Today’s guest columnist is Jeff Moorad, principal of MSP Sports Capital, chairman of the Morgan Lewis Sports Industry team and adjunct professor at UCLA Anderson School of Management.
When Jerry Jones bought the Cowboys for $140 million in February 1989, the deal included Brightlink, an early two-way video communications company founded by the selling owner, H.R. “Bum” Bright. Two months after the team was sold, as we completed negotiations on a record-breaking rookie contract for Jerry’s first-ever draft pick, UCLA QB Troy Aikman, Jerry insisted that the deal be formally agreed to via Brightlink’s video-conference technology.
So Troy, Leigh Steinberg and I drove to a telecommunications facility in the San Fernando Valley (a far cry from today’s all-too-familiar Zoom or Webex invite) to seal the deal in a video meeting. We left the facility, drove straight to Van Nuys Airport, hopped on Cowboy One and flew to Dallas for the press conference. The video meeting step could have easily been skipped—but I’ll forever remember Jerry’s insistence as a foreshadowing of what was to come. Indeed, Jerry, in his Hall of Fame ownership career, along with other pioneers including Robert Kraft, Pat Bowlen, Arthur Blank, Paul Tagliabue and Roger Goodell, would spend the next 30 years guiding the NFL to the forefront of telecommunications and the entertainment business generally. Jerry’s $140 million investment was most recently valued at nearly $7 billion.
What Jerry and his counterparts in other leagues began was a whole new era of sports franchise ownership, where teams (and leagues) would be run as disciplined entrepreneurial businesses. The industry has become increasingly professionalized, and business and investment are directed according to accepted metrics rather than ego- or fan-driven agendas. As these priorities manifest in sophisticated professional management, it’s no wonder the investment community is rapidly catching up to the opportunities in sports.
A series of ownership rule changes has also opened up increased opportunity for investment in sports organizations, and entrepreneurial fund managers have followed the opportunity. Firms like Ares, Dyal, Arctos, RedBird, Silver Lake and MSP Sports Capital are now focused on the sports industry, each targeting a unique set of opportunities and different deal structures with varying positions in the capital stack. The liquidity from these funds—as well as other private debt and equity sources, venture capital, SPACs, IPOs and institutional financing—makes me confident the explosion in sports investing will continue to grow.
Fundamentally, investors are attracted to the disproportionate annualized returns available in sports, with limited relative downside risk. The indexed valuation performance of sports franchises and clubs has far outpaced the S&P 500 over the last decade, and in some leagues, such as the NBA and MLB, has done so dramatically. Rising valuations have shown to be uncorrelated to on-field performance or to the broader market cycles. For a disciplined institutional investor, sports represent a significant uncorrelated diversification opportunity for a portfolio. At MSP Sports Capital, the sports investment fund I founded with Suns vice chairman and NBA Board of Governors member Jahm Najafi and Sportradar’s North American CEO Arne Rees, we believe that the combination of competitive dynamics, cultural significance and increasing management sophistication positions teams, leagues and sports-related businesses for continued growth of revenues, incomes and valuations.
In order to achieve favorable risk-adjusted returns, investing discipline remains critical in an industry where emotion can easily take hold of the uninitiated. We believe it’s critical to evaluate both macro dynamics (trajectory of the sport, league management, league competition, regulatory environment) and micro dynamics specific to the asset (management team, brand power and digital presence, fan/sponsor loyalty, local market dynamics and real estate opportunities).
Through our investment in Formula One’s McLaren Racing in 2020, we found a near-perfect combination. On the macro side, we confronted a global sport with deep history poised for expansion in the U.S. and elsewhere (similar to what global soccer experienced over the last decade) through the media-focused leadership of Liberty Media and CEO Greg Maffei. They’ve focused on cultivating global brands and superstars through digital media prowess and the world-acclaimed Drive to Survive Netflix series. The sport has also implemented a cost cap to enable financial sustainability and fair competition. On the micro side, there’s McLaren, one of the two most historic teams in F1 (along with Ferrari), with a rabid global fanbase and a world-class management team headed up by CEO Zak Brown.
At MSP Sports Capital, we only pursue investments with operational control or significant influence. In addition to the operating experience of our partners, our McLaren investment has benefited from the financial and business expertise of our investment partners, Ares Capital and UBS O’Connor. Furthermore, we’re thrilled to be building a global soccer platform with partners David Blitzer and Bolt Football Holdings. We’re also fortunate to have a law firm like Morgan Lewis on retainer—there is a premium on having the right professionals in place to be able to strike when a deal is hot. When MSP invested in McLaren, we had only 24 hours to present an investment structure for a £210 million investment, and the deal would not have happened without the ability to turn on a dime.
Sports investment is not just limited to teams and leagues; opportunities exist across the ecosystem. Whether it’s streaming video, wearables, AR, VR, crypto and web3, collectibles, gaming, or the rise of sports betting, sports will continue to drive new technologies and present opportunities for investors.
While the opportunities are numerous, we believe it is ultimately the IP of teams and leagues, or at least companies with a sustainable link to that IP, that will offer the best risk-adjusted returns over the long term. Regardless of the changes in technology, the IP will continue to grow in value. The value of content rights has risen with the shifts from broadcast to cable to streaming to the introduction of web3. IP owners have also been able to directly capture significant value from new technologies, such as MLB with BAMTech, the NBA with Sportradar, and the NFL with Genius Sports. If investors hang around the IP hoop, they’ll find the basket.
Prior to his current positions, Moorad was a principal in the sports representation firm Steinberg & Moorad; a general partner and the CEO of the Arizona Diamondbacks; and vice chairman and CEO of the San Diego Padres.