Private equity targets inefficient industries with the opportunity to leverage and build value, and sport is right in the cross hairs.
The words “private” and “equity”, when combined, have the uncanny ability to spark immediate anxiety and concern, especially in rusted on sports lovers trying to understand the impact on the game they love. These reactions are fuelled by a reputation of greed, aggression and lack of care for stakeholders. There are of course examples that support this, and private equity is not a charity, but on the other hand there are many positive benefits. It all depends on whether the partner, the structure and the time is right.
Private Equity investment in sport started well before COVID but the global pandemic has only loosened the policies that had kept sport closed to this form of investment. Sports were left exposed as traditional revenue lines were immediately under threat. Only the most commercial sporting organisations with strong balance sheets, diversified revenues and a portfolio of uncorrelated investments felt safe. These organisations were also well positioned to capitalise on opportunities, rather than shift into survival mode or worse, go on life support.
The later needed immediate capital, and private equity is just one of the sources of investment. Governing bodies and leagues around the world are using their commercial rights to access capital to sure up their future. With that capital comes caveats, accepted as the norm in the commercial world, but less understood in the sporting environment.
With this happening in the board rooms, “what is the impact on grassroots and the community” you say?
Interestingly, community sport should be one of the biggest beneficiaries of private equity investment.
Firstly, private equity is often the catalyst for governance reform, whether that’s constitutional change, structural improvements, resource allocation or quality of reporting. They add greater commercial acumen and look to inject expertise into both the board and senior management. They also look to monetise every opportunity bringing revenue into the sport, and that’s where the community game comes in.
Let’s look at the rugby model globally and its impact locally. The majority of funding comes top down. Every four years, World Rugby operates a Rugby World Cup which generates 90% of their revenues. Those funds are distributed to national governing bodies and in turn to state or provincial. The waterfall however stops there and although programs are implemented to support the community game, they really fight for themselves.
This is where private equity will change the narrative around community sport. Rather than just looking top down to monetise the game they will be looking left, right, up, down and anywhere they can. They will also look to leverage other organisations into the value chain. The community sports fans are the ones who buy the subscription that funds the broadcast deal, buys the ticket, merchandise, food and beverages on game days and acquires products and services from the major sponsors. They are also the executives, passionate about the game who drive sponsorship within the corporate’s they work. Private equity will embrace and drive whole of ecosystem uplift, not just the high-performance end of the game, which is easy to focus on when you’re only looking up.
Founding Partner of XV Capital, James Godfrey said, “It’s interesting when you look at privately funded leagues, like Major League Rugby in North America. The owners never look up for funding from World Rugby or USA Rugby, as they are not part of the funding waterfall. Their entire focus is therefore on their fans and the community game. I expect this will be one of the positive effects of private equity coming into Australia and NZ, that the attention shifts as to where revenues come from. The importance of fans and the community game will rise as a major priority which can only be a positive and bridging the gap between the professional and grassroots game.”
Change is not always comfortable but evolving is key to survival. Private equity in sport is here to stay but as stated earlier, it all depends on whether the partner, the structure and the time is right. It’s critical the opportunity is used for transformational reform that clears obstacles, grows the game and benefits the entire ecosystem. Beware however as you play this card once. It requires calm, considered, robust and courageous forward thinking.