Given American TV habits and this year-round attention on live sports, it’s no surprise that private investments in the sports industry have increased rapidly. Most of these investment dollars have been put into equity deals up to this point, but credit deals are increasing in volume.

Take Ares providing debt financing to NHL’s Ottawa Senators in 2021 for growth and general corporate purposes, and a $500m financing package in the form of HoldCo notes to Chelsea FC last year, to help manage interest costs. Monroe Capital has also been active in sports recently, providing a construction loan to Panther National to build a golf course, and supporting Growth Catalyst Partners’ carveout of The Equine Network, a broadcaster of horse racing and other sports.

“People will go to the end of the earth to watch a game live and on their screen, and people will pay significant dollars for it,” Ben Fund, a managing director in Carlyle’s credit opportunities team, said. “You are seeing that translate to very large media deals and huge valuations for sports assets.”

Credit investments have ultimately been less frequent than equity deals. But appetite seems to be changing, with Blackstone’s president Jon Gray saying publicly last year that the world’s largest private markets firm would consider lending into various parts of a sports franchise’s capital structure, such as debt or preferred equity. The firm had already explored opportunities in European soccer leagues Serie A and the Bundesliga.

To that end, we thought it would be a good time to explore sports as a credit investment ahead of a potential flurry of activity.

The rules of the game

Before getting into some of the match day scenarios affecting deals, it’s probably best to establish what types of investment can be done in sports. The most sought after are investments in teams or leagues themselves.

Most major US leagues only allow for up to 30% of a team to be owned by private equity. This is further restricted so that an individual fund can only own between 15% and 20%, depending on which league the franchise is in. Partial ownership creates a trickier structure on which to place leverage.

A look at the European model allows for a little more creativity as many clubs are either fully owned by a sponsor (Inter Milan is owned by Oaktree), or individuals or a small ownership group that can seek non-sponsored private credit or bank debt.

Crystal Palace, a Premier League club, received a private loan from MGG earlier this year to fund player trading and day-to-day operations, as an example. MGG has also provided an $80m loan to Burnley, a former Premier League club, sources told 9fin. MGG declined to comment for this article, and Burnley did not respond to our request.

Stadiums can also provide an opportunity for asset-backed lenders in the form of revenue generating real estate. As 9fin previously covered, financings against stadiums used by FC Barcelona and Olympique Lyonnais last year offered the market a glimpse of how that could work.

Less established leagues offer more ways in, as valuations can be lower and there is a desire to grow. The NWSL and WNBA could both prove interesting investment opportunities. For example, Monarch Collective, a women’s sports-focused private equity firm is trying to bring an expansion team to the NWSL, providing a built-in sponsored opportunity for direct lenders. Carlyle’s Fund said the firm is excited about the NWSL, as evidenced by its acquisition of one of the teams in the league.

Investment in a team makes more sense in league structures where individual franchises have more autonomy. This is most applicable to college sports in the US, which has seen an uptick in interest from lenders like Sixth Street. The San Francisco-based firm has been in talks with Florida State University since 2022 to create a holding company for its athletic department’s commercial rights and then invest in the institution via that holding company, according to reporting by Sportico.

Benchwarmers

For lenders not interested in traditional direct lending, team, league, or even media right investments, there are other ways to gain exposure to the market.

Andalusian Credit Partners, a true middle-market private credit firm, has this attitude. Many of the deals that cross its desk are more general sporting companies or are popular because of the trickle down of popularity of high-level sports.

“Not only do we like the long-term secular trends around professional sports, but also collegiate and amateur sports, including youth and club sports,” said Aaron Kless, CEO & CIO of Andalusian.

Private equity firms have certainly been interested in these businesses. A couple of years ago, KKR made an investment in PlayOn! Sports, a high school sports technology company. Avenue Sports Fund made a minority investment in CityPickle, a New York-based pickleball court operator. EQT purchased IMG Academy, a group of schools focused on developing young talent to play professional sports.

All of this is potential fodder for private credit firms looking to back buyouts or recapitalize existing debt structures of sports-adjacent businesses. These investments are also more familiar to traditional direct lenders than minority stakes or asset-backed type lending.

“We’re looking for EBITDA positive businesses,” Kless said.

Underwriting the underdogs

Though there are plenty of options in the playbook, what credit managers really care about is execution — namely, underwriting and due diligence.

In many ways, private credit deals in the sports sector are not that different from investing in more traditional credits (like HVAC companies or car washes). Lenders are still looking for things like EBITDA or free cash flow, covenants, and solid valuations.

“We have a consistent underwriting approach to fully understanding a business. So the process is not necessarily distinctly different for this sector,” said Jim Miller, portfolio manager and co-head of US direct lending at Ares. “The people you utilize to do this and the inputs you evaluate can be distinctly different, though.”

Understanding the nuances of the industry is likely the biggest part of the risk assessment process. When underwriting investments around or in sports, teams' and players’ performances, scores, defeats, and relegations all can affect company valuations, cash flows, and revenue generation.

To overcome some of this, direct lenders are focused on a simple attribute: quality. This includes the quality of the league, the quality of the market, and the quality of the deal. “You’re trying to understand the desirability and longevity of that asset determining its value,” Miller added

Take former Premier League club Burnley, which we mentioned above. Even before the club faced its second relegation in three years, auditors warned about its worrisome financial situation— mainly due to the loss of broadcast revenue, which fell from £104.9m to £47.8m. Drastic swings in revenue could lead to covenant breaches, so lenders will likely have to pay closer attention to their documents.

The example of Leeds United in the early 2000s is another cautionary tale for lenders of the risks of leveraging ticket sales to fund expensive player transfers, only to fall foul of poor performances and relegation.

Relegation is less of an issue in US sports investments due to the closed league structure. However, let’s take the college example again for a second. Imagine you had been a credit investor three years ago in either Oregon or Washington’s athletics program. The exodus of all but those two teams from the Power 5 division Pac-12 left that league reeling and on the brink of collapse.

With that, revenue from tickets is likely to drop due to lower quality opponents along with a drying up of the lucrative TV rights. These risks exist on a season-by-season basis and are not for the faint hearted.

Staying in their lane

This is why direct lenders may opt for businesses that are easier to understand from a credit perspective. What this means in practice is lending against the more ancillary businesses that are riding professional sports’ coattails, so to speak.

Most commonly, these can be businesses that help support fan engagement, subscription services for coaching, concessions operators, or even apparel.

For example, Andalusian — which counts David Tepper, hedge fund manager and the owner of the Carolina Panthersas an investor — this year assessed the possibility of a deal with a football gear company, though it ultimately did not pursue it.

The firm has resources in the field through its advisory business and its direct connection with the NFL. It was able to talk with people overseeing the league’s equipment and player safety and ask them about differences between products, and get a better understanding of possible liabilities for this business.

“With ancillary businesses in and around sports, we have to have a deep understanding of the sport or the segment that the business is ultimately serving,” Andalusian’s Kless said.

After all, there are specific things that may affect revenue related to sports, like historical ticket prices and sales, youth participation, merchandise sales, audience and fan engagement, locations, and community involvement.

With all this extra complication, even for the simpler companies, what’s in it for lenders, you may rightfully ask?

“One of the reasons why we like sports as an asset class is that the infrastructure style and revenue base are highly recurring,” Ares’ Miller said.

The revenue spectrum is broad for sports investments but sales can be long-lasting and sometimes simple for the right businesses. Plus, the possibility of human engagement seems to make sports investing much more attractive and advantageous.

“Broadly speaking, whether it's baseball, hockey, basketball, or football, they still tend to have very highly predictable recurring revenue streams,” Miller said. “The fact is that people want that fresh content every week. For many fans, it’s a religion.”