On Monday evening, we had auctions for two new franchises participating in the latest edition of the Indian Premier League (IPL). And one surprise bidder — a private equity firm CVC Capital Partners paid Rs 5,625 crores to snag Ahmedabad in a hotly contested auction.

But why are private equity investors interested in the IPL? Why are they putting up this kind of money? Well, in today’s Finshots, we explain this and more.

Business

The Story

Let’s start with a timeline. A timeline that gives you a sneak peek into how unlisted shares of Chennai Super Kings have grown in value.

  • January 2021: Rs 65 per share.
  • September 2021: Rs 110 a pop. Remember, CSK had just won their fourth IPL title.
  • October 2021: Rs 235 a share.

And now valued at over Rs 7,200 crores, it’s one of the most successful teams in the IPL and a unicorn (almost) — A company that commands a valuation of over a billion dollars.

Now you could argue — “That’s just valuation. The world is a crazy place and people have money. Even companies with threadbare revenues are valued at a billion dollars these days. It’s just the way it is.”

And granted, you have a point.

But let’s look at profitability, eh? As of 31st March 2021, CSK made profits to the tune of Rs 40.26 crores. It’s a fair bit lower than the Rs 111 crores they made in 2019. But considering the pandemic and all that, it’s a miracle that they even turned a profit last year.

And all of a sudden you start seeing these franchises in a different light altogether. In fact, with this kind of financials, anybody would be itching to invest in an IPL team. So really, it shouldn’t be all that surprising to see Luxembourg-based PE firm CVC Capital join the bandwagon.

But we are only getting started here, because CVC Capital isn’t new to the world of sports. If anything, they are the pioneer s— bringing PE money into sporting tournaments at a time when others shied away. Oh yes, they were betting on this industry back in the 90s.

In 1998, CVC Capital bought the motorbike racing tournament MotoGP. They sold it in 2006 for a neat profit and then made another bet elsewhere — motorcar racing and Formula One. And yeah, they weren’t just buying teams. They were buying the whole damn sport and flipping their stake to make ludicrous sums of money. Rumour has it that the company netted 700% in 8 years when they sold MotoGP. With Formula 1, they are set to make a return on investment of over 1,000%. It’s the most profitable deal they’ve made so far and it’s the most profitable investment anybody has ever made in F1.

It’s not just the racing circuits that have proven lucrative. Take a look at the returns from, basketball (NBA), baseball (MLB), American football (NFL), and ice hockey (NHL) compared to the 500 stocks that make the diversified US market index S&P 500. Most sports leagues have outperformed the index by a fair margin over the last couple of decades.

So you can probably see why PE firms are pumping money into football, basketball, and even volleyball. Just two months ago, CVC Capital agreed to invest $3.2 billion in La Liga, Spain’s top football league. In return, they wanted 10% of all media revenues for the next 50 years. Crazy!

But what’s driving these valuations in sports teams and leagues?

Okay, let’s break it down a bit.

  1. Scarcity
    According to Pitchbook data, in the US, between the NFL, NBA, MLB, MLS, and NHL, there are only 151 teams across the board. Likewise, there are only 98 teams in the Premier League, Serie A, Bundesliga, Ligue 1, and La Liga. And in the IPL, there are only 10 teams. When supply is limited and demand is high, prices rise. Economics 101!
  2. Monopolies
    In addition to scarcity, these leagues don’t expand as often. And as an investor, you know you’ll be working within the confines of an oligopoly i.e. a marketplace characterised by limited competition. So it’s a bit easier to project things like “market share” and “revenues”.
  3. Illiquidity
    If you’re thinking of buying shares in sports teams, it’s going to be hard. Why? Because most teams aren’t listed on the stock market. And when shares aren’t traded often and ownership is sticky, buyers are willing to pay a premium when the opportunity does arise.
  4. Emotions
    Sure, PE firms are driven by money, but there may be a pinch of emotion here somewhere. In the words of Andrew Laurino of PE firm Dyal, it’s more fun to own your favourite sports team than to own a chemical plant.
  5. Finally, Money
    Let’s look at media and broadcasting revenue to get a sense of what kind of money we are talking about. Sony picked up media rights for the IPL after paying around Rs 8,000 crores for the first 10 years. Then, Star India bagged the rights for the next 5 years by putting up a whopping Rs 16,000 crores. And with media rights going up for auction once again in 2023, the expectation is that somebody may pay well over Rs 30,000 crores. That’s a lot of money! And PE investors will get their fair share.

So, yeah, there’s clearly money to be made and PE firms will want to jump in. They’re raising more money than ever. And they’re hunting for deals across the world.

This is only the beginning.

Until then…

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