Can PE Score in the Youth Sports Sector?

Youth sports is estimated to be a $40 billion dollar industry, and one that private equity has been eyeing with interest. Christopher Russo, CEO and founder of advisory firm Fifth Generation Sports, joins the podcast to discuss the risks and opportunities in the youth sports sector, as well as other sports niches that could be home runs for investors.

Read a transcript of the podcast below.

Middle Market Growth: Welcome to Middle Market Growth Conversations, a podcast for dealmakers discussing the trends shaping the middle market. I’m your host, Carolyn Vallejo, and this is a production of the Association for Corporate Growth. It’s been over a year since the NFL cleared the way for private equity investment and football teams pushing PE investors further into professional sports. But there’s another segment of athletics with exciting potential for middle market investors, youth sports. Today we’re joined by Chris Russo, CEO and founder of Fifth Generation Sports, to tackle some of the biggest questions investors should be asking about youth sports. Chris, welcome to the podcast.

Chris Russo: Thank you for having me.

MMG: First, we want to, of course, get to know you a little bit. So tell me about yourself and the firm that you founded Fifth Generation Sports.

CR: So, I have been in the sports industry the last 25 years or so. Started in sports at the NFL, where I ran the digital media business there for six years, nfl.com and the tech businesses surrounding that. I then did a startup in the fantasy sports space, which I sold to USA Today about 10 years ago. And then since that time, I’ve been an investment banker, mostly focused on the sports sector first at a firm called Houlihan Lokey, which does a lot of middle-market transactions. And when I was there, I sold Sports Illustrated and a number of other companies on behalf of Time, Inc. and Meredith as they were coming together. And then more recently launched Fifth Generation Sports, again, focused on sports M&A in the middle and lower middle market.

MMG: Awesome. And just for fun, what was your first job that you ever had and what was a lifelong lesson that you took away from it?

CR: Well, I guess it’s a coincidence, but it’s true. My first job was actually as a soccer referee in youth sports in my hometown of Darien, Illinois. And so I was a referee and took all the brunt of parents’ complaints and all of the good of being out there on the field with kids and my friends. And what I learned, I guess, from that as well as my own involvement in sports is really the importance of that competitive dynamic and that comradery and leadership and the things that you learn as a young person playing sports. So, I think that was the lesson overall that I learned that sports is really important part of, you know, not only growing up but ultimately being successful in business and other things.

MMG: Excellent. Definitely a full circle moment then. So let’s dive into our discussion about youth sports and recently private equity investment in this space has been gaining steam and gathering some attention. There was a big writeup in the New York Times back in July. What’s behind this accelerating interest in youth sports?

CR: There’s a few factors. First, it is a large market and as was pointed out in that article, in a lot of what’s been written about youth sports, it’s somewhere between $37 billion and $40 billion in terms of just the total size of that market. So it’s a large market. It’s in many ways still fragmented. So there’s an opportunity to roll up and consolidate businesses, and that’s interesting to private equity. I think private equity firms also notice that parents will spend a lot of money on their kids and keep spending, so there’s a sense that that industry might be recession proof or at least recession resistant. And then I think the last factor, which again relates to the article you mentioned, there’s some very prominent investors who have started to spend money in the space, Harris, Blitzer which was discussed in that article, but also KKR and others. So when you have some really preeminent, well-respected investors getting involved in the sector, that really gets other people interested and excited about it as well.

MMG: Are there any niches or subsectors you think are particularly ripe for investor interest?

CR: There are a few sectors which right now are, are drawing the most interest. One of them is the facility space and that is, you know, the Cooperstown facility that Harris Blitzer acquired, you know, other facilities, whether they be baseball fields or indoor soccer facilities or rinks. So, the facility space is certainly drawing interest. The software space is also interesting. I actually was an advisor to a company called Sports Recruits, which was an online recruiting platform. We sold that business to IMG Academy. You see a lot of other software businesses and sports thriving. There’s also the events business where you have companies that run events, tournaments, all kinds of other camps, and that’s a big sector. And then probably the last sector that’s gained a lot of attention over the past few years is the streaming video, streaming media sector and that was especially catapulted by COVID when people couldn’t necessarily go to the games, but they could watch their kid playing with video and live coverage of youth games. So, I’d say those four—software, facilities, events, and streaming—are probably the big four right now, but there are others as well.

MMG: That’s exciting, especially for tech investors who might not consider this a space they can step into, there seems to be a lot of opportunity there. There are some concerns from some areas of the market that this kind of interest from PE investors and the overall professionalization of the youth sports space might price out some younger players. Do you think this is a concern? Are there steps that investors can take to maybe get ahead of this potential issue?

CR: Well, there’s really two points that I think you made there, which is what are the athlete and family-centric issues, and then how does that affect the investors in terms of the athlete and family-centric issues? Certainly the increasing costs and all the other things you can buy do get difficult to pay for, especially for families that maybe don’t have, you know, the means to do so. So, I do think that becomes a challenge. I think the other part of the over-professionalization is maybe the psychological toll some of this takes on kids who now find every highlight is online and every statistic is being kept and there is extra pressure that gets created. So I think those are things that we all need to be cognizant of as far as how does private equity and investors sort of deal with that. I think the good news for private equity and these investors is they can kind of control all of this. And if they are going to be responsible and build these businesses for the long term, they really do need to think about pricing of some of the services. They need to think about making some of these things available at lower costs for communities that can’t afford them. They need to think about how to manage some of the stresses that, you know, come to kids as part of these more formalized systems. So I do think the owners of these businesses can help manage some of that, but you know, parents are going to have to take the lead as well.

MMG: No, that’s a great point and that’s a great segue into a deeper conversation about due diligence here. So, for investors who are potentially interested in this space, are there any considerations or risks unique to the youth sports industry that they should be keeping in mind, apart from some of the factors that you just mentioned?

CR: The youth sports business is still very fragmented and it is very much of a mom-and-pop run sector. So there is a challenge in that, in the sense that when you buy a bunch of businesses that are smaller, sometimes the management isn’t up to par and you need to implement new systems. Sometimes the financial reporting isn’t up to par. Sometimes it’s difficult to grow scale because you have to sort of do it one club at a time in some instances in terms of growing a business. So that fragmentation and that mom and pop nature of it is on the one hand very attractive to private equity because you can consolidate things and build something big. On the other hand, you know, there are challenges because the, the professional systems are not always in place from a business standpoint. And you also take the risk that some of these businesses are highly dependent on the local operator, and if that person decides to leave after a couple of years, you know, the private equity folks are left holding the bag if they don’t have a good succession plan. So I think there are some challenges that people are sorting through, deals are getting done.

MMG: As investors sort through those challenges, as you say, what kinds of deals are you seeing in the space at the moment? Are there any particular deal structures that you’re seeing? Any characteristics that stand out that these deals maybe have in common?

CR: At a high level, we’re seeing both M&A deals and capital raises. I would say on the M&A side, the consolidation plays are the ones that seem to be in flavor right now. So, you know, private equity firms, investors that are looking to take one core asset and maybe pay a lot of money for that core asset and then roll up a lot of smaller assets in the space to make the economics make sense. So because this is a highly fragmented industry or sub-industry, you do see that consolidation play that rollup as being the primary kind of deal that I’m seeing. But there are also other variations of that as well.

MMG: So now we’ve been, of course, diving deep into youth sports, but as I mentioned earlier, PE investors are gaining a foothold in multiple pro sports leagues as well. So are there any interesting observations on deals or investor strategies that you’ve been watching on the pro side?

CR: There certainly has been a lot of activity, as I think you mentioned in your opening around investment in professional teams in limited partner stakes or minority stakes, and the NFL was the last of the four major leagues to open up those LP stakes to private equity. And we’re seeing announcements, even as we record this, of some new deals being done in that regard. So I guess over the last two or three years overall, we’ve seen private equity start to really get excited about investing in teams in the NFL, MLB, NHL, NBA and that has been a real driver of deal flow and excitement. And I think what these private equity firms see is that over the long run, these sports franchises have really continued to grow in valuation, which makes them attractive and, you know, potentially low risk although everything brings its risk with it. On the other hand, the sports teams, as they get more and more valuable, it gets tougher to find private individuals who can afford the valuations that some of these teams are going for. So they’re happy to have private equity, institutional capital at the table. So I think that’s one of the biggest trends we’ve seen over the past two or three years in sports investment is the growth of institutional capital in these professional teams.

MMG: Your specialization is at sort of this juncture of sports and media. That’s certainly an exciting sub-sector of the larger sports picture that we’re talking about here. What trends are you noticing in sports media investment?

CR: Sports media is, like all media, in a little bit of a challenging space right now because of just some macro trends in media, the difficulty with ad dollars, some of the changes in the way for the digital space of, you know, Google algorithms and AI are impacting traffic flows on sports websites. So I would say while media is an important part of what I do, and as I mentioned I think in this discussion several years ago, I sold Sports Illustrated and continue to do a lot in the media space. I think media is an area where there are needs for new revenue streams, new creative structures. So you see media companies in the sports space, you know, trying to find revenues outside of advertising, maybe looking at e-commerce, maybe looking at betting affiliate relationships. Again, looking to find new ways of driving revenues because the legacy models in media are not as strong as they used to be. Now there are also new forms of media or relatively new forms, let’s say podcasting that may be hotter than some of the traditional areas. And so some of the energy moves into these new areas like podcasting or social media where you have influencers and creators, which are driving huge amounts of interest. So the landscape has shifted a little bit. And so it’s a little bit more of a mixed bag than it was four or five years ago where it was sort of straight up to the right

MMG: Talking about a mixed bag, you mentioned earlier in our conversation, there are so many niches in the youth sports space and there are so many niches in sports overall. So while I still have you, I want to hear your opinion on some of the most attractive niches for investors that you’re interested in when it comes to sports investment as a whole.

CR: One of the most robust areas in the last few years has been women’s sports. And that has really been, you know, driven by growth in ratings some amazing athletes like Caitlyn Clark, but by no means just Caitlyn Clark. Some exciting valuations that have happened in, you know, the WNBA, NWSL, soccer, and other women’s sports. So a lot of investors now are really focused on the growth going forward in women’s sports. I was involved in the sale of the legacy PHF women’s hockey league a few years ago to Mark Walter and the PWHL, which launched a new women’s hockey league, which is doing quite well. So a lot of activity in the women’s sports space. We also see a lot of activity in what I would call emerging leagues. Those are new leagues that might be, you know, pickleball for example, or table tennis or, you know, all kinds of other, in some cases, quirky and crazy ways that people can compete. But I think because the four major leagues have gotten so expensive from a valuation standpoint, some investors are looking for alternatives and some of these emerging leagues are actually very attractive. And then probably the final area of personal interest to me is the sports collectibles and memorabilia space. I’ve been spending a lot of time in that area over the past couple of years. It’s a very large sector, you know, $26 billion industry by some reports, but again, mostly fragmented mom and pop companies and I see a lot of momentum there. So I would say those are three of the areas of biggest interest to me. But there are others as well.

MMG: Fascinating. For some of our listeners who may be interested in learning more, we do have some further insights available on women’s sports, professional sports, sports betting on middlemarketgrowth.org. But as you just mentioned, there are so many pockets here, really attractive areas for investors that they maybe want to take a closer look into. So, Chris Russo, CEO of Fifth Generation Sports, thank you so much for joining the podcast.

CR: Thank you for including me. I appreciate it.

This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

The Middle Market Growth Conversations podcast is produced by the Association for Corporate Growth. To hear more interviews with middle-market influencers, subscribe to the Middle Market Growth Conversations podcast on Apple Podcasts, Spotify and Soundcloud.