Playing the Long Game: A Guide to Minority Sports Investments

The sports sector is emerging as one of the fastest-growing focus areas for investment by private equity firms (in particular, following the relaxation of ownership regulations in the US) and private investors, such as high net worth individuals, athletes and celebrities. It is clear that the opportunities arising as a result of the increased commercialisation of sport generally, particularly women’s sport, and the developing technology around tech enhanced stadiums, direct to consumer streaming platforms, game analytics (for example, using AI tools that provide real-time statistics and predictive insights) and other fan-engagement tools (such as player performance metrics) are all making sports assets more appealing to domestic and international investors.

You can read more about why private investors are capitalising on the rise of sports assets and the associated risks and challenges here ^[1].

As a result of the growing interest by private investors in the sports sector and rising valuations for premium sports assets, minority investments will continue to be an attractive option for both the sports assets themselves and also investors. Any prospective minority investor should carefully consider the strategic rationale for the investment, how they will fit in with the target business and what legal protections they, as a minority investor, will reasonably require in order to achieve their objectives.

How to align your minority investment strategy with your long-term objectives

Understanding an investor’s rationale for taking a minority stake in a sports asset is important when deciding what risks, protections and legal terms will need to be included and negotiated in the long form documentation that will govern the operation of the business going forward. In particular, an investor should ensure that the terms of any shareholders’ agreement (a private contract entered into between the target business and all the shareholders) are aligned with the investor’s strategic objectives. For a private investor, the benefits of taking a minority investment are that they can participate in any upward financial reward of the business’ growth and financial success without assuming all of the risk and operational responsibility of running a business. However, private investors should also consider other objectives, such as whether they want to leverage their personal brand to help attract sponsorship or other commercial partnership arrangements, in which case the legal documents will need to carefully consider the protection of the investor’s intellectual property and manage the expectations of the investor in terms of their visibility and profile with the business. For private equity firms and family offices, the focus of the investment will likely be the enhancement of the professionalism of the sports asset to safeguard financial returns and such investors will therefore seek to have a greater control of the business at shareholder and board level in order to maintain oversight and, in certain circumstances, a degree of control of the management of the business.

With any investment into the sports sector there is often a level of publicity and fan engagement which, depending on the investor’s objectives, should be managed to either promote and engage with the fan base to raise the profile of the investor and the new partnership or to manage communications so that the details of the investment remain confidential.

Board representation in sports investments: do minority investors need a seat at the table?

With any minority investment, the existing shareholders and management team will need to consider whether the new investors will have an impact on the existing governance structure of the business or require a re-trade on the protections that are already in place for the incumbent shareholders. Whether or not the investors will have any rights to appoint a director to the board will typically hinge on the amount of the financial investment and what else the investor is bringing to the table (i.e., whether the investor will provide commercial partnerships or have a public facing role). The shareholders may decide that all new investors would initially have the right to appoint a director provided that their equity stake in the business doesn’t drop below a minimum percentage to encourage investors to continue to invest in the business beyond their initial commitment.

Whilst a board position will be a non-negotiable for private equity investors on the basis that their strategic objective will require greater oversight over the budget and business plan, not every minority investor will need (or be granted) the right to appoint a director to the board. Being appointed as a director requires that person to take on an amount of personal risk and responsibility for the running of the business and so it is important that any minority investor weighs the benefits that come with having a say in the day-to-day operation of the business against the time commitment, restrictions and responsibility that comes with the position.

It should be noted that for some sports assets, football clubs being the prime example, the appointment of a new director also requires regulatory approvals which can cause delays in the completion of the investment process.

Minority shareholder protections: what consent rights should you negotiate?

The minority shareholders should prepare a list of "reserved" or "consent" matters that will require the prior written consent of the minority investor before any such matters are carried out. Consent matters typically include any action or agreement that might negatively impact the rights attached to the shares that are issued to the investor on completion of the investment, the approval of budgets and annual business plans so that the investor can monitor how their financial investment is being spent, changes to the name or nature of the business and any other actions that go to the heart of any material deal terms. Depending on the comparative bargaining power of the shareholders and the amount of the financial investment, the list of consent matters can be more or less extensive and minority shareholders may also seek to include other restrictions around disposal of material assets (such as the stadium or other material real estate assets), approvals around the employment terms of key employees or players and restrictions preventing the company being able to dilute the investor without following a process allowing the investor to maintain its equity percentage in the business.

Financial planning for minority investors: what happens when the business needs more capital?

Before agreeing to make a financial investment, any prospective investor should undertake a certain amount of legal and financial due diligence on the business in order to understand any risks associated with the investment and how the business proposes to use the cash injection received (e.g., for expansion plans, working capital requirements etc). This due diligence process should also seek to understand the company’s financial outlook and how the investment fits within the wider strategy of the business. For sports assets such as football clubs, there is often a requirement for a material cash injection to settle existing debts, invest in new players and generally professionalise the club with the strategic goal of enhancing the club’s on field performance and, therefore, mitigating the risk, and associated adverse financial implications, of  relegation. However, football clubs also have large overheads and require a constant stream of financial investment in order to maintain or improve its stadium and training facilities and with the aim of attracting and retaining talent. Minority investors should set clear expectations with the shareholders at the outset as to whether they will be willing (or able) to offer further funding to the business, the timings of any agreed payments and details of how they expect to structure future payments (investors may prefer to provide further investment by way of a loan which would attract interest and can be ring-fenced for specific projects). Investors with a stronger bargaining position who are willing to provide future funding may seek to include an anti-dilution provision within the long form legal documents which is designed to protect an investor’s equity percentage and economic value if the company issues more shares in the future. If an investor is not willing (or able) to provide further funding to the business above their initial investment, then the default position is that the investor’s equity holding will be diluted if the company issues more shares to new, or other existing, investors.

Exit planning for minority investors: drag-along and tag-along rights explained

It might seem counter-intuitive to focus on the terms of an exit when negotiating how to first invest in a new business, but this should comprise an important part of the overall strategic vision of a minority investor at the outset of discussions. Depending on whether a minority investor expects to exit after a number of years (following the tried and tested private equity business model), or if the investor is looking to build a longer term partnership with the business, the negotiation of the long form documentation will need to reflect an agreed position on exits, valuations and capital events. Minority investors should, in particular, consider what should happen in the event that the company were to be sold in the future. Drag and tag provisions govern how shareholders can exit a company in a sale scenario and are particularly important for minority shareholders who won’t have the ability to block a sale or approve the identity of the purchaser. A drag-along right allows the majority shareholders to compel minority shareholders to sell their shares to a purchaser on the same terms, which is attractive to buyers and can maximise value to all shareholders. Alternatively, a tag-along right protects minority shareholders by allowing them to participate in a sale initiated by the majority shareholders, preventing them from being left behind. The triggers for these provisions should be considered, specifically whether the shareholders want a "lock in period" or to apply conditions on a future exit.  

The rise in minority investments in sports assets shows how attractive and resilient the sector has become. But investing into a business without receiving control means that the small print really matters. Any investor should seek proportionate governance rights, regular information access, sensible exit routes and above all an alignment with the majority shareholders. In a market driven by passion and prestige, it is the careful structuring that will ultimately protect value and support long term success.  

^[1] Scoring Big: The dynamics of Investment in Sport, Molly’s article