When Coronavirus first shut down the U.S. economy in March, some speculated that team owners with primary businesses negatively impacted by the outbreak would be forced to sell their clubs (think: Tilman Fertitta, Micky Arison). Not only has that not happened—thanks in large part to the strength of the stock market—less desirable teams like A.S. Roma (deemed by one prominent soccer executive to be a money pit) have managed to find buyers willing to pay a premium. Macro-economic trends indicate that the rich have gotten richer over the last six months, so it is not particularly surprising the market for pro sports teams remains strong. But, if the long tail effects of Coronavirus continue to depress club revenues and the great recession continues to place downward pressure on prospective investors’ primary businesses over the next few years (think: those who made their money in real estate), it could result in far fewer individuals looking to buy sports franchises and a subsequent decline in team valuations. In order to ensure that does not happen, the Chief Strategy Officer for one U.S. club suggested savvier leagues—like the NFL and NBA—may decide to finally open up limited partnership stakes to the public markets (think: MANU).
Our Take: Guys like Dan Friedkin (new owner, A.S. Roma) are buying clubs today with the mindset that the 2020 COVID-19-induced losses are simply the price of doing business and that pro sports will return to form sooner than later with the emergence of a vaccine. But if the ripple effects from Coronavirus continue to stall the U.S. economy over the next several years (presumably depressing ticket and sponsorship sales in the process), the CSO we spoke to said team ownership will become painful for all except for the leagues’ wealthiest owners (think: Steve Ballmer, David Tepper)—particularly if the stock market begins to falter. “Three years of capital calls worth $30 million, $40 million or $50 million is pretty brutal for anybody,” he said.
A prolonged period of losses would all but certainly result in a flux of teams—or at least limited partnership stakes in teams—hitting the market. Under normal circumstances, there would be a robust market for those opportunities, but that may not be the case if clubs are bleeding tens of millions of dollars in cash annually and the prospective buyer pool has shrunk. Should that scenario come to fruition, the CSO we spoke to suspected that the leagues would adapt their ownership rules even more than they already have. “We’ve seen the NBA and MLB move to allow investment funds to buy limited stakes in teams. [If Coronavirus continues to negatively impact the sports business], you’re going to see rules regarding ownership get looser and looser until we get to the point where teams are opened up to the public markets (in a controlled way). That would enable teams to gain liquidity without dipping into the owner’s pockets and give the leagues a path to continue growing the value of their brands.” Of course, the NBA and MLB relaxed ownership rules due to the continued rise in team valuations and the difficulty LPs were having exiting their positions, not because there was a lack of interested or qualified buyers.
While the CSO we spoke to was convinced leagues opening up teams to the public markets would ensure valuations continue to climb (he asked how much Patriots stock would have risen over the last two decades if it were available to the retail investor), Andrew Kline wasn’t so sure. The Park Lane Founder and Managing Director said, “Sports teams aren’t assets that are meant to be publicly traded. The public markets like quarterly earnings, and unless the team is going to be profitable year-after-year, it’s not going to be of interest to the institutional money that drives stock prices.” Remember, unlike the retail investor, institutional investors are not going to invest in a passion play.
Even in the NFL, where every team is guaranteed to be profitable, Kline says there would be minimal interest from smart money. “If you look at P/E, [NFL team] earnings are actually pretty small compared to their valuation. So, even if they are profitable year after year, they wouldn’t be generating a great yield on the [investment].” He said the private equity funds that the NBA and MLB have opened their doors to are a better option as they bring patient capital—necessary to capture the team’s long-term appreciation in value.
Needless to say, Kline does not believe the U.S. pro leagues are bound to “go to the public markets [with team ownership opportunities].” He pointed out that “70% of teams [are already] losing money annually in many of these leagues [and that has never tempered interest before].” There is always an uber-rich investor willing to take down a trophy asset, and that is likely to continue being the case.
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