Changes in sports ownership rules and improving interest rates could soon lure more private equity and venture capital investors off the sidelines of sports after a recent lull.
The number of private equity and venture capital investments in sports services, including sports teams and related events and services, are trending lower for a second consecutive year, with 11 deals through the third quarter. A single blockbuster deal accounted for the vast majority of private equity investment in sports this year: Silver Lake Technology Management LLC's acquisition of Endeavor Group Holdings Inc., a transaction valued at $21.49 billion.
With the Endeavor deal, aggregate transaction value for sports services deals through the third quarter of 2024 came to $31.64 billion, almost quadruple the $8.81 billion total for full year 2023.
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Challenging economic conditions largely explain the decline in the number of private equity and venture capital-driven deals in 2023 and most of 2024, said Claudine Cohen, managing principal at advisory firm CohnReznick.
"It was all the economy. It was inflation. It was high interest rates. There's still a lot of question marks around consumer spending," Cohen said in an interview.
However, that could change in 2025, particularly as new investment opportunities open up in the NFL, the most-watched sport in the US.
"We will see some more tailwinds that will lead to a lot more dealmaking probably in 2025," Cohen said. "There's also a little bit of a sheep mentality with private equity ... if they are seeing that the returns are good, it will draw a lot of entrants into the market."
New NFL ownership rules kickoff change
A surge in private equity investments in the NFL is expected after the league voted to allow minority stakes in teams.
Under new NFL rules approved in August, a team can sell up to a 10% stake to multiple private equity funds. The private equity stakeholders must hold the investment for at least six years before selling. So far, the NFL has approved Arctos Partners LP, Ares Management Corp., Sixth Street Partners LLC and a consortium comprising Blackstone Inc., The Carlyle Group Inc., CVC Capital Partners PLC, Dynasty Equity Partners Management LLC and Ludis Capital to buy stakes.
"It's not going to be for everyone because a lot of private equity is control-based majority buyouts. They like to drive the operations and the strategy of the business. It's very restrictive for them," Cohen said.
The NFL is the latest and most restrictive among the major US sports leagues in terms of allowing private equity to hold minority stakes in teams. The NBA, MLB and NHL allow teams to sell up to 30% ownership stakes to private equity funds, according to a report from Houlihan Lokey.
The new ownership rules are a "test run" for private equity investments in teams that ultimately will need more capital, said Vicki Odette, partner at corporate law firm Haynes and Boone LLP.
"If this goes well, they will need to increase the percentages that private equity can own because the [teams'] valuations continue to skyrocket, and the capital that they're going to need will not come from individuals, but from private equity," Odette said.
Biggest deals, outlook
Private equity and venture capital has backed two of the 10 biggest sports services transactions in the year through Sept. 30. In addition to Silver Lake's Endeavor deal, Carlyle and the owners of Seattle Sounders LLC invested $58 million in the National Women's Soccer League club Seattle Reign LLC.
The Sounders deal, while much smaller than Endeavor, highlights private equity's growing interest in women's sports. Although women's sports have lagged men's sports historically in terms of audiences and investment, soaring viewership is driving up valuations.
"For many funds that don't meet the criteria of those large NFL-type deals, the WNBA and some of the women's soccer and volleyball teams are some of the very interesting sectors where private equity can probably come in at better valuations and drive more value," Cohen said.
Several women's teams are already valued at more than $100 million, "
The second-biggest sport service deal overall for the year so far came from a non-private equity buyer: Formula One Group parent Liberty Media Corp. agreed to buy Dorna Sports SL, the exclusive commercial rights holder to the MotoGP World Championship, from Bridgepoint Group PLC and Canada Pension Plan Investment Board for an enterprise value of about $4.14 billion.