Sport investment: China fading

“I have been reading on a daily basis that the club’s future is expected to be cleared up today. But, as I reiterated the other night, the reality is that the club’s future has never been in question and our vision for Inter has been crystal clear since 2016,” said Steven Zhang, chairman of Italian football club Inter Milan, addressing a shareholders’ meeting following reports of a potential sale.

Inter has been controlled by Suning Holdings Group – which is owned by Jindong Zhang, Steven Zhang’s father – since 2016, one of a string of European football club acquisitions by Chinese investors around that time. A potential sale to BC Partners failed to materialise early last year, and a few months later, Suning’s China-based electronics retail subsidiary required a USD 1.36bn bailout.

“This is a very complicated process,” said a source close to the situation. “Everyone knows Suning is in deep financial trouble and that Inter is one of their most valuable international assets. Put those together and do the math.”

Fosun Group, another previously free-spending Chinese company, is busy divesting assets as part of efforts to address a USD 36bn debt pile. However, Wolverhampton Wanderers, an English Premier League (EPL) club it acquired in 2016, is not for sale, according to Adam Sommerfeld, a managing partner at UK-based Certus Capital Partners, who has advised Fosun on several sports deals.

Wolves is one of five English football clubs known to be controlled by Chinese investors and there is a general expectation that any of them could be available for the right price, given how the Chinese government has soured on extravagant overseas acquisitions. However, even with a willing seller, executing on these transactions could be complicated.

“We have a situation with a team in one of the English leagues where the local authorities cannot approve a sale because they are unable to determine that the individual in question owns the team and is able to sell it. This has made us reticent of China deals,” said Sommerfeld.

“There are lots of different SPVs [special purpose vehicles] and when you investigate the cap stack you might find 10-15 people involved, and they are all invested in one another’s funds. We’ve found Evergrande [a heavily indebted Chinese property developer] around a number of things.”

This represents a dramatic reversal of fortune that extends all the way from Europe to sports assets within China – and it runs contrary to the current global boom in sports investment.

Up then down

Private equity feasted on the periphery of China’s European football invasion. Hong Kong-based LionRock Capital retains a minority interest in Inter; it declined to comment on a potential sale. Trustar Capital and CMC Capital Partners both backed in City Football Group, the holding company for Manchester City and other related businesses; Trustar exited in 2019 and the status of CMC’s investment is unknown. IDG Capital has sold its minority stake in France’s Olympique Lyonnais.

However, a clutch of GPs rose to prominence in 2015-2018 through investments in other businesses situated in the sports and media value chain. They are now reluctant to talk about the experience.

CMC accumulated assets including the broadcast rights to China’s domestic football league, sometimes through a long-dated investment platform. It declined to discuss these deals when asked by AVCJ earlier this year. Yao Capital, a private equity firm established by basketball star Yao Ming, is said to be inactive. Its website is inaccessible and Yao Ming’s co-founder didn’t respond to enquiries.

The China sports investment thesis in part originated from President Xi Jinping sharing his football dream in 2009 – that China qualify for another world cup, host a world cup, and win a world cup.

A State Council blueprint published in 2014 designated sport a national strategic priority and envisioned the industry would be worth USD 750bn by 2025, 12 times the 2015 total. Football would spearhead this development, supported by a glut of new training centres and pitches.

Investors piled in, leading to the European football deals as well as a surge of capital into China’s domestic league that facilitated the hiring of high-profile international players. Much of the activity was driven by property developers and technology giants. Wanda Group, Fosun, Alibaba Group, and Tencent Holdings all set up sports units. So did Suning, as part of efforts to diversify into content.

The bid to monetise rising local interest in sport didn’t pay off. “Selling merchandise might be fine, but sports leagues haven’t been profitable in China,” said the source close to the Suning situation. “And if sport isn’t making money, then the value chain has no value.”

A senior investment professional with a China-focused private equity firm that has looked at sports assets, added that domestic football is a bad business. “There is no fan loyalty, tickets are dirt cheap. A lot of those investors tried to make back their money through real estate, but that didn’t work, so they turned to match-fixing,” he said.

Earlier this year, Chinese media reported that the Chinese Football Association summoned clubs to a meeting and warned them that it would work with the police to investigate and crack down on match-fixing. This followed a series of investigations and prosecutions in the 2000s.

Investors still see upside in overseas sports assets that can command a following in China, notably live events. Wanda Sports Group acquired the Ironman brand in 2015 with a view to rolling out tournaments in China. It exited in early 2020 after pandemic-driven cancellations of events across its portfolio crippled business. Wanda Sports, which listed on NASDAQ in 2019, was delisted last year.

The China-focused investment professional lost out to Wanda on Ironman in 2015. He subsequently bid on endurance sports brand Spartan with a view to launching a TV series in China – as well as running events – to reach a wider audience.

Uncertain times

The overriding current challenge is uncertainty. A new five-year national fitness programme was unveiled in 2021, which positions sport in the context of health and wellness. There is an expectation that the industry will grow by two-thirds to USD 774bn by 2025, underpinned by investment in essential infrastructure like gyms, parks, and stadiums throughout the country.

Sommerfeld of Certus expects little in the way of outbound investment noting the emphasis is on domestic activity. Yet the source close to the Suning situation questions whether social need will trump traditional commercialisation in these deals.

This is playing out against what is described as a politicisation of sport. This came to a head in 2019 when the general manager of National Basketball Association (NBA) franchise Houston Rockets spoke out in support of protests in Hong Kong ahead of a preseason game in Shanghai between Los Angeles Lakers and Brooklyn Nets. Tencent cut the Rockets from its China streaming schedule.

It has contributed to a weakening in investor interest in China’s domestic basketball league. Andy Mantel, CEO of China-focused Pacific Sun Advisors, launched Ten Events Ventures in 2020 to target China-related sports assets. He previously worked on potential investments in local basketball franchises but ambitions to take this further quickly faded.

“The league has been in a bubble for the past three years and they have started diluting the private ownership of basketball teams, some of which have been for sale,” Mantel said. “It doesn’t make sense to buy something if there are not market dynamics around it. At the same time, there’s a risk the government could say, ‘You can’t do this.’”

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• Topics
• Greater China
• Expansion
• Consumer
• China
• sports & entertainment
• Trustar Capital
• CMC Capital
• Yao Capital
• Lion Rock Capital