Private equity (PE) transactions in the sporting world have recently caught the public’s attention. Numerous news reports have noted how several key parties have raised objections to the proposed transaction between SA Rugby and Ackerley Sports Group, with the Springbok brand at the centre of discussions.

This is not the first time we have seen PE transactions in South African rugby, with the Lions, Bulls, and Sharks all majority-owned by different parties through PE transactions. Furthermore, PE has long been an important and proven means of enhancing the commercial value of sporting enterprises, especially in the United States and Europe.

Luxembourg-headquartered CVC Capital Partners have a wide range of investments in the sporting sphere. In 2016 they sold Formula One to Liberty Media for USD 8-billion, having purchased F1 in 2006 for USD 2-billion. CVC also has a wide rugby position, holding stakes in England’s Premiership Rugby, the Six Nations tournament and 28% of the United Rugby Championship, the professional league that the Sharks, Lions, Bulls, and Stormers participate in.

In New Zealand, US firm Silver Lakes purchased a 5.7% stake in New Zealand Rugby’s commercial arm for approximately USD 120-million in February 2023. In December of the same year, Silver Lakes purchased a further 1.79% for an additional USD 37-million, which is significant because the initial transaction was met with resistance by provincial rugby unions, the players union and other stakeholders in the game.

Why private equity firms are increasingly investing in sport

Sports has become an increasingly popular sector for PE capital for several reasons:

• The rising value of sports media rights, sponsorship deals, and sports franchise merchandise sales, with traditional broadcast rights holders now challenged by streaming services for the right to broadcast games or matches.
• Sports fans broadly speaking are extremely loyal to their chosen teams and brands, resulting in a built-in market that sports franchises can access, grow, and commercialise. For example, English football club Manchester United generated USD 384-million in commercial revenue in 2023, 46.7% of total revenue. In 2009, commercial revenue only accounted for 23% of the club’s total revenue.
• The global sports industry is reportedly the ninth largest in the world with a value of USD 2,65-trillion, providing PE firms with a large basket of assets they can invest in.

PE investors' ultimate goal is to receive a profitable return on their investment, a motive that all parties in a transaction are aware of, requiring the selling party to have a clear understanding of their value and the expertise to negotiate a deal that will place them in a sound position post the transaction.

The value private equity firms provide to sports franchises

From a sports franchise perspective, PE investors bring both finance and expertise to the negotiating table and with that a prospect for growth. The immediate capital injection offered by PE investors is often supported by access to high-quality skills that can support sports franchises to maximise the tactical and strategic potential of their operations and brands.

In a South African context, the modernisation of sports administration is another string PE firms can add to their bow. Historical and systemic reasons have left South Africa’s sporting landscape pockmarked by sports organisations that may not have the necessary skills or access to capital to professionally administer and commercialise opportunities to a high degree of success. Some of the most entrenched interests in South African sports are rooted in historical amateurism. Governance structures empower stakeholders whose presence within the system is often based on political acumen and long-standing patronage networks, which merit a secondary consideration.

These entrenched interests are difficult to overcome because professionalisation means asking these same individuals and institutions to vote against their interests. A recent example is the Western Province Rugby Football Union (WPRFU), which in March 2024 agreed to sell a controlling stake in WP Professional Rugby (WPPR) to a consortium of PE investors. The sale followed many years of instability, with the WPRFU placed under administration by SA Rugby in October 2021 with WPPR being effectively bankrupt at the time. If the WPRFU had not agreed to the sale, the WPPR and the WPRFU faced liquidation due to liabilities generated from poor decision-making in prior years.

Arriving at a fair PE settlement between investor and sports franchise

The ultimate success of PE transactions in the sports sector rests on the nature of the agreement struck, the degree to which the investor and investee trust each other, and the agreement itself being balanced and fit for purpose.

For PE transactions to be effective, there should be an alignment of values and reputation between the negotiating parties. Both sides in a negotiation must understand who they are potentially partnering with. For the rights holder, maintaining a controlling stake in the commercial vehicle the PE investor is buying into is often paramount. In turn, the PE investor is likely considering the different routes available to them to maximise their return and make a profitable exit from the partnership.

In these types of transactions, we have observed negotiating parties rush to the drafting phase of an agreement, negating critical introspection and the thoughtful inclusion of provisions which adequately address their respective interests. Patience and a willingness to engage in hard and respectful negotiation is required. In this context, it is highly recommended to appoint legal advisors experienced in these types of negotiations, given the complexities involved.

Private equity can provide sports franchises in South Africa with vital financing and skills, as PE investors have done worldwide across the global sports industry. However, it is incumbent on South Africa’s different sporting codes, federations, and franchises to recognise the duty of their responsibility to the general public at large and the value of the asset they hold so that if approached by a PE investor, they are able to conclude a deal which reflects their true value.

Written by Megan Jarvis & Jon Forman, Partners at Webber Wentzel