In a recent analysis from Baird, the investment firm and financial services company forecasted that tech advances, improved player performance and safety features, elevated traditional and social media exposure, and other economic factors will accelerate the future of team sports participation, benefiting from both the sporting goods industry and its investors.
Baird admitted that the company’s bullish sentiment represents a contrarian view as conventional wisdom holds that the mostly meager team sports participation gains, or even declines in some sports, over the last two decades reflect less interest from younger consumers, particularly Gen-Z, in traditional sports.
“For these younger consumer cohorts, traditional team sports took up too much time, were viewed as difficult and/or boring and did not sufficiently reflect or complement their identity,” Baird wrote in its analysis. “Non-sports activities, such as streaming and on-demand television, video games, social media, mobile devices, and nontraditional sports, such as adventure sports, e-sports and spin-offs of existing sports, filled the void and grew at a much faster pace.”
Baird noted that player safety concerns (i.e., overuse injuries and concussions) have also impacted team sports participation, subsequently depressing investor sentiment in the team sports sector.
Over the years, disappointing paybacks on the hard goods side, including from Nike, Adidas, Newell Brands and Jarden, have also soured investor appetites, even though private equity-supported platforms have fared better over the years; however, Baird sees societal, economic and technological shifts incentivizing sports participation and the underlying earnings potential for the industry. Baird wrote, “As the ‘tide turns’ in favor of traditional team sports, we anticipate participation rates, average spend per athlete, pricing power and overall category revenues will experience upward shifts, and we anticipate attractive and unique investment opportunities.”
Among the “societal” changes driving Baird’s forecast for a brighter future for the team sports industry are NIL (name, image and likeness) deals, which it believes “will become a game-changer.”
According to Baird, NIL contracts allow entrepreneurial, amateur athletes to “cash in on their shining moments,” especially those adept at social media, with the financial incentives serving as “a catalyst for early and continued participation for amateur athletes.”
For example, Baird noted that LSU’s All-American gymnast, Livvy Dunne, with over 12 million followers across TikTok and Instagram, scored a “mid-six-figure” contract with the Vuori activewear brand, as reported by Forbes.
Relatedly, the rise of social media has elevated engagement opportunities for amateur and pro athletes and has “transformed the culture of sports consumption, changing from an individual activity to a group or community-building activity and allowing the sports industry to become ingrained into people’s everyday lives.”
According to Baird, social-media interaction continues to “humanize” elite athletes, making them more “relatable” to fans, driving interest in watching sports and helping “young consumers develop real connections to their idols and yearn to participate at a younger age.”
Baird’s analysis added, “At every level, an athlete’s brand value is growing in importance as they explore new sources of revenue as influencers.”
While past studies have identified a negative correlation between TV consumption and physical activity, Baird sees signs that richer athlete engagement through social media “could be mitigating and, perhaps, reversing this downward trend.”
Baird wrote, “Active or passive (e.g., social media, watching) participation elevates interest, which in return drives appreciation and potential future active participation. The assumption is that the more someone knows about sports (e.g., rules, strategies, tactics, players) or has engaged (actual participation or viewership), their appreciation and probability of participation is higher.”
Women’s Sports Having A “Turning Point”
Other “societal” drivers in team sports participation and spectator interest are in women’s sports, marked by record game attendance, increased viewership and major media deals.
Baird states in its analysis, “Recent studies indicate younger fans have the greatest appetite for watching women’s sports, and they are driving women’s sports viewership at a faster rate than the overall category. Moreover, the number of women who currently play sports or who closely follow sporting events is steadily increasing. Importantly, NIL is helping women college athletes bypass prior barriers to receive endorsement monies and other compensation, which creates a pathway for them to optimize their athletic primes and sets themselves up for the future.”
The analysis also points to often-cited drivers of team sports participation, including participation’s psychological and social health benefits, including boosts to self-esteem and lessening of depression, receiving renewed interest with greater attention to mental health, especially among younger athletes. Baird also noted that studies show team sports participation is more closely linked to improved health than individual sports due to its social nature.
Also cited in the analysis is how sports bring people together, providing “a sense of identity and community.” Baird wrote, “Sports can also overcome differences and encourage dialogues to combat prejudice, ignorance, intolerance, and discrimination. Notably, sports significantly contribute to our other sources of entertainment, including movies and music, as well as our economy.”
The analysis outlines how team sports play and fandom had a strong recovery following the shutdown phase during the COVID pandemic, providing a “feeling of normalcy, excitement and resiliency across all professional and amateur sports.” The analysis cited Aspen Institute’s 2022 State of Play report that found kids ages 5-to-18 averaged 16.6 hours of sports play per week in 2022, up from 7.2 in 2020 and 13.6 pre-pandemic, outpacing individual sport participation.
Among “structural and economic” factors favoring team sports, Baird cited increased team valuations across the four major U.S. sports leagues and overseas soccer clubs as “a proxy for team sports growing as a percentage of the broader economy.”
With media rights deals increasing, Baird sees teams incentivized to market their players. As teams and league values increased, player compensation has “exponentially more than their predecessors from just two decades ago.” Earnings opportunities have also multiplied for athletes off the field via sponsorship and licensed merchandise deals.
“As diverse economic opportunities, player compensation and social media stardom grow and gain visibility, participation and interest in team sports will expand at every level,” Baird writes in the study. “The economic opportunity and motivation for athletes has never been greater, which is a powerful driver of future participation.”
According to Baird, the spread of legalized sports betting with the booming sports gambling industry is more likely to “pay dividends for all sports stakeholders, including players.”
Operationally, the arrival of a wide range of increasingly sophisticated ecosystems supporting youth sports is also creating investment opportunities. With the transition of volunteer-driven organizations to “for-profit” leagues, new clubs have built digital platforms that make onboarding, scheduling, payments, and real-time logistics easier for young athletes and their parents. Companies, including 3Step Sports and League One Volleyball, among others, also offer advanced coaching, cutting-edge facilities and competitive opportunities to budding athletes. Likely consolidation across youth clubs and leagues is expected to lower costs for parents and improve ease of access for a greater portion of the youth athlete population.
Finally, the arrival of NIL deals also promises to “increased awareness, excitement, and interest” among students and parents in high school team sports. Like lucrative salaries for pro athletes motivating athletes at the higher level, the “potential ‘trickle down’ opportunities for high school athletes can also be a powerful driver of youth and high school participation rates.”
Technology And Innovation
Among tech tools advancing team sports, Baird cited emerging solutions that provide more information on the impact athletes absorb while playing, promising to help prevent and reduce concussion rates and exposure over time and address the threats from high-impact sports, including football, hockey and soccer.
Data generated by sensors has also helped elevate a player’s performance and create “gameday excitement” for fans and advertising opportunities for brands.
Artificial intelligence promises further advances in smart food, neuro-coaching, gene therapy, and sleep management. Baird said, “No doubt this will result in a flood of new records and exceptional on-field/arena performance, drawing greater awareness, excitement, and interest to traditional sports.”
For investors, helping support valuations in the team sports space is a “growing new investor base,” including several by well-heeled athletes in a position to capitalize on sports-related investments. Baird wrote in its analysis, “With innovation and technology spreading into consumer-oriented arenas where athletes have the upper hand (e.g., sports, fitness, lifestyle, gaming, nutrition, entertainment, etc.), those ‘personalities’ utilize brand power and add value to already attractive opportunities.”
Pro athletes have joined forces with traditional private equity to invest in existing and new youth sports opportunities, including platforms creating the “ecosystem” modernizing team play onboarding, scheduling, payments, and logistics. Blue-chip institutional investors have formed funds to support investments in sports and related media and entertainment areas. Baird wrote, “Athletes, celebrities, influencers (“personalities”), and private equity have recognized the opportunity and are jockeying to invest in the category, and we expect to see this current momentum continue.”
Baird’s analysis focused on companies offering performance and protective equipment and accessories, primarily baseball and softball, football, hockey, golf, and tennis/pickleball.
Baird identified seven companies with “proven brand authenticity, operating scale and management sophistication” as potential optimal investments for private equity investors or strategic buyers looking to participate in the pureplay team sports equipment categories. The seven included Rawlings, TaylorMade, Wilson, Bauer, CCM, Riddell and Marucci Sports. (On November 15, Fox Factory Holding completed the acquisition of Marucci Sports from Compass Diversified (CODI) for $572 million, representing an EBITDA multiple of approximately 10.5x times).
Investment opportunities highlighted in the analysis included ECD Lacrosse, Epoch Lacrosse, Franklin Sports, Mission, Rapsodo, Spare, True Temper, and Warrior in equipment; Battle, G-Form, Guardian Caps, and Shock Doctor in protection; and Diamond Kinetics and Hawk-Eye Innovations in technology.
In future reports, Baird expects to expand its view to include the impact of consolidation in the team sports industry, the development of for-profit economy in youth sports and enrichment, and provide an in-depth look at major sport participation.”
Baird cautioned that its expectations are based on “multiple simultaneous change factors,” with some representing “recent phenomena” presenting more uncertainties. The analysis stated, “Importantly, Baird believes no one factor ‘moves the needle’ in a material way but the cumulative impact is generating positive psychological and behavioral effects among parents, players and coaches and driving increased demand in the ecosystem.”
Baird’s analysis comes as activity has increased in sports investments. Beyond the Marucci sale to CODI, Fanatics, cap maker New Era Cap, and Amer Sports, the parent of Wilson, have all reportedly explored initial public offerings.
On November 14, Reuters reported that private-equity giant Bain Capital was exploring a sale or IPO of Varsity Brands, the parent of BSN Sports and Varsity Spirit, in a deal potentially valued at more than $6 billion, including debt.
“Our team at Baird has been advising clients across the sports ecosystem for decades,” Matt Elberts, director and lead author of the article, told SGB Executive. “Yet, I don’t believe we’ve ever been more excited about the opportunities in front of the industry as we are today. Seemingly, investors agree as we continue to see an acceleration of capital and time pouring into the market. We expect this will be one of the most exciting sectors in the M&A market in the years to come.”
Photo courtesy FeXplained