Simon Cummins | What CEOs need to know before joining a PE-backed sports business

Simon Cummins, partner and head of the global sports, gaming and media practice at executive search and talent consulting firm Odgers Berndtson, discusses some of the tensions involved in working with private equity investors

Simon Cummins

With digital innovation creating new revenue streams and streaming platforms upending traditional broadcast channels, private equity has for some time now, been casting its net into the sports industry to capitalise on new areas of growth. However, it is this year where private equity has made its most significant inroads into the world of sports. For many beleaguered leagues and clubs struggling through a pandemic-stricken 2020, with cancelled matches and declining revenues, the increased attention (and capital) from private-equity firms couldn’t have come at a better time.

Forging a relationship with a PE firm can, and often does, signal a change in leadership – for any organisation regardless of sector. In the sports industry however, there are added nuances a new leader would have to manage, and prospective CEOs of PE-backed sports businesses should consider carefully before accepting a role.

Unlike the vast majority of other businesses, sports businesses have fans, and fans want the best players, the best feeder squads, the best support teams and manager – all of which requires significant investment, often over and above revenue, hence the need for wealthy owners. Sometimes this will be a vision shared by the PE-backers, and everyone is happy. However, the friction comes when the PE vision of investment does not align with fan interests. Perhaps the owners want to take equity out of the club or league at a time when there are high levels of debt or a poorly performing team, and instead of reinvesting, any surplus is spent servicing the debt and/or paying dividends to shareholders. This generally doesn’t sit well with any fans and it falls to the CEO to strike a balance between managing their backlash with the wants and desires of the PE owners.

Things become even trickier when the financial decisions of the PE-backers clash with the culture of those of the organisation, or the culture of an entire sport – particularly when it comes to the local fan community and the grassroots elements of the game. If the PE owner wants to forego funding these elements in order to focus on revenue generation, then they risk upsetting the balance between fan and business interests. It may be removing the family enclosure to bring in office suits, hospitality boxes or hotels, or to reduce funding in the community and junior sides – sometimes necessary actions for a cash-strapped club. Fans are rarely accepting of these decisions and it requires a CEO who has a deep understanding of how to manage brand loyalty, community spirit and the emotional investment of stakeholders, and harmonise these with the commercial interests of the owners.

The cracks appear when the appointed CEO either doesn’t buy into the vision of the PE firm, or underappreciates the emotional aspect of the fanbase, i.e. when the CEO leans too far to either side. If the CEO is at odds with the PE firm, then bringing in a mentor or coach to sit between them and the owners is sensible. This individual might be a chairman or board advisor and will act as mediator, strategic advisor, and confidant all in one. Being CEO is often a lonely job, particularly when reporting into a PE firm that can be several steps removed from the day-to-day running of an organisation and appointing a mentor can therefore be healthy for that relationship and for the CEO themselves.

If, on the other hand, you have a CEO who isn’t familiar with the sports sector and the levers to pull to keep all the stakeholders on one side, then a gulf can appear between the business and the club or league. This is a gap that can be bridged by hiring a ‘number two’ to the CEO – someone who has an understanding of the culture and the sports ecosystem, and has a relationship with the various stakeholders, including the fan community and the media and sponsors. The upside to bringing in a non-native sports CEO is often the financial rigour and expertise that might not have previously been there if the board or executive committee doesn’t come from that background. A deputy to the CEO can help communicate this, and the message that maintaining a strong family values club isn’t mutually exclusive from the decisions of a PE house.

These are not, however, the only skills a CEO would need to bring to a PE-backed sports business. Those that are leading organisations still in the grip of the crisis will need to be proactive, innovative and resilient, making decisions at pace and recognising that the pandemic has removed any option to prevaricate. As they transition out of crisis management and into resetting the future strategy, the best sports industry leaders will be investigative, visionary and inclusive problem solvers. They understand that traditional revenue streams such as match day ticket sales are unsustainable in the short-term and genuine innovation will be required to build new market strategies.

These leaders will need to be flexible. With one hand they should empower teams to explore and be creative and with the other they should provide specific direction. They should be able to apply deep analytical rigour and due diligence while at the same time, scanning the horizon to imagine and build a vision of a successful future. This is particularly important for sports businesses that, at this time, are struggling to find their place in a future of lockdowns and social distancing. In addition to focusing externally these leaders will therefore also need to be resolute in their mission to create a sense of purpose within the organisation itself – or risk disengaging those that work for them.

Right now, being the CEO of any sports business is an extremely tough job. Most will need to draw upon every resource and skill they have to ensure the survival of the organisation they lead, while under the laser-like focus of their board, their employees and the media. The job becomes that much harder when you add the complexities of a PE-backer into the mix. To be successful, it takes an individual who is driven, courageous and entrepreneurial, but who also demonstrates humility, empathy and self-awareness. Ultimately, they need to be mindful of the tradition, heritage and values of the sport yet often change business models to serve the way the next generation are consuming content.