Can Private Equity benefit college sports?

[Hoo's That]

The biggest opportunity for PE will come when the bluebloods leave the NCAA. The teams will be operated by some sort of ownership situation, either by the schools themselves (like the universities in Mexico City and Nuevo Laredo own teams in Mexican soccer) or private ownership which uses everything seen on game days now via license fees paid to the universities.

Oh, and in answer to the topic of the thread - No, private equity only benefits those with shares and not anyone else. Personally, I'd like to see it taxed out of existence because of all the bad things it has done, continues to do, and will do in the future if not stopped.

 

[GoSU96]

I get it but I think this downplays the point of what PE is there to do - provide returns. Without confidence (either through their direct management or via the current management structure) that sufficient profit would be cleared, they’re out. And what in the current management structure of 98% of college athletic program management would give that confidence today?

‘They aren’t for profit entities, so why would it be of interest to management. Football’s job in college is to, 1) pay for itself, 2) generate enough excess revenue to support the rest of the AD, 3) any remainder to go back to the school.

I don’t see the play.

 

[HtownOrange]

There is a difference between GP and LP. In the GP role, the PE firm owns the entity, in most cases outright or full control of the board. In traditional PE investing, investors serve as LPs. Meaning, you give the PE firm (GP) money in hopes for a return on your commitment.

In this example, the poster is inferring that the PE firms act as LPs, where they don’t own the majority of a conference or school, but rather they are giving capital in hopes of a return.

Think of it as if you invest in a mutual fund, ETF, etc. If you invest in an index or active fund, you are hoping that the index / fund deliver returns. You are not necessarily dictating in what companies the manager or index actual index invests in.

This is a little oversimplified, but hopefully it helps.

Thanks for the explanation. If the PE is in the GP slot, as most interweb mouths seem to indicate, there is no long term benefit to a school or conference to sell out its position. Once sold, there is no return for the school or conference.

If the PE is in the LP slot, why are they necessary for a properly run AD. In a poorly run AD, i.e. Rutgers, UConn, FSU, where is the real benefit as they are not likely to ever generate a return on the investment. Essentially, the PE money is a gift to the school. While FSU could conceivably gain a return after a decade or two, a return not likely to meet PE expectations, the other examples {Rutgers and UConn) have failed to attain a limited run in the red let alone run in the black.

And this fails to factor in the penultimate mission of the university and conferences. (Recall that conference are combinations/collectives of sports teams from ACADEMIC institutions, so yes, athletics must support the overall mission).

Apologies for oversimplifying a response to your oversimplified explanation (I think we can agree a fan site is not the optimal forum to resolve such a complex issue), but I hope you can understand why I cannot yet reconcile the hype from fanboys and talking heads, with FSU's Alford thrown in for good measure. And Alford must be discounted to a significant degree as he is simply wrong on so many fronts.

 

[OttosShoes]

Rutgers, UConn, FSU, where is the real benefit as they are not likely to ever generate a return on the investment.

I think the FSU move is "you buy us out of the ACC contract, we give you everything from the SEC one that replaces it." But the jokes on them because the SEC already has enough bad teams pretending they aren't.

 

[HtownOrange]

1.) This is all hypothetical. It all started with FSU putting out feelers to PE firms because they need help with the entire ACC GoR issue. The reason we haven’t seen it is because collegiate anthletic departments aren’t set up to provide IRRs of 20 plus percent.

2.) However, as one poster threw out there, conferences perhaps could be. Let’s use the ACC in this case. Perhaps PE firm XYZ injects capital in the ACC. They could give money for the ACC to pay for someone else’s GOR. They could install a board of experts in media contracts, marketing, etc. Again, all hypothetical at this point.

I agree with Item #1. Alford fooled everyone into thinking he could pressure the ACC and ESPN to his will while conning the SEC and/or B1G to offer FSU sanctuary following their bullied exit from the ACC. He lowballed the ACC with an offer to pay an exit fee of $100MM (less than the agreed upon exit fee) and receive FSU's TV rights back for free. It came out that FSU does not have $100MM to back this offer. If I recall correctly, then Alford reached out to PE for the exit fee. Then reality hit and Alford and FSU have been backtracking since.

Regarding Item #2, the issue remains that the PE will want a big return. Assuming another GOR is worth breaching (it isn't per UT, OU, USC, UCLA and FSU but set aside this evidence to date for the sake of argument) this leads to two questions: 1) How will the acquisition generate sufficient returns for a PE investment? and 2) Wouldn't it be wiser to hire consultants/advisors to ensure the proper analysis and legalities have been met before acquiring a new school?

P.S. Thanks for your responses, and for t hose of others adding insight. This is what I am looking for, though it appears I am being combative, I am using this to further my understanding of the issue. While I am not convinced I should trade in my position, I remain willing to look deeper into the matter before taking a firm position.

 

[HtownOrange]

This is exactly what I am thinking. The investment at the LP level is typically in equity, not debt. That suggests a longer term investment. The capital injection is accretive to the value of the conference (and therefore the investment) by raising payouts to member schools as one example. That in turn keeps some teams around and viable, while attracting other teams that also want to remain viable. This can make the conference something of a selector that can build value for things like TV deals (increases through look-ins) or simply selecting schools that have sound AD fiscal responsibility to ensure there will not be losses or drop offs in investment, making it a safer investment vehicle (like how blue chips are not often high reward, but also not high risk, especially over a longer term). All the examples CIL gives are GREAT examples of how investment can drive value without relying on the skill/fiscal responsibility of the individual AD. It will incentivize ADs to reinvest, or find ways to become more profitable so that they CAN reinvest.

When I work on an operations budget for a property, I am often reminded of the sins in building the property. Those "sins" were often the result of trying to maintain the debt budget, (money borrowed to build the property) so that balancing must be done with great care. It demands responsibility and strategy. This is where so many ADs lack the discipline, instead leveraging their future equity to justify blowing the debt budget. Private Equity will not allow for this, which is why I see it happening at the conference level first (at least with any substantial investment). The PE at the AD level is already happening in the form of alumni donors. These are the seed investors. The Arthur Rock of the scenario.

Arthur Rock - Wikipedia

The outstanding question there that we have all been asking is, "what is the return?" Why did Standard Oil invest in Syracuse University, (see Sims and Archbold)? The answer there I believe was largely "tax shelter". Now-a-days, it could be access to talent. Could argue this is why it's increasingly important to become a research institution. Look at the B1G and their dedication to engineering, bio, and tech research. This is why they insist on being an AAU member (and BTW, half the ACC schools are also members - GT, Cal, UNC Duke, Pitt, UVA, Stanford, Miami, Notre Dame).

Thanks for the response. I understand your comments but see the application only for the B1G and the SEC which neither would be interested in sharing profits with PE for a cash infusion. To obtain most new properties, they need only patience, which is likely to cost them less (no fees, loan interest, ROI, etc.) for buying a property now in lieu of waiting until the property becomes available.

I don't see any expansion for the ACC being worth the payback, again much for the same reasons as t he B1G and SEC. The only teams worth doing this for are B1G and SEC top dogs, who are not leaving their thrones to join the ACC.

Regarding the Big 12, they will have issues holding on to what they have if any of the B1G, SEC, and/or ACC come calling, though they will hold on until the present agreements run their courses.

Just my opinion.

 

[HtownOrange]

I think the FSU move is "you buy us out of the ACC contract, we give you everything from the SEC one that replaces it." But the jokes on them because the SEC already has enough bad teams pretending they aren't.

I think you are correct, but then PE looked at the real cost of getting out of the ACC early and politely handed FSU their collective hat, shoved them out the door, and said, "What's your hurry?"

 

[NJCuse97]

Thanks for the response. I understand your comments but see the application only for the B1G and the SEC which neither would be interested in sharing profits with PE for a cash infusion. To obtain most new properties, they need only patience, which is likely to cost them less (no fees, loan interest, ROI, etc.) for buying a property now in lieu of waiting until the property becomes available.

I don't see any expansion for the ACC being worth the payback, again much for the same reasons as t he B1G and SEC. The only teams worth doing this for are B1G and SEC top dogs, who are not leaving their thrones to join the ACC.

Regarding the Big 12, they will have issues holding on to what they have if any of the B1G, SEC, and/or ACC come calling, though they will hold on until the present agreements run their courses.

Just my opinion.

I don't see much in this at all (as I think is the case with you too).

That said, in my mind, there is more room for improvement/upside with the ACC than the B1G or SEC. I think that is why we don't hear of it from those two conferences. They are the selectors, but as soon as either contemplates pushing one of their members out to make room for new blood (money) the conversation changes. Would the ACC want Miss State, or Auburn? What about Iowa or Purdue, or an opportunity to take back the seaboard with Maryland and Rutgers? I can see scenarios where the mid-tier teams (and maybe Rutgers) could present opportunities to the ACC that an outside investor could make feasible. Would the ACC want a piece of Nashville and Chicago by using the money to entice Vandy and Northwestern? With outside money leveling the field, the ACC could have a better shot at swinging USC and UCLA given Stanford and Cal. Think what that opens (ASU, Colorado, Utah for example). It also has the potential to end the FSU and Clemson silliness through larger payouts (to all teams? imbalanced based on value perception to the PE?).

It gets easier to see why there is chatter about it, no matter how unlikely. In my mind the real AI boom is still 8-10 years away from bearing real fruit, but it's all anybody's talking about these days.

 

[Scooch]

This thread is fantastic. Thanks HtownOrange for starting it!

A question perhaps best directed to NJCuse97, but anyone feel free to jump in... What has been the motivation for PE to get involved with pro sports?

I mentioned the Red Sox upthread. Red Bird Capital bought a 7% (?) stake in the team from John Henry's ownership group a few years back. What has been in it for them?

I get why John Henry found it appealing, but is PE buying a single digit stake in a pro franchise anything more than a simple minority ownership stake that any individual could purchase?

 

[Timonen]

‘They aren’t for profit entities, so why would it be of interest to management. Football’s job in college is to, 1) pay for itself, 2) generate enough excess revenue to support the rest of the AD, 3) any remainder to go back to the school.

I don’t see the play.

The play (which would be berserk if it actually happened in the college sports zone) is the Middle East sports-washing angle. Saudi doesn’t care about returns. It wants to be involved in things that attempt balance all the awfulness in their regimes….so let’s buy Newcastle football club or overpay for the ATP tennis finals or pay for older soccer players to come play in a league that is barely even watched domestically. When that starts to poke into college sports, it’s all over anyway

 

[NJCuse97]

The play (which would be berserk if it actually happened in the college sports zone) is the Middle East sports-washing angle. Saudi doesn’t care about returns. It wants to be involved in things that attempt balance all the awfulness in their regimes….so let’s buy Newcastle football club or overpay for the ATP tennis finals or pay for older soccer players to come play in a league that is barely even watched domestically. When that starts to poke into college sports, it’s all over anyway

Interesting point and "Sovereign Wealth Funds" who are often these PE investors certainly do a fair amount of "white washing" or public image scrubbing with investment, even just to lay claim to being an "conventional investor" on the world market. I have heard this about middle east oil money such as the Saudi SWF. The assumption is it not only brings the prerequisite prestige amongst the public, but legitimizes aspects of some regimes.

 

[HRE Otto IV]

This thread is fantastic. Thanks HtownOrange for starting it!

A question perhaps best directed to NJCuse97, but anyone feel free to jump in... What has been the motivation for PE to get involved with pro sports?

I mentioned the Red Sox upthread. Red Bird Capital bought a 7% (?) stake in the team from John Henry's ownership group a few years back. What has been in it for them?

I get why John Henry found it appealing, but is PE buying a single digit stake in a pro franchise anything more than a simple minority ownership stake that any individual could purchase?

A pro sports team is equity which can appreciate. Which isn't the case in college. At least not in its current form.

Buying a piece of the Red Sox you relatively know your revenue streams. You know that there will be a buyer should you one day want to sell. You are in a closed league.

If you buy Pitt football you have no clue what the revenue will be beyond the current TV deal. With a open system there is always a threat that Pitt gets "relegated" to 2nd citizen status which greatly impacts your future revenue. You have the potential for Academic or Government interference which could greatly impact future revenues. You have no clue if there will be a buyer if/when you want to sell.

Now if there were a Super League, I see how PE buying into it makes sense. But no way do I see a benefit for PE to invest under the current landscape.

 

[pokercuse08]

I assume the sports, at least the money makers, would be the only items under contract with PE, whether "sold" outright or allowed to be managed. I assume academics, students, activities outside of the AD, etc. would remain under the University's control.

My assumption is that the deal would be something like... Private Equity offers FSU a $300M lump sum, contingent on FSU negotiating its way out of the ACC for that amount in a deal that preserves its media rights AND on getting an offer from the SEC/B1G. FSU then gives private equity something like a $7-10M/yr payment (half to two-thirds of the increased revenue from the conference), and control over ticketing/concessions/merch with PE paying FSU a cut of ticketing.

Obviously it's hard to see how it pencils out without all the details, but it would be a way for a team to break out of the ACC earlier. The other scenario is similar, but would see PE injecting the difference in ACC vs B1G/SEC revenue each year in exchange for control over merch/concessions/ticketing that would allow them to make up that much and more. Of course, why do this if you can just do the same stuff PE would do and increase that cash flow anyway?

At the end of the day, the deal would likely boil down to up front cash in exchange for a share of revenue that returns 15-20% per year on the initial investment for PE that goes on in perpetuity, backed by enough collateral that the PE fund can't lose. You get the result you want in terms of realignment for your school sooner, but in exchange 50 years from now your fans are complaining on message boards about how you're STILL paying the PE fund millions of dollars a year, and that's if things go well. If things go poorly, they circle like vultures and sell off your weight room and take a 100% cut of the revenue of every event in your stadium and charge your university exorbitant fees to use it for graduation etc etc.

 

[pokercuse08]

A pro sports team is equity which can appreciate. Which isn't the case in college. At least not in its current form.

The value of college athletics programs can definitely appreciate or depreciate in current form. Syracuse is worth a hell of a lot more now than it was a year ago. UCLA and USC are worth a lot more now than they were a few years ago. The blue bloods are all worth more now than they were 10 years ago. We just don't see a lot of estimates of this value, and there's no open market to prove the numbers from time to time.

But rest assured, the same way a privately owned business can increase in value based on its revenue and profit growth, these programs are doing the same.

If you buy Pitt football you have no clue what the revenue will be beyond the current TV deal. With a open system there is always a threat that Pitt gets "relegated" to 2nd citizen status which greatly impacts your future revenue. You have the potential for Academic or Government interference which could greatly impact future revenues. You have no clue if there will be a buyer if/when you want to sell.

Higher returns would offset the higher risk with some programs. Once PE starts buying up pieces, there will be an open system because they will always be able to sell their shares. Given that their share will be attached to revenue, they will be easy to put a valuation on based on projected revenue, current interest rates, etc. There will always be someone willing to buy it, even if it's at 80 or 90 cents on the dollar of that valuation.

Now if there were a Super League, I see how PE buying into it makes sense. But no way do I see a benefit for PE to invest under the current landscape.

I think it's the other way around. Like, PE couldn't get into the NFL until now because the NFL didn't need their money. They relaxed the rules because the Saudis are giving their money away and the NFL owners want a piece. But entities that don't need the cash from PE are harder to break into, and those are the most valuable entities.

So PE can't buy a piece of Ohio State or Michigan or Alabama or the B1G/SEC, but maybe they can buy a piece of FSU and get into the SEC later - at which point they are grandfathered into it and can perhaps influence the conference to allow them to buy more.

 

[HRE Otto IV]

The value of college athletics programs can definitely appreciate or depreciate in current form. Syracuse is worth a hell of a lot more now than it was a year ago. UCLA and USC are worth a lot more now than they were a few years ago. The blue bloods are all worth more now than they were 10 years ago. We just don't see a lot of estimates of this value, and there's no open market to prove the numbers from time to time.

But rest assured, the same way a privately owned business can increase in value based on its revenue and profit growth, these programs are doing the same.


Higher returns would offset the higher risk with some programs. Once PE starts buying up pieces, there will be an open system because they will always be able to sell their shares. Given that their share will be attached to revenue, they will be easy to put a valuation on based on projected revenue, current interest rates, etc. There will always be someone willing to buy it, even if it's at 80 or 90 cents on the dollar of that valuation.



I think it's the other way around. Like, PE couldn't get into the NFL until now because the NFL didn't need their money. They relaxed the rules because the Saudis are giving their money away and the NFL owners want a piece. But entities that don't need the cash from PE are harder to break into, and those are the most valuable entities.

So PE can't buy a piece of Ohio State or Michigan or Alabama or the B1G/SEC, but maybe they can buy a piece of FSU and get into the SEC later - at which point they are grandfathered into it and can perhaps influence the conference to allow them to buy more.

Who are the buyers for a college football team? There isn't demand under the current structure even if it did exist, which it never will. These are no profit athletic programs. There are no shares to buy or sell.

The NFL will likely still exist 100 years from now. The current form of the ACC won't likely make it another 10 years. Huge difference investing into an NFL team vs an ACC team.

 

[pokercuse08]

Who are the buyers for a college football team? There isn't demand under the current structure even if it did exist, which it never will. These are no profit athletic programs. There are no shares to buy or sell.

The NFL will likely still exist 100 years from now. The current form of the ACC won't likely make it another 10 years. Huge difference investing into an NFL team vs an ACC team.

You're hung up on this lack of a market to buy/sell teams, as if that means there are no valuations for these teams. If you walk into a local restaurant, laundromat, or car dealership they are all worth some value that we don't know based on their revenue, debt, profitability, assets, etc.

In CFB there would be a ton of demand if ADs started selling shares in football programs. Most of them don't need to sell and would be crazy to do so. You can't say there's no demand for the Dallas Cowboys just because Jerry Jones isn't selling right now. Same concept applies to the top college football programs.

As for the last part, if they buy a piece of FSU they're hoping to be out of the ACC anyway. And if they're buying a piece of the ACC, they're getting a risk premium based on the chances of that conference still surviving in 10 years. Investors buy pieces of stuff that might not exist in 5-10 years all the time.

 

[NJCuse97]

This thread is fantastic. Thanks HtownOrange for starting it!

A question perhaps best directed to NJCuse97, but anyone feel free to jump in... What has been the motivation for PE to get involved with pro sports?

I mentioned the Red Sox upthread. Red Bird Capital bought a 7% (?) stake in the team from John Henry's ownership group a few years back. What has been in it for them?

I get why John Henry found it appealing, but is PE buying a single digit stake in a pro franchise anything more than a simple minority ownership stake that any individual could purchase?

Not sure I am the best (I'm an architect with experience in a private real estate investment/development organization). That said, my best guess is first and most simply, professional sports franchises pretty consistently increase in value as do the TV deals associated with them.


This is true of the NFL

https://www.cnbc.com/2024/09/05/rising-nfl-valuations-massive-returns-for-owners.html

Part of it is the brand/merchandising, part of it is the gate and broadcast revenue, and part of it is the physical assets. Bruce Ratner (Forest City Ratner) bought the NJ Nets so that he could relocate them to Brooklyn. He wanted to do so in large part because he saw the physical presence of the franchise as a value add to his proposed housing project that would surround the arena and establish the area as a destination, dramatically increasing the real estate value of the project.

Bruce Ratner - Wikipedia

en.wikipedia.org

And EPL is another example of 'good investment'

Why America is buying up the Premier League – and what it means for the future of ‘soccer’

www.port.ac.uk

 

[Oakland]

Who are the buyers for a college football team? There isn't demand under the current structure even if it did exist, which it never will. These are no profit athletic programs. There are no shares to buy or sell.

The NFL will likely still exist 100 years from now. The current form of the ACC won't likely make it another 10 years. Huge difference investing into an NFL team vs an ACC team.

I don't think they are looking to buy college teams (maybe later!), they are looking to invest in the cash flow of these teams.

 

[HRE Otto IV]

I don't think they are looking to buy college teams (maybe later!), they are looking to invest in the cash flow of these teams.

Without a share, it is just a loan. Which makes them loan sharks. Since college sports have a non profit status, it makes it hard to make money through investing.

 

[CIL]

Without a share, it is just a loan. Which makes them loan sharks. Since college sports have a non profit status, it makes it hard to make money through investing.

It’s called private credit. Basically a loan from a non traditional lender.

 

[HRE Otto IV]

It’s called private credit. Basically a loan from a non traditional lender.

I get that but does a school even need that when they certainly can get a traditional loan or even have the AD borrow from the school itself?

For it to make sense for the school it would have to be a lot of money at a cheap rate. Which is the opposite of what benefits the PE.

 

[GoSU96]

Which for 85% of D1 is $10m or less

The other 15% don’t need the help and the e remainder the Juice ain’t worth the squeeze

There’s no business model other than the actual football programs are spun off from the universities and privatized and that would be a huge hit to good will, All that is the AHL or international league with bigger brands in smaller markets.

At point why wouldn’t the NFL just skim the cream right out of HS or their first year?

 

[Oakland]

Without a share, it is just a loan. Which makes them loan sharks. Since college sports have a non profit status, it makes it hard to make money through investing.

From the little I have read, it is definitely not a loan; they get a share of the cash flow - think of it as a royalty trust.

 

[AZOrange]

Would love to see their model…

 

[FireballPhil]

As far a FSU goes I am not convinced PE would buy in so FSU could leave the ACC, especially with no landing spot guaranteed. I think a PE could do more is FSU actually stayed in the ACC. But again, one school alone isn't going to swing it, there just isn't enough ROI