports governing bodies are extremely reluctant to cede any control over their sport, citing their responsibility to maintain the sport’s integrity and traditions. Where a sport has separated its commercial rights from its governance structure, it should be easier for an investor to exploit those commercial aspects to generate its financial returns whilst the governing body preserves its independence over how the sport itself is governed and played.

As mentioned, the pioneer and prime example of this structural separation is Formula One – the sport is governed by the Fédération Internationale de l'Automobile but a completely separate entity owns, controls, promotes and exploits the sport’s commercial rights (Formula One Group). This made it perfectly suited for external investment firstly by CVC and latterly by Liberty Media. However, for those sports considering following this model, it is important to weigh up the benefits of attracting investors with a commercial focus against the impact and influence they will have on the sport, its traditions and accessibility.

Complications arise where the target sporting entity is owned by a collection of clubs or unions whose objectives are more sporting than commercial, particularly if their interests are not entirely aligned. Premiership Rugby’s recent rejection of CVC’s takeover bid is an example of how difficult it is to reach an agreement when multiple parties are involved, particularly if a super-majority or unanimous vote is required to effect such fundamental change. It is therefore important to consider internal restructuring to make a sport a more investor-friendly model if the sport is contemplating external investment.

It’s a balancing act – relationships, tensions and public perception

Before accepting investment for a specific event or a series, it is important to consider the politics and current calendar of the target sport. FIFA’s president, Gianni Infantino, recently proposed an investor-fuelled, revamped football Club World Cup featuring top clubs internationally7. This event would have been in direct competition for teams, audiences and revenue with the Champions League and resulted in a negative reaction from UEFA (European football’s governing body and the organiser of the Champions League). Due to the opposition, Infantino’s proposed event is currently going through a consultation process which will explore the merits of the new formats in more detail and will be presented at the next FIFA council meeting in March 20198. Regardless of the outcome of the consultation, this sort of public conflict may be damaging and may deter future investors, participants and audiences alike.

There is an important balance to be struck here. Those sporting entities considering accepting external investment must not be overly influenced by the potential commercial gain, and should fully consider the position of the proposed event or series within the current calendar and the effect that the investment will have on the sport as a whole. With so much at stake, it is advantageous to have the support of the sport’s governing body to encourage coexistence and positive publicity.

Ability to identify “assets

In an investment scenario, the sports organisation must be able to clearly identify and evidence the ownership of the assets being licensed, sold or transferred. Being able to demonstrate a clear chain of ownership is particularly important, and investors will often carry out substantial due diligence to ensure that the assets they are acquiring an interest in belong to the sports body that they are contracting with. Those assets might include, for example:

  1. intellectual property (e.g. key trade marks);

  2. sponsorship rights;

  3. hosting rights; and

  4. media / broadcast rights.

Any agreement for the sale, license or other exploitation of assets or rights in a sport or event must clearly identify each of those assets or rights being sold or licenced to the investor by the sporting body, and what the investor can do with those assets or rights (including any restrictions). This should ensure that the investor is clear from the outset as to the rights it is acquiring and should avoid future disputes as to the parties’ respective rights to control and exploit aspects of the sport in question.

Key conditions – early stage considerations and long-term strategy

The parties to any form of investment transaction in the sports sphere will need to be very clear on the key terms and conditions of the deal and, in a partnership scenario, will need to develop guiding principles (which will assist in fostering a successful relationship between the parties) at an early stage. Key issues, terms and other conditions to be negotiated will include:

  1. the fees / price payable for the property / assets / rights;

  2. the rights granted (if any) by the sports body;

  3. the key performance indicators (if applicable);

  4. the obligations placed on both parties (which can be substantial and wide-ranging);

  5. the way in which the property / rights may be exploited;

  6. warranties (and indemnities) provided by both parties; and

  7. evolution, exit procedures (discussed below) and sport-specific requirements.

The parties will often have differing priorities, as noted above. From a sports organisation’s perspective, the protection of the image, reputation, integrity and regulation of the sport will be paramount whereas the investor will be primarily focused on maximising profits and seeking control over assets / rights. Having said this, there is likely to be a high level of collaboration between the parties with the overall aim of promoting the sport which will in turn protect the investment.

In a partnership arrangement, it will also be necessary to negotiate and put in place policies, procedures and structures (e.g. steering committees) to oversee the management, implementation and evolution of the venture. The parties will want to ensure they are fairly represented and procedures are in place for resolving inevitable differences of opinion and conflicts of interest etc.

Exit plan

One of the key elements in any sports investment will be the provisions surrounding the "exit" of the investor. Both parties will want to ensure they are adequately protected in this regard, either on termination of a partnership or, potentially, the sale of the investor’s interest. The sports body in particular will want to maintain a strong position to ensure it is able to take over and continue to run an event or competition when its agreement with an investor comes to an end, for example.

Further, in circumstances where an investor wishes to sell its interest to a third party, the sports body will usually seek approval rights over any potential new owner of the assets, and may also request a veto right in relation to a proposed sale of the investor’s interest to certain third parties (e.g. parties which the governing body may consider to be inappropriate from a stakeholder / political perspective and/or parties whose involvement might comprise, or be seen to comprise, a conflict of interests). Further, the sports body might seek to share in the “upside” of any sale of the investor’s interest.

Finally, where an investment is structured as a partnership, it must include an exit plan which will contain detailed terms to ensure that when that partnership comes to an end or is terminated:

  1. there is a smooth transition of the rights and assets (and/or event) back to the sports body; and

  1. the responsibilities of both parties (e.g. in relation to the transfer of intellectual property, data, documentation, other information (such as commercial and sponsorship information) and the provision of support etc.) are clearly set out.

Conclusion

In 2016, KPMG estimated that the global sports industry was worth in the region of $600bn and $700bn9, a value which has continued to grow at a rapid rate year on year. The opportunities to invest in sport and the potential returns on such investment have also increased and have in turn led to new market entrants and an appetite to engage with, and exploit opportunities in, the sports industry.

This increase in investment activity in sport has meant sports governing bodies and other organisations in the sports sphere are having to adapt and think carefully about their role and the position of their sport in the "market". There are many new opportunities for sporting bodies to improve the commercial value of their sport whilst also ensuring that their sporting traditions are preserved and their governance structure remains independent.

The tensions and competing interests that exist in various scenarios and structures for investment in sport, and the legal and commercial issues that arise between the parties involved, can be wide-ranging and difficult to reconcile. Identifying the key concerns of each party, clarifying exactly how certain assets will be exploited commercially, and negotiating appropriate terms becomes particularly important in such circumstances.

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About the Author

Lydia Zakrzewski

Lydia Zakrzewski

Associate, Charles Russell Speechlys

Lydia specialises in corporate advisory and transactional work including, mergers and acquisitions, private equity and reorganisations with a focus on the Sports sector.

Chris Smith

Chris Smith

Associate, Charles Russell Speechlys

Chris is a multi-specialist lawyer who advises a range of clients in the sports, tech and lifestyle sectors. He played tennis to a professional level before entering the legal industry.

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