Charting Course: Capital is Coming to Sports

Last week’s news from the golfing world was seismic to say the least. I don’t think anyone could have predicted the “merger” of PGA Tour and LIV Golf and the swift turn of events that led to it.

Rarely do we see two prominent organizations in the same domain change direction so swiftly. The pivot from rivalry (on the golf course and in the courtroom) to commercial partnership is still being digested by the golf and professional sports communities. For those interested, I joined CNBC’s Squawk Box – alongside former SEC Chair Jay Clayton – to help unpack things.

If you take geopolitics out of the equation for a moment, this is a stark reminder of how fleeting time can be when an outsized financial investment is at stake. It’s also a valuable lesson for leaders across other professional sports – the status quo does not last forever. Every senior sports executive must strategize now for how to accommodate fresh capital infusions down the line.

Implications for the Game of Golf

The Saudi Public Investment Fund (“PIF”) stands to commit billions to the newly formed entity for PGA, LIV and DP’s commercial rights. Despite the check size, this is not an isolated incident. Far from it. PIF has already invested in the alternative asset class of pro sports through the English Premier League (via Newcastle United), marquee live events across boxing and professional wrestling, and by reportedly bidding to acquire Formula One racing earlier this year.

Golf, however, is in a different position. It’s a global game that operates regionally through different tour organizers. It can be argued that this fragmented structure has prevented the sport from realizing its true value.

What we witnessed last week should be the impetus for consolidation of professional golf on a global scale – a move that ultimately benefits a broad array of stakeholders including pro golfers, fans and enthusiasts, corporate sponsors, and a host of other commercial players. Over time, I expect PIF’s investment to manifest as high-quality golf courses (new or improved), attractive entertainment and residential districts adjacent to these destinations, and the emergence of new technology platforms for training and content consumption. On top of fresh capital, PIF’s international network of relationships will help accelerate golf’s entry into new markets.

Two Camps; One Challenge

Regardless of this new PGA/LIV vehicle’s success, we can be certain that PIF will not be the last sovereign wealth fund to partially allocate to high-quality assets in sports. This puts teams and leagues in a position where they must play both offense and defense.

The administrators of truly global sports (think soccer, boxing, MMA) may be more inclined to consider external capital as a strategic threat – especially if their focus is regional. But even big American sports like basketball and hockey could face new competition from international upstart leagues.?

As with every business, league management must constantly analyze and plan for competitive threats. It’s worth noting that U.S. organizations like the NFL, NBA, NHL, and MLB have a clear lead over their counterparts, and likely have less to worry about. This dynamic, however, hasn’t stopped industry authorities like NBA commissioner Adam Silver from noting the great benefits that international capital can bring to the table via non-controlling investments.

The massive amount of capital around sports also provides incredible opportunities. For example, it’s not hard to imagine an American sports league using money from a sovereign wealth fund to expand its international business, growing the pie for everyone, or devising new ways to reach and engage younger audiences for longer-term sustainability. The possibilities are endless if a league has prepared to embrace them.?

Resting on your laurels is a sure way to be disrupted. This is the time for leagues to consider how they would put this external capital to work – whether it’s to cement their stature or create new value.

A Sign of the Times

Why is so much capital seeking out opportunities in sports right now? One big reason, in our opinion, is that professional sports at-large are more globalized than ever. Advances in media, IP distribution, and technology are huge drivers. We believe that this growth has attracted more professional investors who also apply more sophisticated investment strategies. Examples include:

Longer Time Horizons: Unlike the 5-to-10 year holding periods we’re accustomed to seeing in private equity, several firms are now using “longer tail” funds to deploy capital in professional sports. Think 15-to-20-year vehicles with longer shelf lives and lower annual yields that can still meet investor appetite for risk-adjusted returns and?diversification.

Structured Equity: The sports economy (and its reputation for steady cash flows) has also been the beneficiary of “structured equity” investments. These financial products combine the merits of equity and debt investing, including greater downside risk management than control buyouts or growth-stage venture capital, making them an attractive option for more cautious LPs.

As instruments that derive value from underlying equity’s performance, structured solutions can also incorporate a pre-determined maturity date, an interest or a coupon component, and ‘priority status’ in the event of the underlying asset’s liquidation.

Private Credit: The resurgence of private credit is a hot topic in financial services. As rising interest rates have made private lending more viable for creditors, we are seeing several sports properties take on loans secured by a share of their future earnings (e.g., from media rights). For the properties that took on excessive debt in a low-rate environment, refinancing solutions on more attractive terms can provide a route into pro sports investing.

Final Thought

Like it or not, the fresh capital is coming in. The question now becomes who will embrace it, and who risks being displaced.

There can be no assurance that historical trends will continue. Information included herein relating to market characterization is based on Bruin Capital’s subjective determinations that it believes are reasonable, but others may disagree with such characterization. Other market participants may make different determinations based on the same underlying data. There can be no assurance that Bruin Capital will be able to source partnership opportunities, successfully implement its business strategy or that any holding will generate a return of or on capital. Our views and opinions expressed herein are current as of the date of this article and are subject to change.

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