Today’s guest columnist is Sportico sports finance reporter Brendan Coffey.
It’s not news to people in the industry that institutional asset managers are flocking to invest in teams, but it’s worth noting the amount of money flowing toward franchises and related business has increased noticeably this year.
In recent months Gerry Cardinale’s RedBird Capital has started raising a new $2.6 billion fund, Arctos Sports Partners is collecting $2.5 billion for its new second fund and private equity behemoth Ares Management just closed on an oversubscribed $2 billion sports-focused fund.
The list goes on: Dyal Homecourt still intends to raise $2 billion to invest in NBA limited partner stakes, while the percentage of assets devoted to sports keeps increasing at asset giants Silver Lake Technologies, Sixth Street and CVC Partners. Then there is the gaggle of new sports tech and betting-focused funds launched by everyone from well-known industry executives to colleges to marketing firms.
In short, despite the turbulent markets, these are good times for sports businesses seeking capital, as attendees are sure to see at Sportico’s Invest in Sports conference next week.
The force behind this “is the change of consumer behavior that really drives the behavior of every advertiser on the planet, and that is cord-cutting,” said Christopher Zook, the CEO of CAZ Investments, a $4 billion asset manager.
Zook has spent 20 years pursuing thematic investments, such as shorting subprime mortgages ahead of the Great Recession and getting in early on the oil and gas fracking boom. His latest theme is sports. 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 they really have to focus on live events, because that’s the only time people will actually let a commercial go by and watch it,” he said.
Sports gambling’s expansion adds to the growth equation, while inflation only makes sports more attractive for investors, since teams have leverage to pass higher prices along to fans at the park, Zook says. Team land holdings help, too, he notes, since real estate is a traditional inflation hedge.
No doubt the major teams and leagues are in the driver’s seat for raising capital. Sports’ long-term value growth plus its low correlation with 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 provided attractive gains. 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 isn’t as spectacular as you might think: The total return (price plus dividends) of the S&P 500 was 1,260% in that time. Expectations are that sport owners will do what it takes to keep providing growth of a similar trajectory.
“We are expecting two-and-a-half times multiples on our money and a 20% IRR [internal rate of return], otherwise we really wouldn’t be interested in this space,” said Zook. And CAZ’s expectations aren’t unusual compared with other managers.
While that’s below the rate of the past 25 years, it’s still a bar that teams and leagues need to hit in the timeframe of most institutional money—three, five or seven years. Ares invests primarily by giving loans and financing debt—which is less risky than equity and thus fosters lower expectations for returns. The firm has averaged a 12% IRR on all of 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 sport fund, given the rising interest rate environment means risk-free debt—U.S. Treasuries—will pay more in yield going forward.
Eventually, the more teams rely on institutional money for continued liquidity, the more the balance of power will even out, according to Zook. “There will be some pressure to distribute, probably in the form of dividend recaps,” he said, referring to the strategy of entities taking a loan to pay special dividends to shareholders, much like MSG Sports’ recent declaration. “When rates go back down again in two or three years, it would not surprise me at all to see someone do an LTV [loan-to-value] of 10%… to where your return on equity becomes a little bit higher.”
Drawing capital from a business to pay dividends is fairly standard practice, but in sports it comes with risk. Ask Manchester United’s Glazers.
Plus, 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 advisors that comprise a growing cohort of sports-focused funds’ investors are more likely to cash out if team values stagnate or decline more than a blip.
So expect institutional money to agitate not just for payouts, but more aggressive growth: buying other teams, forcing media right fees higher and inventing revenue streams that don’t exist. How is that best done? Think platforms.
To CAZ’s Zook, Fenway Sports group is “the epitome of a platform in sports right now,” with its holding of multiple teams—Red Sox, Penguins, Liverpool FC, RFK Racing—plus content ventures. The Chicago Cubs with their real estate projects and the Sacramento Kings’ recent purchase of the minor league baseball Sacramento River Cats are two other examples. “The more of a monopoly that exists 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 is, so far, a remote one: The technology giants figure out 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 sports investing is too much of a good thing. “If there becomes too much money chasing too few opportunities, then prices become silly. That’s always bad for an investor.”
The truth may be the industry sits far from “silly” levels right now. But the money being raised this year by Arctos, Ares and RedBird alone? According to PitchBook data, it’s more than three times what was invested in sports in 2021.
In-person tickets are sold out for Sportico’s Invest in Sports conference next Wednesday, but you can still purchase a virtual seat to the event here.