Today’s guest columnist is Sportico sports finance reporter Brendan Coffey.
It is not news to people in the industry that institutional asset managers are flocking to invest in teams, but it is worth noting that the amount of money flowing towards franchises and related businesses has increased significantly this year.
In recent months Gerry Cardinale’s RedBird Capital has started raising a new $2.6 billion fund, Arctos Sports Partners is raising $2.5 billion for its second new fund and private equity behemoth Ares Management just closed on a $2 billion focused fund on sports, which is oversubscribed.
The list goes on: Dyal Homecourt still plans to raise $2 billion to invest in limited partner stakes in the NBA, while the percentage of assets devoted to sports continues to increase at asset giants Silver Lake Technologies, Sixth Street and CVC Partners. Then there’s a gaggle of new sports and betting tech funds being launched by everyone from well-known industry executives to colleges to marketing firms.
In short, despite the troubled markets, these are good times for sports businesses seeking capital, as attendees at next week’s Sportico Sports Investment conference will no doubt see.
The driving force behind this “is the change in consumer behavior that is really driving the behavior of every advertiser on the planet, and that’s cutting a cord,” said Christopher Zook, CEO of CAZ Investments, a $4 billion asset manager.
Zook has spent 20 years chasing thematic investments, such as shorting subprime mortgages before the Great Recession and getting in early on the oil and gas fracking boom. His latest theme is sport. Zook has “several hundred million dollars” in the strategy now, with direct investments in esports and sports, and a large chunk in pro teams invested through Arctos. “How do advertisers reach the people they want to market to? The answer is that they really have to focus on live events, because that’s the only time people will actually let an ad pass by and watch it,” he said.
The expansion of sports gambling adds to the growth equation, while inflation only makes sports more attractive to investors, as teams have leverage to pass on higher prices to fans at the park, Zook said. Team land holdings also help, he notes, as real estate is a traditional inflation hedge.
No doubt the major teams and leagues are in the driver’s seat for raising capital. The long-term value growth of sports combined with its low correlation to other asset classes ticks two big boxes for the CFA crowd. But with big money comes — well, maybe not huge risk — but risk nonetheless.
The first is that Wall Street managers aren’t like Green Bay Packers cheeseheads buying a share to hang in a frame: They demand results. Historically, teams have had attractive returns. From 1996 to 2021, values grew 1,118% for NHL teams, 1,560% for MLB, 1,850% for NBA and 1,890% for NFL franchises, according to Sportico data. But that’s not as impressive as you might think: The total return (price plus dividends) of the S&P 500 was 1,260% in that time. The expectation is that sports owners will do what it takes to continue to deliver similar growth.
“We expect two and a half times multiples on our money and a 20% IRR [internal rate of return], otherwise we wouldn’t really be interested in this space,” Zook said. And CAZ’s expectations are not unusual compared to other managers.
While that’s lower than the rate of the past 25 years, it’s still a bar that teams and leagues need to reach within the timeframe of most organizational money – three, five or seven years. Ares invests mainly through lending and debt financing – which is less risky than equity and therefore fosters lower expectations for returns. The company has had an average IRR of 12% on all its funds in its history, according to an investor presentation deck reviewed by Sportico last year. That’s at least the baseline expectation for its sports fund, given that the rising interest rate environment means risk-free debt—U.S. Treasuries — they will pay more in future yields.
Ultimately, the more teams that rely on institutional money for continued liquidity, the more the balance of power will be even, according to Zook. “There will be some pressure to distribute, probably in the form of dividend reviews,” he said, referring to the strategy of entities taking a loan to pay special dividends to shareholders, very similar to the recent statement of MSG Sports. “When rates come down again in two or three years, it wouldn’t surprise me at all to see someone doing a 10% LTV [loan-to-value]… where your return on equity gets a little higher.”
Taking capital out of a business to pay dividends is fairly standard practice, but in sports it comes with risk. Just ask Manchester United’s Glazers.
Also, as the investor universe expands, the money becomes more finicky. Endowments and pension funds may be fine committing 10 years to an investment, but the high-net-worth individuals, family offices and financial advisers who comprise a growing cohort of sports-focused fund investors are more likely to switch funds if team values remain static. or decline more than a blip.
So expect institutional money to stir not only for payments, but more aggressive growth: buying other teams, forcing the right media fees higher and inventing revenue streams that don’t exist. How is that best done? Think about platforms.
For Zook CAZ, the Fenway Sports group is “the epitome of a platform in sports right now,” with its holdings of multiple teams — Red Sox, Penguins, Liverpool FC, RFK Racing — along with content ventures. The Chicago Cubs with their real estate projects and the Sacramento Kings’ recent purchase of minor league baseball’s Sacramento River Cats are two other examples. “The more monopoly there is in the local market, the better it is for the local team,” Zook said.
The main long-term risk Zook sees to the platform strategy, so far, is a remote one: The tech giants are finding a way to get marketers to reach the same audiences as effectively without live sports.
In the near term, Zook says the biggest risk for investing in sports is too much of a good thing. “If too much money goes after too few opportunities, then prices get silly. That’s always bad for an investor. “
Perhaps the truth is that the industry is far from “silly” levels at the moment. But the money being raised this year by Arctos, Ares and RedBird alone? According to PitchBook data, there is more than three times what was invested in sports in 2021.
Personal tickets have been sold for next Wednesday’s Sportico Sports Investment conference, but you can still buy a virtual seat to the event here.
