Today’s guest columnist is Sportico Sports Finance Reporter Brendan Coffey.
Institutional asset managers flocking to invest in teams is nothing new to those in the industry, but it’s worth noting that money flowing into franchises and related businesses has increased significantly this year.
In recent months, Gerry Cardinale’s RedBird Capital has begun raising a new $2.6 billion fund and Arctos Sports Partners has raised $2.5 billion for a new second fund, the private equity giant. Ares Management has closed an oversubscribed $2 billion sports-focused fund.
The list goes on: Dyal Homecourt maintains its intention to raise $2 billion to invest in the NBA’s Limited Partner Stake, while property giants Silver Lake Technologies, Sixth Street, and CVC Partners have The proportion of assets devoted to sports continues to increase. Then there’s the bevy of new sports technology and betting-focused funds launched by everyone from high-profile industry executives to universities to marketing firms.
In short, despite the turbulent market, as participants are sure to see, these are good times for sports businesses seeking capital. Sportico’s Invest in next week’s sports conference.
The force behind this is “the change in consumer behavior that really drives the behavior of every advertiser on the planet, and that’s cutting the cord,” said CAZ Investments, CEO of $4 billion asset manager CAZ Investments. One Christopher Zook said:
For two decades, Zook has pursued thematic investments, including shorting subprime mortgages before the Great Recession and being an early entrant in the oil and gas fracking boom. His latest theme is sports. Zook now has “hundreds of millions of dollars” in its strategy, and he has invested heavily in sports and sports direct, as well as professional teams invested through Arctos. “How do advertisers reach the people they want to market to? That’s why,” he said.
The expansion of sports betting adds to the growth equation, but inflation only makes sports more attractive to investors. Because teams can pass higher prices to park fans, Zook says. He points out that the team’s land holdings will also help, as real estate is a traditional inflation hedge.
There is no doubt that major teams and leagues are taking the lead in fundraising. Long-term value growth in sports, along with low correlation with other asset classes, makes him fit in two big boxes for the CFA cloud. But big money may not be big risk, but it’s still risky.
The first is that Wall Street executives aren’t like the Cheeseheads of the Green Bay Packers who buy stock to hang in a picture frame. they demand results. Historically, teams have delivered attractive returns. From 1996 to 2021, the value increased by 1,118% for NHL teams, 1,560% for MLB, 1,850% for the NBA, and 1,890% for NFL franchises. Sportico data. But it’s not as great as you might think. The total return (price and dividend) of the S&P 500 was 1,260% at the time. Sports owners are expected to do what is necessary to continue to provide a similar trajectory of growth.
“We expect 2.5x funding and 20% IRR. [internal rate of return]Otherwise, we wouldn’t be really interested in this space,” Zook said.
While this is below the rate of the last 25 years, it remains a hurdle that teams and leagues need to meet in most organizations’ funding timeframes (3, 5 or 7 years). . Ares invests primarily by offering loans and raising debt. It is less risky than stocks and has lower return expectations. The company has achieved an average IRR of 12% across all its funds to date, according to investor presentations reviewed by. Sportico last year. That’s at least the company’s baseline forecast for its sports funds, as a rising interest rate environment means yields on risk-free government bonds (US Treasuries) will be even higher going forward.
Ultimately, the more teams rely on institutional money for ongoing liquidity, the more even the balance of power will be, Zuk said. “There will be pressure for distributions, probably in the form of dividend recaps,” he said, referring to companies’ strategies of taking out loans to pay special dividends to shareholders, such as MSG Sports’ recent declaration. “I wouldn’t be at all surprised to see someone achieve LTV even if rates go down again in a couple of years.” [loan-to-value] 10%… to the point where the return on equity is a little higher. “
Withdrawing capital from a business and paying dividends is a fairly standard practice, but sports involve risk. Just ask Manchester United’s Glazers.
Moreover, as the investor world expands, money becomes more troublesome. Endowments and pension funds may be fine with committing to 10 years of investment, but high net worth individuals, family offices and financial advisors make up a growing cohort of investors in sports-focused funds. are more likely to cash out if the team’s value stagnates. Or decline over blip.
Institutional funds are therefore expected to falter not only for payments but also for more aggressive growth. That means buying other teams, charging high media rights fees, and inventing revenue streams that don’t exist. How is it best done? Think platform.
For CAZ’s Zook, Fenway Sports Group is “the archetypal platform in sports today,” with multiple teams and content ventures including the Red Sox, Penguins, Liverpool FC and RFK Racing. Real estate projects for the Chicago Cubs and the Sacramento Kings’ recent acquisition of minor league baseball’s Sacramento River Cats are two other examples of his. “The more monopolies that exist in the local market, the better it is for local teams,” Zuk said.
The main long-term risks Zook sees in its platform strategy have been modest so far. The tech giant is figuring out how marketers can effectively reach the same audience without live sports.
In the short term, Zuk says the biggest risk in sports investing is being too good. “If you chase too few opportunities and have too much money, the price will be ridiculous. That is always bad for investors.”
The truth may be that the industry is currently far from “ridiculous” levels. But will he be the only money raised this year by Arctos, Ares and RedBird?He’s more than tripled the amount invested in the sport in 2021, according to PitchBook data.
Same-day tickets are sold out Sportico’s We’re investing in a sports conference next Wednesday, but you can buy virtual seats for the event here.
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