Over the last 25 years, sport management, especially the management of the business of sport, has become more professional. An inevitable process as sport managers once not aware of the gold mine they were sitting on, they started realizing how big profits they were handing to the intermediaries, who at the time were basically the financiers of sports through the long-term rights buy-out, or minimum guarantee contracts.
To keep larger chunks of revenues within the sport, organizations turned towards a more business-oriented structuring. As the lack of know-how slowly decreased over the years, more substantial organizations with higher commercial appeal turned to agencies less and less for pre-financing.
Big profits enjoyed by the agencies diminished, and we have seen them transform their businesses from rights trading to servicing and consulting. But this does not mean that sport institutions’ do no longer need external financing. On the contrary, the rapidly changing sports business environment leads to more widespread demand for it. Sports property owners looking to grow their business through geographical expansion or small to medium-sized clubs seeking to capture a bigger slice of the top-level competitions’ lucrative commercial deals all require external financing for their expansion and growth plans. This is where the private-equity sector, having access to a so-called dry powder of almost 2 trillion dollars and currently struggling to find highly profitable returns in other industries due to the pandemic, comes into play.
The sports industry has always enjoyed higher growth rates compared to many other sectors in the past two decades, and following the downturn caused by the pandemic, the sector is expected to grow at a CAGR of 8% from 2021 onwards. Promising future industry forecasts, accompanied by the combination of private equity’s appetite for untapped potential sectors and the warm welcome by sports organizations, create the environment that will perhaps shape the next few decades of professional sports. At this point, everything seems to be perfect for initiating private investments in sport. Especially in European football, we see individual and institutional investors from the United States, China, Arabian Peninsula, and elsewhere acquiring majority or minority stakes in various clubs primarily in England, followed by those in Italy, Spain, France, and even smaller countries like Belgium.
Naturally, not all of these investments will yield high returns to their stakeholders. So, what would be the key factors for success? Success for the equity investors and success for sport in general, and football in particular. Among many overall economic conditions, industry’s adaptation to developments in media technologies, changes in consumer/fan behavior, and so on, two stand out as determining factors. First is, regulating the industry in line with changing economic factors and investor expectations. Second, managing to maximize sporting success and financial returns within these new regulatory boundaries.
Sport is a peculiar business. The more competitive it is, the bigger the cake is, which brings up the need for strong rivals. European football’s unique administrative structure formed according to historical and social conditions provides all to reach the highest competition on a continental level from the lowest local leagues. And that is one significant factor that makes football so attractive for the masses. Therefore, from a regulatory standpoint, the task at hand is not an easy one. Neither providing the big clubs a privileged share from the top competitions thus widening the already large financial gap between the big and small clubs, nor creating a new closed competition that will deny the very basics of the game’s social influence, will help the future economic and social development of the sport. The need to find an alternative middle ground is obvious.
From a club’s perspective, sustainable sporting success is at the heart of it all while improving income from revenue streams of player trading, ticketing, merchandising, sponsorship, media rights, etc., and maintaining fan engagement and local communities’ participation.
Sport is an industry with no high-tech manufacturing facilities, equipment, and processes, nor has complex supply chains that need to be managed worldwide. It is ultimately a people-oriented industry. Inevitably, it all comes down to people who will create and maintain structures that will benefit those who invest in the sector, the existing owners, relevant stakeholders, and society in general. May they be people trained many years on the job or with academic degrees or people with different industry backgrounds, it will be those with a comprehensive understanding and vision of the sports industry who will make a difference.
Gone are the days of members, board members, and their acquaintances managing sport as another social activity. Professional managers leading either business or sporting performance management teams are needed more than ever. Setting the strategies and aligning human capital to these strategies is currently the foremost vital challenge to be faced.
In the end, the winners will be those who can acquire, maintain and grow the human capital with sports management merit that can best implement the strategies for future success.
Private equity’s entry into sports may act as a catalyst for establishing the aforementioned improved structures and management, which will provide healthy financial returns for investors whose human capital is as strong as their financial resources.