Collectors Holdings (Collectors) recently announced a $100 million raise at a $4.3 billion valuation. Existing investors D1 Capital Partners, Cohen Private Ventures and The Chernin Group financed the round. In a conversation late last week, Collectors CEO Nat Turner said the three investment firms sought to increase their skin in the game because they “really liked what was happening.” The profitable holding company grew revenue and EBITDA by more than 100% year-over-year.
But 2021 was full of tailwinds (think: stimulus checks, rise of the YOLO investing strategy). By contrast, 2022 has been plagued by both a dip in the public markets and geopolitical turmoil, making it fair to wonder if the collectibles industry is headed for a downturn and if the investors in this latest funding round jumped in at the peak.
The Chernin Group founding partner Jesse Jacobs does not think that is the case. He sees the growing activity and interest in sports cards and an increasing desire to invest in alternative assets (see: crypto, NFTs), and believes the company is well-positioned to take advantage of those broader macro trends.
JWS’ Take: While the trading card industry undoubtedly benefited from the tailwinds referenced during the throes of the pandemic, consumer demand for Collectors’ core authentication and grading services has not fallen off. Turner said the company is seeing the “same levels, if not higher [today], than six months ago.” That is despite Collectors’ most accessible and affordable service still being suspended (the company is trying to catch up on a backlog that was at one time 13 million cards deep).
The Collectors CEO also pointed out that “a big percentage of [the company’s] growth last year came through acquisition.” It bought and closed on six companies in 2021, with Goldin Auctions, a business that grew from under $100 million in sales in 2020 to around $330 million in 2021, the most noteworthy among them (Wata Games, Card Ladder and Genamint were among the others).
Collectors’ core grading business, which includes the PSA brand, did grow last year. But that is largely a reflection of investment made in growing capacity to grade and ship cards back to the customer. The new regime built out its office footprint in Santa Ana, Calif., and grew its headcount to increase its “through-put” rate. Investments in technology have also helped to make the business more scalable. “When we acquired the company, PSA was doing 22,000 cards/day. [On April 1], we did over 50,000,” Turner said.
A $4.3 billion valuation may sound rich. But Jacobs said if you look at Collectors on a multiple basis and consider its earning power and current growth rate (the privately held company does not release revenue or EBITDA figures), there is an argument to be made that it could be higher. FWIW, similarly fast growing marketplaces, StockX and GOAT, raised money at comparable valuations in 2021 ($3.8 billion and $4 billion, respectively).
Collectors has also managed to slowly morph into more of a tech-oriented business than the service-driven one that went private a year ago at $92/share. “A business like that is going to command a pretty significant multiple compared to a pure services business,” Jacobs noted.
In addition to the growth rate and influx of technology, Turner said the market size supports the valuation. A recent report from Market Decipher suggests the global collectibles industry will be worth $522 billion by 2028, up from $372 billion in 2020.
Like many online auction and collectible companies, Collectors experienced massive growth in ’21. The Chernin Group is not banking on the company to continue on that trajectory. “When we underwrote this new investment into the business,” Jacobs said, “we assumed a strong and sustainable, but more modest growth rate.”
Collectors should still have plenty of room to grow, though. In fact, Jacobs believes its PSA brand can double through-put without increasing demand. It simply needs some new warehouses and people capable of operating them. The company is in the process of building out new grading and authentication facilities in New Jersey, Delaware and Japan, and working on large-scale expansion projects in Santa Ana and Seattle for the same purpose.
Jacobs also believes there is an opportunity to market PSA services to collectors of lower priced cards. “That would open [the business] up a much larger market,” he said. Historically speaking, grading services have been geared toward owners of higher-end cards.
Turner added that there are opportunities to expand beyond trading cards, coins and video games into additional collectible categories (think: watches, comic books, art). And the company announced plans to launch a new secure vault platform and collection management service this summer.
TCG initially became interested in the collectibles industry in Q1 ’20 because it saw several macro trends converging. Some deep thematic analysis brought the firm to the conclusion that “the two most interesting areas in the industry were the auction platforms and the grading platforms,” Jacobs said. “We thought the auction platforms would grow as there was increased activity: people buying and selling cards. And in order for this to become a really stable, mature market that attracted institutional, long-term capital, there needed to be grading; outside third parties who would verify a card is in perfect condition, just as you would with a watch or rare book.”
Its first investment within the category was in Goldin Auctions late in 2020. The Chernin Group pumped ~$40 million worth of growth financing into the high-end collectibles marketplace. It then participated in the $850 million buyout of Collector’s Universe (the publicly traded parent company of the card grading giant PSA and the coin grading company PCGS) in Q2 2021. Collector’s Universe has since been rebranded as Collectors.
While The Chernin Group had high expectations for both investments to begin with, Jacobs said the companies have “massively exceeded” them. “The industry has grown at an even higher rate over the last two years, our conviction around [trading cards and alternative assets] has only increased and the financial performance—growth, revenue, EBITDA—has just been extraordinary.”
Collectors plans to use the additional capital raised for “M&A and general growth.” Turner suggested the company could also buy tech infrastructure that would help to scale the business. Genamint, AI software that assists with card grading, was among the company’s ’21 acquisitions.
Collectors has not yet identified an exit strategy (at least not one it was willing to share). But Jacobs did not sound worried. He said “good companies will find a home,” and right now the focus continues to be on growing the business.
Turner echoed that sentiment. “We didn’t want to get out over our skis on valuation because we intend to keep growing the business,” he said. “This is not a private equity flip situation. We’re building this for the long-term.”
(This article has been updated to provide the correct name of PCGS.)