Q: Sports-investing is a fun topic and my clients like it, but is it a sustainable investment category?
— West Coast family office
A: The sports, media and entertainment space has experienced meaningful uncorrelated growth as compared to the broader market.
The significant expansion in the addressable market has been driven by a confluence of factors, all of which may come as no surprise:
- Increased team profitability and operational sophistication: Teams are becoming more financially savvy and efficient.
- The evolution of streaming platforms: Streaming services are transforming how content is delivered and consumed.
- More people watching live events: There’s a growing appetite for in-person experiences and meaningful connection.
While the COVID-19 pandemic indeed brought challenges due to social distancing measures, it also accelerated changes in how sports, media and entertainment companies finance their businesses, creating new opportunities for private capital providers like Ares to invest in this historically resilient asset class with long-term fundamentals.
Here are the top three reasons why we believe investing in sports is here to stay.
1. Growing Need for Alternative Capital Providers
Historically, sports franchises were financed through traditional bank lending at the league and team level. Traditional bank lending has become constrained due to increased bank guidelines and regulatory restrictions. As a result, a number of sports franchises today run very low leverage levels paired with significant common equity interests. In need of more flexible and diverse financing options, we believe these leagues and teams are now seeking out alternative capital providers to fill this gap and support continued innovation and growth at the franchise level.
2. Long-Term Growth Trends
We believe this sector is poised to benefit from attractive underlying market fundamentals over both the near and long term. Teams have experienced continued profitability growth which has increased the value of sports franchises, including leagues and stadiums. In addition to sports, within media and entertainment there has been a large secular shift in how content is delivered given the increase in popularity of live viewership both in-person and through streaming channels. For example, sports consumption on YouTube alone is up 45% year-over-year1!
3. Lack of Correlation
In our view, major sports franchises have remained highly resilient and have grown consistently in a less correlated manner than the broader market. The enterprise value of professional sport franchises has grown over the last decade even during periods of dislocation, including during the 2008-2009 global financial crisis2. This growth has been fueled by enhanced team profitability and operational sophistication alongside the consistent growth for non-scripted entertainment.
Looking forward, we believe that there will continue to be an active marketplace for these assets as sports team ownership is quite attractive to a growing pool of individuals and institutions with inherent scarcity for these franchise assets given the limited number available.
