The state of the sports capital markets

Rob Tilliss, managing member and chief executive at Inner Circle Sports, discusses finance in sport and where it may be heading.

Rob Tilliss, managing member and chief executive, Inner Circle Sports

The flow of institutional capital into the sports industry has been nothing short of dramatic over the past twenty years.

When I first entered the sports financing realm at Chemical Bank (later merged with Chase Manhattan Bank and subsequently JP Morgan), the nascent lending market was being developed by a few money center banks.

In the early 1990s, the leagues created their own financing pools whereby they collectivized teams’ media rights, and in some instances collateralized the underlying franchise charter, to achieve a lower cost of borrowing for teams.

The timing was good as a market soon emerged providing billions of dollars of loans to the leagues at very attractive terms and pricing. So much so that in the mid-2000s, the leagues began to issue their own commercial paper backstopped by bank liquidity facilities that resulted in strong investment-grade borrowing rates.

Following the global financial crisis in 2008-09, the asset-backed market dried up and the banks moved back in to provide more direct lending. The institutional private placement market wanted a bigger piece of the action.

Insurance companies, pension funds, and other institutional investors had been funding stadiums and arenas but now offered long term financing to teams through the league-wide financings.

In addition, hedge funds and specialty lenders entered the market, providing subordinated debt and holding-company loans to team owners to help fill gaps when the banks reached their maximum loan-to-value ratios.

In Europe, third-party ownership (TPO) funds emerged to finance player transfers in football, and while outlawed by Fifa in 2015, the market remains active to fund player moves.

The debt capital inflow to the industry has been a large contributor to the overall and historic growth in franchise valuations. Financing the construction of new stadia and arenas has led to a substantial boost in revenues and cash flow for teams. Media rights have soared and allowed the leagues to increase leverage over time.

For teams, this has led to a strengthening of balance sheets, as well as their ability to pay players and develop a winning team/brand. Longtime professional team owners were sitting on assets that, in some instances, were having a twenty-fold increase in valuation relative to comparable transactions in the market.

What does the future hold? While there is the possibility of recessions, tightening credit, and a less favorable tax environment, the fervent demand for sports content shows no sign of slowing down. Given the conservative nature of how the leagues limit debt on a team-by-team basis, a major default or credit downgrade seems unlikely.

In fact, leagues may be increasing debt limits to provide more financing for acquisitions now that individual teams are selling in the billions of dollars. Given the sensitivity of disclosing private information, initial public offerings don’t seem likely. But it will be compelling to watch as foreign, corporate, and institutional investors enter and help innovate how we finance sports transactions.