Private equity investment in sports: key due diligence considerations

A huge part of the due diligence will be to do with the key assets of the franchise/team a PE investor is looking at. Tangible assets, such as stadiums, hotels and training facilities are all a key part of this. Taking the Premier League as an example, stadium ownership within the EPL varies widely, so a review of the ownership/lease arrangements for the stadium will be required, and similarly, consideration of any revenue-generating opportunities such as selling hotels (a la Chelsea) or training facilities.

Sports teams are, at their very core, people-oriented organisations. Whether that’s fans, C-Suite members or players, people are the lifeblood of every sports organisation. Investors will need to be fully cognisant of this when carrying out their due diligence, and should carry out a detailed review into the contracts for key board members/executives, managers and coaching staff and of course, key players, including termination rights, buy-outs, salaries and incentive bonuses. 

Linked to the players contracted to each individual team, is one of the most complex aspects of any sport: financial and governance regulations. FFP/PSR in the EPL (soon to be Squad Cost Ratio) has hamstrung teams with otherwise wealthy owners from only being able to spend a certain amount based on the commercial revenue they generate. Similarly, there are stringent ownership tests which assess various disqualifying events (e.g. prior regulatory issues, solvency issues and criminal convictions). Outside of football, the governing bodies of other sports often impose their own financial, ownership, and governance criteria, and these often vary widely between different sports. Navigating these requirements is often a minefield, and it can be the most decisive factor in determining whether an investment is viable or not.

A key, yet sometimes overlooked aspect, is the commercial deals a team/franchise will have in place. In the era of financial regulations across sports globally, commercial revenue has never been more important to the success of a franchise. A detailed contract review of (amongst other things) term, termination rights and change of control clauses will need to be carried out to ensure that any unprofitable (or less profitable) deals can be safely and inexpensively terminated.  

This is often the most valuable asset for any team/franchise (for example, Real Madrid’s brand is valued at €1.921 billion). Key areas include trademarks, team logos, merchandise and broadcasting rights. The diligence process should look into confirming ownership and identifying and potential or pending disputes. Of course, a key part of the success of the brand will be the commercial deals available to the team, and the success of the team in their chosen sport and so whilst it may seem a safer bet to pursue a more established brand/team, there will be more to be gained in the long term in unearthing an underappreciated/underutilised gem.

At Russell-Cooke, we have a breadth of experience in carrying out both share and asset sales & acquisitions, including the sale of Leyton Orient FC. In addition, our regulation team helps sports clients to navigate complex legal and regulatory governance frameworks, working seamlessly with our corporate and commercial & real estate, planning and construction teams to review and advise on complex commercial arrangements, IP issues and real estate matters. If you are looking to invest in, or purchase, a sports franchise, Russell-Cooke has the skillset to assist you.