By Steve Argeris, Christopher Weigand, Katy Raffensperger, and Brandon Leppke, of Hogan Lovells
A confluence of market and regulatory factors has made now the prime time for new and creative investment structures for investments in U.S. sports franchises, long an illiquid asset class available only to wealthy individuals or groups of wealthy investors, and “sports-adjacent” businesses, as private equity firms and special purpose acquisition companies (“SPACs”) jump at new opportunities to invest. From a general market perspective, we are continuing to see skyrocketing team valuations, which, coupled with unprecedented levels of “dry powder”, the emergence of the SPAC trend and lengthy periods of revenue losses for leagues and franchises due to COVID-19, have made now the time for many prospective sports investors.
Against this market backdrop, regulatory changes have further opened the door to private equity investment in sports franchises. In 2019, Major League Baseball became the first U.S. professional sports league to allow private investment funds to hold passive, minority interests in multiple teams and the National Basketball Association (“NBA”) and Major League Soccer followed in 2020. This new flexibility in ownership structure provides existing sports franchise owners with access to liquidity, highly beneficial in light of COVID-19-related revenue losses, while still allowing them to maintain control over management and operational decisions. This stands in contrast to funds taking active positions in European clubs and helps insulate U.S. franchise owners from activist pressure and interference in day-to-day operations of the team from minority partners. In exchange, private equity firms, flush with dry powder, have an opportunity to invest in a high-growth, uncorrelated asset class with a history of steady revenue streams.
In contrast to the loosening regulatory environment applicable to private equity firms, SPACs, however, are facing increased regulatory scrutiny from the U.S. Securities and Exchange Commission (“SEC”). More specifically, recent staff statements call into question the historical accounting treatment for SPAC warrants, as well as the ability of SPACs to rely on the safe harbor for forward looking statements under the Private Securities Litigation Reform Act. SPAC IPO activity slowed dramatically in April as a result of these statements, and incremental guidance from the SEC, particularly as it relates to forward looking statements, could have a longer-term chilling effect on SPAC activity.
Despite these potential regulatory challenges, SPACs have had success with investments in sports-adjacent businesses, although this has not been the case with sports franchises themselves. For example, Diamond Eagle Acquisition Corp. (a SPAC that IPO’d in May 2019) acquired DraftKings, Inc., a sports-betting and fantasy sports platform, in April 2020 for $3.3 billion. DraftKings, Inc. closed its first trading day on the NASDAQ up ~10% at $19.35 and is currently trading well in excess of that price. On the other hand, RedBall Acquisition Corp. (which IPO’d in August 2020) was rumored at the end of 2020 to be discussing acquiring a minority ownership interest in Fenway Sports Group (owners of the Boston Red Sox and Liverpool FC). However, reports indicate that the RedBall team was unable to secure the necessary additional outside investment needed to fund the acquisition.
Unlike SPACs, private equity has proven to be a viable investment vehicle for ownership stakes in sports franchises. In April 2021, Arctos Sports Partners became the first NBA-approved private investment fund to hold an interest in an NBA Team, and subsequently acquired a minority interest in the Golden State Warriors. The deal provides a blueprint for the NBA future private equity investment in sports franchises.
Taking all of this together, an interesting potential trend emerges that could help drive both private equity and SPAC investment in the sports industry. Although SPACs may not be a viable investment vehicle for ownership stakes in sports franchises due to soaring team valuations (among other factors), SPACs have proven to be viable for sports-adjacent investments in industries such as sports betting, sports media, sports technology and e-sports. These sports adjacent businesses frequently provide robust ancillary revenue streams for sports franchises, which could continue to drive up the valuations of these franchises. At the same time, transactions such as the Arctos Sports Partners’ investment in the Golden State Warriors have provided a solid model for private equity investment in sports franchises, which, unlike SPACs, have proven to be viable even in the face of unicorn franchise valuations. In fact, these unicorn valuations appear to have only further paved the way for private equity investment as franchise owners seek opportunities for liquidity and private equity investors seek opportunities for this crown jewel asset class. Accordingly, there appears to be ample opportunity for the SPAC and private equity investment models to play off of one another and continue to drive new investment into the sports industry.