03.05.19 Quarterly Insight

Ten years ago, few of us would have heard of esports, much less recognised it as an investable subsector within sport.

Today, however, whilst there is still routine confusion surrounding the difference between ‘esports’ and ‘gaming’ (more of which later), there is no doubt that esports has captured the imagination of not only Millennials and Gen Z but also the investment community.

Whilst applying suitable caution to headline-grabbing statistics, they can help provide some useful perspective as to the size and growth of esports. Nielsen reports that:

1. More people watched the 2016 League of Legends final (43m) than watched the NBA final game 7 of the same year (31m); and

2. Global audiences for esports exceed those of both the National Hockey League and Major League Baseball.

Even if these figures are half correct, this represents a remarkable achievement for a sport that was barely recognised ten years ago and, in part at least, helps to explain the growing interest of investors.

The key question for investors is whether this represents a sustainable trend?

Before delving deeper into the relative merits of esports investing, it’s worth clarifying the key difference between ‘esports’ and ‘gaming’.

In short, ‘esports’ is about competitive gaming that drives viewership and ‘fandom’. It is the following of established professional teams and players by an engaged and passionate fanbase. This is very different from ‘gaming’, which involves amateur participation by enthusiasts in their favourite games.

Estimates by NewZoo, an analytics and market research firm for games and esports, suggests that of a global population of 2.2bn gamers, esports players and viewers only account for around 5% of this. However, just like more traditional sports, esports has its legends of the game; so while Barcelona fans revere Lionel Messi, Dota2 fans’ reverence for ‘KuroKy’ is at least equal.

Driven by the rise of live streaming and improving infrastructure surrounding newly created professional leagues, 2018 global esports revenues are expected to exceed $1bn during 2019 and reach $1.7bn within three years. Beyond this, Fact.MR, a global market intelligence company,is forecasting that they will reach $6bn by 2028.

It is the confluence of this level of growth and an association with the next generation of paying consumers that is driving the burgeoning interest of investors. In particular, there is recognition of the potential growth associated with esports media rights deals which, at under 20% of global esports revenues, languish behind the likes of the NFL which is estimated to generate nearly 50% of its annual revenues from media rights. An approximate sector average is around 40%.

Data from CBInsights, an intelligence and analysis platform, shows a steep rise in capital raisings in the esports sector rising from $564m in 2012 to a forecasted $1.9bn in 2017 (the last year for which data was available); a CAGR of 27%. Given that in March 2018, Chinese behemoth Tencent Holdings invested over $1bn into the Douyu and Huya esports platforms over the space of just two days, it’s reasonable to expect that past levels of growth are set to continue – at least for the time being.

However, such large corporate financings mask the fact that, for the most part, investment in esports is still dominated by early-stage fundraisings, with 63% of all 2017 fundraisings being classed as Seed or Series A rounds. The corollary to a high proportion of early-stage fundraisings is that, in absolute terms, M&A activity (being defined as the purchase of a controlling interest) is still relatively limited, with only 24 deals being completed in 2017 according to Pitchbook – a research company covering capital markets. However, compare this to the four deals completed in 2012 and there are definitely tentative signs that the market is maturing.

Deal data from the start of 2019 is also encouraging. According to the Esports Observer, there was over $100m of investment in the month of March alone. This included the $19.2m acquisition of headset maker ROCCAT by Turtle Beach and Aquilini GameCo’s acquisition of Luminosity Gaming. More recently, 76ers and Dignitas owners, HBSE, confirmed that it would buy a majority stake in the Houston Rockets’ League of Legend Franchise, Clutch Gaming for $20m.

Against this backdrop and with the meteoric rise of new titles such as Epic Games’ Fortnite as well as EA’s Apex Legends (which saw an even faster take-up rates when launched), it’s not surprising that the investment community’s interest remains piqued.

However, seasoned investors will be looking for real value potential in their investments. This will involve consideration of the full gamut of opportunities and well beyond perhaps the more obvious investments into teams and franchises (albeit many of these have worked out very well for the early investors and, judging by Harris Blitzer Sports & Entertainment’s acquisition of Clutch, continue to garner interest). In this regard, there is an array of interesting opportunities within the wider ecosystem of esports, from innovative new platforms to exciting independent games publishers. Notwithstanding, as a niche and (some would say) often inwardly looking community, access to good quality esports deal flow can be challenging, as the traditional links between the companies and investors are, in many cases, not well established.

Oakwell Sports Advisory has forged strong links into the esports community – with both investors and companies seeking capital. We would be pleased to help you navigate a world which, to some, will be as confusing as some of its games!

Contact:
Doug Harmer

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