Will Private Equity score in the sports industry?
They say adversity is at the heart of all great innovations and there is no doubt the last 7 months have seen plenty of that. However, not even the greatest futurists among us could have foreseen the rapid partnering of the finance sector and the professional sports industry in the way that it’s currently unfolding.
On one hand, the global sports industry is dynamically growing (at a compound annual growth rate of 4.3% since 2014) with global revenues projected to be more than US$64 billion this year, thanks to multiple revenue streams coming from broadcasting rights, merchandising deals, winning championships and a lot more. On the other hand, the global pandemic hasn’t left it untouched by reducing valuations and creating a need for financing, so there’s no surprise that private equity sees a lot of potential yet to be unlocked on the field.
So let us start this story with 27-year-old Spencer Dinwiddie. A rising star in the NBA, Dinwiddie was drafted by the Detroit Pistons in 2014 before moving to the Brooklyn Nets in 2016 where he continues to play today. What makes Dinwiddie’s story a little more interesting than most is that in 2019, he partnered with long-time friend Sherrard Harrington to create Eonxi, a VC firm focused on the influencer and athlete market, and in January 2020 they launched “DREAM Fan Shares”, a blockchain-enabled platform that offers fans the ability to acquire token rights to future earnings from professional athletes and influencers. Dinwiddie himself was the first offering on the platform, securitising a portion of his three years US$34.4m NBA contract.
To Dinwiddie, the logic was simple, by selling off stakes in the contract he could get access to liquidity now that otherwise wouldn't have been available for years, liquidity he could use as seed capital for Eonxi’s investments and capital raising. And on the other side of the transaction, investors in the token would receive annual dividends, with the guaranteed nature of NBA contracts believed to make it a relatively low-risk proposition.
Securitisation in sports is not a new thing. In 1998, Frank Thomas, the first baseman for the Chicago White Sox, was famously unsuccessful in trying to securitise a portion of his contract because of terms related to a player’s strike. In 2001, NDH Capital managed to securitise the deferred compensation component of a former professional NFL player’s contract that was similar to a 25-year annuity.
But most recently and most relevant to Dinwiddie’s DREAM Fan Shares, was the experience of Fantex. Fantex was a financial services company that between 2013 and 2016 securitised a portion of 11 athletes’ future earnings and then IPO’ed them in a similar fashion to David Bowie’s 1997 celebrity Bond. After failing to get traction in the market and achieving any critical mass the platform was shuttered in 2017 and the company's CEO and co-founder, Cornell French, left the business. What also ensued was a number of lawsuits to collect payment from the securitised athletes. It turns out that getting an NFL line-backer to cough up 10% of their income isn’t always as easy as a nicely worded email.
Only time will tell if Dinwiddie’s DREAM Fan Shares prove to be different to those vehicles that went before him but it’s an interesting rethink of a financial instrument that has been tried, tested and even detonated (think CDO’s from the GFC).
This is just one snapshot of what we are seeing in the professional sports world at the moment. 2019 was a record year for PE investment in the European sports market with around US$911 million invested across 10 deals, the largest deal being Silicon Valley-based Silver Lake's $500 million purchase of a 10% stake in the vaunted English soccer club Manchester City. 2019 was also a strong year for sport investment in the US with US$1.2 billion invested across eight deals and in the post-COVID world we have seen Private Equity latching onto marquee professional sports teams in Europe and the US, we have seen a dedicated PE fund raised targeting minority investment in professional sports teams and we have seen the NBA tap Dyal Capital on the shoulder to raise a US$2bn NBA Investment Fund specifically to acquire minority interests in NBA teams.
One thing is for sure, private equity brings a lot more than just cold, hard cash to the table. But how will their professional approach, focus on efficiency and emphasis on profitability change the game? We are yet to see.