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Private Equity Investment in Sports: The Off-centre Opportunity

                 “The field of sport is akin to a jigsaw puzzle, where many pieces need to come together to produce a long-term successful athlete. The athlete’s success depends not only on his/her talent but also on the support system s/he receives”

                                                                                                                                                                                        –Sudha Murthy

Earlier this year CVC Capital Partners agreed to a USD 3 billion deal with Spain’s soccer league, La Liga, in return of 10% of all media returns for the next 50 years. Closer to home, in a dramatic turn of events, when the BCCI invited bids for two new Indian Premier League (IPL) teams, a windfall of INR 12,715 crores was definitely unforeseeable – the involvement of the global private equity firm, CVC Capital Partners, to “take over” Ahmedabad added to the mystique.

For the past 13 years, IPL has been the benchmark for exemplifying what private investments can do to a sport and has opened the doors to attracting more corporate investments in other sporting ecosystems. For instance, handball is set to hit India’s television screens next year as the Premier Handball League (PHL) supported by Bluesport entertainment under the patronage of the Handball Federation of India[1].

The Indian Super League (ISL) has also successfully managed to establish itself in terms of viewership and engagement. Furthermore, sports such as hockey, kabaddi, wrestling, badminton and volleyball have managed to garner a significant following and enthusiasm in the country their respective sports league. Owing to stellar performances in the Tokyo Olympics by the likes of Neeraj Chopra, Mirabai Chanu, P.V Sindhu and Ravi Kumar Dahiya, brands are reeling to sign them, driving commercial valuations and impact associated with their respective sports onto a profitable highroad. Hence, India is an ideal ground for significant investments in the field.

Up until a few years back, the involvement of leading conglomerates like JSW, Edelweiss Group, Embassy Group and Infosys had always been purely philanthropic in nature.

However, with the visible shift in trends, the next consideration is whether private equity investment in sports would be a slam dunk!

 

Factors Driving Valuation in Sports Teams and Leagues

Odisha FC, nicknamed the Kalinga Warriors, under the ownership of a global shipping giant, is the most valuable club in the ISL standing at an impressive INR 433.26m. In a more impressive feat, the Pro Kabaddi League, since its inception in 2014, has managed to rank above the ISL and stand in close competition with the IPL in terms of viewership. In 2015, Vivo signed a 300-crore engagement to become the league’s title sponsor. In 2018, over 70 sponsors competed to invest in the league[2]. The previous edition of the event was sponsored by Dream11, while big names like Tata Motors and Honda also retained their sponsorship[3]. Additionally, with the new class of spenders from the Fintech and EdTech industries like CRED, Unacademy and Upstox making their presence felt in the roaring business of cricket, it is evident that private equity investment and sports are definitely a match!

In alignment with the abovementioned dynamics, the following factors seem to be responsible for driving valuations in these sports teams and leagues:

  1. Scarcity and the inherent elite status

Between IPL, ISL and Pro-Kabaddi, there are only 33 teams across the board. Likewise, there are only six significant sporting leagues that show potential for lucrative returns in the country[4]. On the international front, according to the PitchBook data[5] in the United States, there are only 151 teams across the NFL, NBA, MLB, MLS and NHL. Similarly, there are only 98 teams in the Premier League, Serie A, Bundesliga, Ligue 1, and La Liga. Hence, since the supply is limited, the demand remains high, which leads to sky-rocketing prices and bigger returns!

  1. Monopoly

In addition to the limited available options, these leagues rarely expand. Hence, from an investor’s point of view, working in the confines of a marketplace with limited competition and foreseeable projection of factors like market share and revenue is easier.

  1. Illiquidity

Buying shares of a sports team is challenging since most teams are not listed on the stock market. Options like affiliations and exchange-traded funds are currently the only means through which individuals can participate in the functioning of their favourite teams. Therefore, when shares are not traded frequently and the ownership is complex, buyers are keen to pay a premium if and when the opportunity arises.

  1. Fans and emotions

For private equity firms, financial profits and ancillary gains are definitely driving factors. However, when it comes to sports, followership and emotions play a significant role. Andrew Laurino of the PE firm, Dyal, pointed out once that it is more fun to own your favourite sports team than root for a chemical plant.[6]

  1. Money

Considering the financial dynamics and broadcasting revenues involved, sports do offer a fertile ecosystem of astronomical returns. For instance, Sony acquired the media rights for IPL for the first 10 years for approximately 8,000 crores. For the next 5 years, Star India bagged the media rights for 16,000 crores. Media rights for IPL are scheduled to go up for auction in 2023[7] with an expectation of the deal closing in at over 30,000 crores[8]!

 

Key Trends Favouring Private Equity Investments in Sports

The sports industry is expected to grow tremendously in the year 2022, by reaching a valuation of USD 614.1 billion globally. The Asia-Pacific and the Middle East are expected to become the fastest emerging markets in the sports industry, with annual growth rates of 9.04% and 6.2% respectively, in the next few years[9].

The key trends that are expected to drive considerable growth and offer new investment opportunities are:

  1. Because of the pandemic’s rapid integration of technology into all aspects of life, the field of sports is witnessing never-before-seen consumer behaviour. Leveraging a combination of virtual reality, new streaming media and mobile technology, the industry has expanded its experience to a global audience and paved the way for new advertising revenues.
  2. The fitness industry is booming, driven by the new age of health-conscious consumers. The trend has resulted in a growth in participatory sports.
  3. The Indian gambling industry forecasts revenue growth that could hit INR 118.8 billion in 2023[10]. Consequently, the fantasy sports and betting industries are undergoing significant regulatory changes, which are set to streamline the industry and offer more substantial and comprehensive investment opportunities.
  4. Similarly, esports is set to experience a positive movement owing to the development of more sophisticated VR tools.

Since participation in sports will experience growth from traditional and newer channels, investment in associated ancillary industries seems lucrative.  

 

Issues With Private Equity Investments in Sports

Unlike other countries, India lacks a robust, centralized, and comprehensive regulatory framework governing the sport, despite the recent changes (being) introduced over the last decade in this regard. Issues pertaining to competition law, betting, anti-competitive actions, match-fixing, and dispute resolution are dealt with varying legislative frameworks spanning from Torts to criminal law.

Investors are organising collaborations with teams and sporting authorities to access a broader consumer cohort since cemented footholds and sponsorship guarantee greater returns on investment. Often, such sponsorship and advertising campaigns during a sporting event, or associated with any sportsperson, lead to ambush marketing by other competing brands. Moment marketing is another factor that treads upon the intellectual property rights of the players and dents the commercial gains of the investors.

It is therefore prudent to formulate a competent legal framework to curb doping, betting, match-fixing, ambush marketing, sports-related arbitration, and mediation and dispute resolution. There is a pressing need for cohesive and specific legislation comprehensively covering sports in India to be implemented.

Further, at a time when private investment activity in sports is moving away from CSR and philanthropic objectives and short-term collaboration and involvement, it is pertinent to ensure that the regulatory framework aligns with the commercial interests of investors while upholding the integrity of sports. The absence of the same can and will dissuade significant private party involvement in the area.

While there are still obstacles to be overcome, the prospects for sports are evident, and successful case studies have already begun to support the investment thesis. Investors and sporting organisations must be aware of possible hazards, but under the proper circumstances, the partnership has the potential to produce radical change and growth in the sector.

At a time when private investment activity in sports is moving away from CSR and philanthropic objectives and short-term collaboration and involvement, it is pertinent to ensure that the regulatory framework aligns with the commercial interests of investors while upholding the integrity of sports.

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Sports and Business: Long Term Thinking is Vital for Success in Both

India’s sportspersons have returned to India after a fantastic performance at the Tokyo Olympic Games. Neeraj Chopra’s javelin throw gave India its first ever gold medal in athletics (and second in an individual event). Weightlifter Mirabai Chanu and wrestler Ravi Dahiya won us two silver medals, while boxer Lovlina Borgohain, badminton player P V Sindhu, wrestler Bajrang Punia and the men’s hockey team won bronze medals. Our overall tally of 7 medals is the highest at any Olympics. Overall, a very creditable performance the nation should be proud of.

As a proud Indian, I too am hopeful that the exposure and “big stage” experience gained by our sportspersons in Tokyo, combined with better training, practice infrastructure and facilities will help India better its 2021 performance. However, I worry about the flurry of speculative discussions in the media about how many medals India will win at the 2024 Paris Olympic Games.

The media is full of expert analysis and recommendations on what the government and sports federations need to do to ensure a higher medal tally in 2024. Sportsperson I am not; nor am I a seer. Therefore, I do not know what individuals and teams need to sustainably enhance their performance and win medals for India in the future. But I do know that ad hoc actions will not suffice.

A structured, long-term approach is essential for sustaining success in sports and business

I see a clear parallel between the world of sports and the corporate world, with which I am more familiar. No matter how talented and skilled an individual athlete or player is, skills alone are not enough to win him/her a medal. They need the right coaching, top quality training facilities, regular opportunities to compete with the world’s best, the right nutrition, inputs on biomechanics, mental conditioning etc. Having all this also does not guarantee a medal-winning performance, because, on the day, anything can happen.

Similarly, individual brilliance or an innovative new idea or product alone will not guarantee success in business. India needs to strengthen its ecosystem for business, with a particular emphasis on startups and young ventures. Coaching and mentoring to give better shape to business ideas, access to risk capital, support during the early stages of the business, tax breaks, the right kinds of sector-specific laws and regulations that will help businesses become viable sooner are all elements of what our business ecosystem requires.

Just as world-class sports infrastructure cannot come up in every state or city in the next year or two, incubators cannot come up everywhere. Junior talent identification and nurturing programs too can take 8-10 years to produce top-class sportspeople who are ready to compete on the global stage. Even if physical infrastructure comes up, finding equally qualified coaches for all locations will not be easy.

Although we know that Artificial Intelligence, Cybersecurity, Clean Energy, Electric Vehicles etc. are all critical emerging areas, it is naïve to expect that overnight India will become a leader in these sectors. The same is true of our performance in sports as well. Countries prioritize participation in those sporting events that afford them their best chances of winning medals; India is no exception. This same thinking needs to be applied to business as well. The first step is to mindfully identify sectors that are critical to our future- for example, clean energy, healthcare, space, drones, defence equipment (aircraft carriers, submarines, 6th generation fighter aircraft, anti-missile systems), electronic chips etc.

Then, just as countries identify individuals with promise in the “priority sports”, the government of India (and the private sector) must identify/agree on ventures with the potential to become world-class and nurture them. Within the national business ecosystem, smaller regional ecosystems need to be created across the country, based on resource availability and other strategic considerations. Individual states must compete with each other to build such ecosystems and attract the best entrepreneurial talent. Doing all this will definitely give India a stronger and more vibrant domestic industry, besides acting as prime movers for overall socio-economic development, employment generation and GDP growth.

Spotting and nurturing young talent in various sports must be part of our education system

Also, our education system has focused on academics, with sports and other activities labeled as “extra-curricular”. This needs to change in two ways. First, right from the primary school level, children must be encouraged to participate in different sporting activities. Trained teachers and specialist staff must spot talent and at the right ages, enable specialized training. This obviously must be done with the parents’ active cooperation. Second, for super talented children who wish to pursue sports as a possible career option, specialized institutions must be set up (either by state/central governments or in PPP mode). Children in these institutions must be given extra coaching and training, while also being allowed to pursue a basic level of academics that will help them once their sporting careers end. Seasoned athletes must be invited to train at these facilities so that young aspirants can learn and benchmark against the country’s best. The National Education Policy 2020 seeks to make sports and physical fitness more central to school education, but the proof of the pudding lies in the eating. Only time will tell how seriously this is taken in a country that values grades and marks over excellence in a chosen field.

Concerted action is essential not just for a US$5 Trillion economy but also a richer medal haul in the future

Winning in sports is not easy- and neither is succeeding in business. If we are not quick to act, flight of entrepreneurial talent to other countries is a distinct possibility, and in time, our businesses (and athletes) may end up competing with rivals who also had their origins in India- and could perhaps have been part of our sports contingents and GDP. What is worse, we may be ranked as poorly on innovation in critical areas as we have been in world sports.

Just as countries identify individuals with promise in the “priority sports”, the government of India (and the private sector) must identify/agree on ventures with the potential to become world-class and nurture them. 

 

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The football transfer: How the Barcelona – Messi matter turned murky

“In Barcelona, on 14 December 2000 and the presence of Messrs Minguella and Horacio (Gaggioli), Carles Rexach, Director of Football of F.C.B., hereby agrees under his responsibility and regardless of any dissenting opinions, to sign the player Lionel Messi, provided that we keep to the amounts agreed upon.”

 

Carles Rexach, the then Director of Football of F. C. Barcelona, scribbled this on a napkin to sign up a young Argentinian wonder kid, Lionel Messi, as he had never seen such a talent before and did not want to lose out on him. Thus, began the fairytale journey of Messi’s tryst with Barcelona and as history suggests this gamble that played out 20 years ago, turned out to be the most profitable for the club and rewarding for Messi.

Messi has been the Messiah for the club on several occasions, wriggling the club out of tough situations with his magic touch. With Messi on their side, Barcelona established itself as a formidable force that won everything that world football could offer. As all good things inevitably come to an end, this fairytale match appeared to have come to an end when Messi formally notified the club of his intention to unilaterally terminate his contract.

The events that transpired after the news broke out of Messi’s intention to leave highlight some troubling issues that are currently plaguing the football transfer market; in particular, the breakdown of relationships between a club and a player at the instance of their squabbling over better wages and contracts. Messi’s dispute with Barcelona revolves around the unique nature of a football contract and the role relationships play in such contracts.

 

In order to understand the dispute better, one must first have a formal understanding of the football transfer market.

 

What is a football transfer? Generally, a transfer in football is like any other business transaction that takes place between two football clubs and involves the transfer of a player who is under a contract with one club to another club in consideration of a fee known as a transfer fee.

 

A transfer is considered complete when the buying and selling clubs agree on the terms of sale and when the buying club enters into a contract with the player.

 

 

How does football transfer work?

If a transfer has to take place, the buying club must first approach the selling club and inform in writing before entering into negotiation with the player. This is legally mandated under Article 18(3) of the FIFA Regulations on the Status and Transfer of Players (the ‘Transfer Regulations’).

 

It is important to note however that the ultimate bargaining power in a transfer still lies with the selling club.

 

 

What is a transfer request?

A player, who is dissatisfied with his current club and finds himself in a position wherein the club has rejected all transfer bids from other clubs, may put in an official transfer request to the club. The only drawback is that such a request has no legal bearing and the club may choose to reject the plea.

 

 

When can a football transfer happen?

A transfer can take place during the “registration periods” which are provided by the governing bodies of the respective national associations.

In Europe, there are officially two periods during which transfers can take place – summer (July 1st – August 31st) and winter (January 1st – 31st) transfer window.

 

What is the duration of contracts between the players and the clubs?

The duration of a contract entered into by a player with the club may vary from short term to long-term depending on a variety of factors such as the age of the player, their skill, commercial value, potential growth and injury risk of the player. The term of a contract is determined mostly by these factors.

According to Article 18 (2) of the Transfer Regulations, the minimum term of a contract shall be from its effective date until the end of the season, while the maximum term of a contract shall be five years. Players under the age of 18 may not sign a professional contract for a term longer than three years.

 

Having garnered a basis of what and how a football transfer works, it is necessary to understand the terms of the contract between Messi and FC Barcelona that enables him to leave Barcelona on a free transfer and the reason behind the current situation between two.

 

What enabled Messi to leave Barcelona for free? Messi extended his contract with Barcelona in 2017 for a duration of 4 years, which was a deal that would enable him to retire at the club. However, on the insistence of Messi, an additional clause was added in the contract, which granted Messi the right to unilaterally terminate the contract at the end of each season and leave for free, provided that he notified the club prior to June 10th.

 

 

What was the legal issue involved in their dispute?

The legal issue involved the interpretation of the terms of the unilateral termination clause in light of the unprecedented COVID–19 pandemic that led to the interruption and the subsequent extension of the season.

 

Messi claimed that since the pandemic had suspended the season temporarily and it restarted only after June 10th (La Liga re-started on June 11th, 2020), it was impossible for him to exercise such a right before June 10th. Messi thus wished for the terms of the contract to be viewed liberally in light of the unprecedented events.

 

The Barcelona Board however contested that the terms of the contract strictly mentioned June 10th, hence Messi could not unilaterally terminate the contract post that date. The issue therefore would depend on whether the terms of the contract specifically mention a “specific date” or whether it is termed as the “end of the season”. In any case, according to Article 16 of the Transfer Regulation, a contract cannot be unilaterally terminated during the course of a season.

 

 

Relationship v Contract: what matters more?

The reason behind this issue turning unpleasant is largely due to the long-standing relationship that Messi had with Barcelona ever since he was a young boy. On a deeper analysis, the issue throws light on an important question – what is the nature of a football contract; is it purely a business transaction or does it involve the building of a relationship of trust, faith and respect?

 

Generally, the nature of any football contract is such that a player is associated with a club for a period of 3-4 years. It is unlike a business transaction of sale wherein it involves a single transaction. Instead, football contracts bind a player to the club for a considerable period of time and hence building a definitive relationship with the club is essential for the success of the contract. While the contract may describe the legal relationship, the true essence of the deal is the personal relationship.

 

Therefore, if a football contract failed to build a human connection between the player and the club, it would only increase the chances of the player leaving mid-contract and create a hostile environment for both parties.

 

 

Conclusion

In this case, Barcelona should have gauged the reasoning behind Messi’s intention to include a clause to unilaterally terminate his contract at the end of each season. Adding to the misery, the club management seems to have created a situation, which ultimately drove him to the point of making a decision to leave.

 

Barcelona’s actions, post Messi’s notification to leave, has been criticized as a tactical move to ensure that Messi had no other option but to stay at the club or could only leave provided the Club received his hefty release amount of € 700 million.

 

While Messi decided not to take the matter to Court, Barcelona seems to have made a big commotion out of it by forcing him to change his decision and stay with the club, perhaps until next June, thereby destroying the long-standing relation between the two.

 

Image Credits: Photo by Connor Coyne on Unsplash

If a football contract failed to build a human connection between the player and the club, it would only increase the chances of the player leaving mid-contract and create a hostile environment for both parties.

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