Sports-Related Investments, M&A Activity Expected To Be Limited With Economy in Flux, Leagues on Hiatus
SportsTech reported that $12.6 billion was invested into sports technology related businesses between 2014-2019. Investor interest in the space grew as the economy soared. But with Coronavirus bringing leagues around the world to a halt and sparking fears of a pending global recession, it’s fair to wonder how the market for capital might change moving forward. Conversations with one prominent early-stage venture capitalist and another well-respected sports industry advisor indicated as long as the economy remains in flux and the sports world is on hiatus, sports-related investments and M&A activity will be limited.
Howie Long-Short: The industry advisor explained that “most investors tend to sit on their hands during periods of uncertainty. We saw in 2008, when $h!t hits the fan the immediate reaction is to get liquid and hang tight. Family offices that have capital aren’t in a rush to deploy it right now. Instead, they’ll be patient, see how things unfold and then pick and choose their spots. Unless there is an amazing opportunity, most investors will wait to do a deal until they see some light at the end of the tunnel; until they have some more visibility in terms of when the leagues are going to start playing again and what the timeline for economic recovery looks like.”
That doesn't mean there won’t be a few deals that serve as outliers (see: Fubo TV, IRONMAN Group), but with ‘shelter in place’ orders in effect across the country “it’s just not going to be easy to get money.” Our advisory source reminded that, “it’s hard to do in person meetings right now and there are a lot of companies that won’t invest in anything until they can spend quality time with the management team.”
The early stage venture capitalist added that it isn’t a particularly good time to be a sports-centric business looking for money. “Technology companies that are targeting the live experience or selling to teams and leagues are going to face some short-to-medium term pain, as the revenue hit from Covid [will likely] temper the consumer's willingness to pay for non-core business products or services.” To be clear, he remains bullish on the space long-term. He said "sports fans have little price elasticity when it comes to consuming and engaging with content about their favorite teams and players. With all sports on hiatus for a few months, the pent up demand for live sports will lead to a massive growth in consumer interaction and spend as soon as broadcasts are back."
Despite the S&P having declined -22% since February 19th, our advisory source said that investors have money to spend. “The venture backed and private equity funds have a good amount of dry powder on the balance sheets, they’re just using it to make sure their own companies don’t go out of business right now. In difficult times, their first priority isn’t to invest in new companies - it’s to capitalize portfolio companies.” Strategic investors face a different problem. “[Publicly traded companies] need to weigh if they want to be buying stuff when their market cap is down [significantly]. There are political and market perception issues with the strategics that [need to be taken into account].”
Investors willing to put up capital right now will certainly find attractive opportunities. The industry advisor said he’s been receiving calls from companies that “have no choice but to do a deal.” The event-oriented businesses our early stage VC referenced and those dependent on advertising sales are in a particularly tough spot, so it’s certainly possible the highest-quality ones will find partners willing to do transactions. “But those are deals that would get done because of pricing and distress as opposed to changing consumer behaviors or [the company's] growth potential.”
Of course, there are sectors that are flourishing under the current circumstances. The advisor we spoke to said, “there’s been a lot of activity on various gaming platforms, so esports should come out of [the Coronavirus lockdown] with some momentum. Sports betting and the mobile fitness/wellness businesses (think: Peloton, Famer) should also see increased interest.”
While investors tend to “over-react to whatever is happening in the moment, the reality is often less than it appears to be.” With that said, the industry advisor we spoke was adamant that the current lockdown is transforming consumer behaviors and as a byproduct there will be some companies that benefit long-term. For example, he cited people who start an at-home fitness program, realize they like it and subsequently decide that they no longer want to spend monthly on a gym membership.
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