Private equity firms wrapped up 2019 with a year-end record $1.5T in unspent capital sitting on balance sheets. By March 2020, that number had ballooned to more than $2T. With so much money to spend and the ongoing pandemic depressing business valuations, it would be logical to assume transaction volume would soar, but that has not been the case. In fact, Jamie Whatley (Dorsey & Whitney LLP) said that P.E. “deal flow [meaning consummated transactions] has declined between 70 to 80 percent [since the pandemic began].” As a result, “there is a lot of dry powder waiting on the sidelines for future deals to pick up.”
Our Take: There are several reasons why P.E. transaction volume has fallen off a cliff over the last four months. While some firms have turned their focus inward, to ensure existing portfolio companies make it through the liquidity crunch (which in turn pulled them out of active acquisition mode), others found it challenging to establish post-COVID asset valuations that sellers agreed with. As Lyle Ayes (Operating Partner, Redbird Capital Partners) explained, “both in—and outside—of sports there have been wide bid and ask spreads between the buyer’s required COVID discount and the seller’s perspective on how bad, how long and how deep COVID’s impact will be.” Shelter-in-place orders and social distancing guidelines have also complicated matters (think: inability to meet face-to-face, perform due diligence).
While the hurdles referenced have held up private M&A transactions, P.E. funds (which will also invest in public equities) have found it equally difficult to find straightforward control deals in the public markets since the coronavirus landed on U.S. shores. As Ayes noted, “There’s a disconnect between what appears to be going on with the economy and where stock prices are” (see: flat to all-time highs).
It’s assumed that over time bid-ask spreads will narrow and as they do transaction volume will increase. The thinking is, “There’s a lag between when [a business owner] starts to feel a bit uncomfortable and when they’re really in trouble,” Ayes said. So, while a business (or team) owner may not be willing to consider a COVID-depressed valuation today, if their financial position continues to deteriorate, it’s possible—if not likely—their mindset will change.
Both Ayes and David Simmons (Founder, DESBall Ventures) are anticipating a particularly active deal environment in the coming months (though neither would commit to the Q1 ’21 timeline Whatley suggested). “The dry powder hasn’t gone anywhere. Funds are still employing all the same people and they have the luxury of just waiting out these companies that are teetering on bankruptcy [or team owners suffering financial hardships],” Simmons said. Remember, as part of contractual agreements with their L.P.s, P.E. firms have access to long-term capital; time is on their side. Ayes added that now that it appears increasingly likely the economy won’t see a V-shaped recovery (i.e. it’s not going to be quick) seller expectations of value may start to come down.
To be clear, P.E. funds have been activity looking for deals over the last several months; they just have not found actionable opportunities anticipated within the sports world. That’s because as we explained in Tuesday’s newsletter—at least as it relates to stakes in pro franchises—while valuations are down, owners’ expectations aren’t. As Ayes explained, “Well-capitalized billionaires are not selling prized assets unless they think the fundamental long-term value of the asset has been impacted (which few believe) or they’re desperate—a narrative analogous to the broader industry.”
That does not mean one should expect a flood of team transactions in the coming months—and certainly not at a fire sale price. Ayes said he firmly believes “the long-term value in [big four sports organizations] remains the same. So, to opportunistically pick off a team [at a depressed valuation] seems unlikely.” He added that pricing assets will also continue to be a challenge in the short-term as neither buyers nor sellers really know what revenues will look like over the next 12 months. “They don’t know how many games teams are really going to play, if fans are going to be permitted into stadiums and arenas or what the sponsorship outlook will look like,” he said.
While opportunities may not be plentiful in the team-acquisition area, Ayes says there are “interesting early stage sports investment opportunities to be had.” Digital and data-driven businesses, eSports, gaming and sports betting should all attract potential investors, and while “ticketing and hospitality businesses have taken a gut-punch, the longer-term outlook remains attractive.” Simmons added that media rights was another subsector that should continue to command investor interest (see: competition for Serie A rights).
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