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Alternative Market Briefing

Opalesque Exclusive: Private equity firm LionRock launches into sports

Tuesday, January 07, 2020

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Tom Pitts
B. G., Opalesque Geneva:

Hong Kong-based LionRock Capital Partners is launching a consumer/sports private equity fund in partnership with Li-Ning Company Ltd, a Chinese company which makes athletic shoes and sporting goods. Opalesque talked to Tom Pitts, head of LionRock Europe and investment committee member, about this new sports fund.

Opalesque: how much have you raised for the fund?

Tom Pitts: The initial main fund should be soft-closed by the middle of Q2-2020. We've been raising capital for the last three months; to date, we have raised $300mn and hope to reach $1bn through both our GP and the co-investment vehicle. We could get very large given who's behind us if the investment warrants that. Li Ning was our initial investor with $61mn through his listed company. No question, with the sort of assets that we are looking at, those pools of capital that have a history with consumer brands are pushing hard on co-investment rights.

Opalesque: what is your investment philosophy?

T. P.: We like to have a counsel of wise men around us. We have built a very strong co-investment ethic where a number of our investors tend to be quite hands-on and are not afraid to roll their sleeves up and probe the investment thesis. Maybe it's our Catholic roots, but I think a certain amount of self-doubt and debate is only healthy.

Opalesque: tell us about Li Ning.

T. P.: Our edge pivots with Li Ning. He is truly at the epicenter of sports in China, given not only what he has accomplished as an athlete, but through his brand which as the NY Times wrote last month: "the hottest brand in global sports apparel". He is an active participant in the drafting of policy papers with the government on the evolution of sports and wellness in China. He has 7,000 stores, 60,000 employees, and as a policy architect, he does bring an obvious edge.

Opalesque: what was the rationale behind the fund?

T. P.: We have always had a pre-disposition around sourcing reasonably price calls on the emerging and maturing Chinese consumer. Around sports specifically, we have two assets. We are an investor in Suning Sports, which is the holder of the broadcast rights to all the major football leagues back into China. We have owned that for a couple of years now, alongside Jack Ma, Goldman Sachs, and China's giant consumer electronics retailer Suning. Post that deal, we were approached to consider a 30% minority interest in Inter Milan alongside Suning, which held the 70% stake. This trade put us deeper on the map as a fund that looks at sports and entertainment. Dan Tseung, the founder of LionRock, knew Li Ning from when TPG Capital took a stake in Li-Ning, the company. back in 2012. We got together with Li Ning and felt we should do something together, as a best in class platform in China and a fund that can buy stakes in overseas brands.

Much of the push for the fund comes with watching Anta Sports, Li-Ning's largest competitor. Last year Anta led a consortium to take over a Finnish holding company called Amer Sports for €4.6bn. Amer owned Wilson, Solomon, Arc'teryx, Atomic, and Peak Performance as well as a few other brands.

Opalesque: what are you looking for in a brand?

T. P.: We look for one that has a light footprint in China, that has been around for a while and is not a restructuring story. Really, the question we need to answer is, will this product sell in China. If the answer is yes, we can super-size that brand in short order. This low touch management approach makes us more palatable to engage with. Interestingly enough, we have had a couple of approaches with brands currently held by private equity as we are seen as both like-minded and the quickest path to scale in a market which is otherwise a very tricky one to navigate.

Opalesque: what would be the effects of an economic downturn on the sports good market in Asia?

T. P.: There is definitely an issue around skiing. Everywhere around the world, skiing is turning into an activity that's reserved for the rich. This year in Vail, Colorado, a single adult ski ticket for the day is $210. There is certainly some elasticity there.

Li-Ning's product line does not price as a premium good. In fact, their apparel sells at a discount to both Nike and Adidas. They are heavily branded as Chinese athletic wear with bold Chinese characters often seen and are starting to play in the cross-section between fashion and sports, having been shown at the Milan and Paris Fashion weeks. Their basketball shoes can be considered technical as they sponsor the likes of Dwayne Wade and D'Angelo Russell, and they are beginning to roll out collaborations with both Atmos and Rick Ross on the fashion side. Young Chinese consumers really to buy into the leading national brands especially with all the trade friction. Li Ning only stands to win from this theme. Despite all of this, the brand is squarely mass which is really where we are focused.

Opalesque: do you look into future-oriented products?

T. P.: No question we need to be extremely aware of the culture of the brands we are buying into as it extends to their ideals around the working conditions with their manufacturers and how they source and think about materials. We want to avoid any company which does not have a demonstrated ethical lens through which it assesses its production - this is something which we will not compromise with. Having said that, a lot of brands that we've talked to don't have any production in China or Asia over fears around losing control over the quality. Having worked in Asia for many years, I've seen the deep bruising that can happen when a Western brand comes in and contract the local factory; the first batch is pretty good, but by the tenth, the goods look very different from what was originally bargained for. Like anything in life, you need to stay on top of your manufacturer - which can be awkward if you sit in Berlin.

Li Ning has 60,000 people working for him in China, and if we decide to outsource some of the foreign brand's production to China, we have a lot of boots on the ground ensuring a certain quality control. So from that perspective, the ability to outsource smartly is much easier than rolling the dice on a factory somewhere in Asia.

Opalesque: tell us about your Inter Milan football club directorship.

T. P.: While Dan and I would never describe ourselves as born and bred football men, having grown up in the US and Canada, we are real sports enthusiasts as we both get up at all hours in Hong Kong or Zurich to watch college football or hockey. We are having a terrific time with the club as we both serve on its board and certainly find ourselves getting smarter every day.

When we were first approached to buy the Inter Milan stake, our initial response was best described as muted, as it is hard to make it fit within the private equity model. In the early stage of our diligence, we watched a round table at the M.I.T. sports analytics conference which debated whether Steve Ballmer, the former CEO at Microsoft, had overpaid when he spent $2bn for the Los Angeles Clippers of the National Basketball Association (NBA) in 2014. I didn't think much of that deal at the time but the panel was surprisingly constructive around the valuation.

Opalesque: what else have you found out about sports franchises?

T. P.: The more work we did around sports franchises, the more we realised there are very few examples of live content like sports that provide the attachment, the followers and the eyeballs of such a passionate audience.

Now you see funds being formed to buy LP stakes in clubs and private equity is increasingly being caught in the mix for franchises. Recently, PE firm Silver Lake Partners took a 10% stake in Manchester City for $500m, a deal that valued the soccer group at nearly $5bn which is more than twice the valuation that both Deloitte and KPMG attached to that club over the summer. That asset will fit nicely into their roster of sports-related businesses and through time, it will probably do very well for them.

There is so much deference to the tag line "content is king" and the millennial theme of experience over stuff. Today, sports are only starting to catch up around how they deliver the players' stories and curate content to win an active engagement with the fan. Today's fan for the big European clubs is as likely sipping a cappuccino outside the stadium as he is in front of his TV in Dubai or Dallas - and this is something that the sponsorship community is all over. We, collectively, need to get smarter here.

Opalesque: Do you look at anything else?

T. P.: Sports and apparel are very tangible and easy to talk about. But for LionRock it can also mean recovery drinks, nutrition bars, or yoga mats, anything you can imagine in and around a sports shop. Everybody, it seems, has a perspective on a sports brand of one description or another and we are finding it extraordinarily interesting understanding the toggles for success.

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