Sports team ownership -
direct vs. indirect?

sports ownership.jpeg

overview

There has been quite a bit of publicity over the past year regarding ‘Sports Ownership’ funds; pooled dollars that are designed to enable the acquisition (or sale) of major league sports minority interests (also known as ‘Limited Partner’ or ‘LP’ interests).  These funds provide an opportunity for investors to realize value if sports franchises continue to appreciate, without having to submit to a detailed league vetting process (fund management is pre-approved); at the same time, they also target sellers who would welcome an opportunity to divest and achieve a quick measure of liquidity.  Add to that the support of leagues like the NBA or MLB and you have at the very least, an interesting value proposition.  


So how does this work?


Strip away the cache of the word ‘sports’ and you will see that these funds operate very similarly to most private equity funds:  they are a closed-end managed fund with established investment criteria, which target certain returns for their investors over time (specific exit strategies will vary).  Given that the simplest way to realize investment returns is to buy low and sell high, this potentially puts the seller of an LP interest in this equation at a disadvantage, because the fund is far more likely to achieve its objectives if they can convince the seller to divest at a steep discount to current fair market value.  However, with the benefit of newfound liquidity, this can potentially eclipse the diminished returns realized in a sale, with respect to value to a seller.


Contrary to reports or suggestions that minority stakeholders possess an illiquid asset, and as such would welcome divesting at a steep discount as the only alternative to an uncertain holding period, we find that the market typically holds many interested buyers, and liquidity---especially in equity stakes <5% is not difficult to attain, and the market for these assets is, and has historically remained, very active, with several recent LP transactions occurring at, or even above, current fair market value, as measured by the Forbes team values.  


What about the buyer?  Surely, if the fund is ‘buying low’ this is an economical path to sports ownership, correct?  Well, that depends on how you define ‘sports ownership’.  Remember, investors are ‘realizing value in the event of appreciation’, which is like betting on an index.  But an investor in a sports ownership fund does not have a direct equity stake in any specific team, nor can they decide what teams the fund invests in, what valuation represents a ‘good buy’, how long to hold the asset, or when to exit.  Looking for access to the owner’s suite?  Unlikely.  A ring when a team that the fund owns a stake in wins a championship?  Even less likely.  But that does not necessarily make it a bad play— if teams continue to appreciate, it may still result in a sound economic outcome.  
There are other ways to become a sports owner, for example, ‘direct ownership’ scenarios where you can still find a (relatively) economic entry point and enjoy many of the perks that go with being an owner.  Most importantly, the investor can have input into what team they invest in, how much they invest, and very importantly, when, and how they exit.  Unlike a Sports Ownership fund, this is not a new concept, and has served many investors well over time, as well as helped them realize their dream of legitimately owning a direct equity stake in a professional sports franchise.  Direct LP ownership is a core area of specialty for Whitecap Sports, and we have advised on numerous transactions in MLB, NBA and MLS in recent years, possibly more than any other domestic US firm.  As such, we offer a very different value proposition than sports ownership funds.  Not sure which is the path most suitable for you?  Contact Whitecap Sports to discuss your objectives in complete confidence.

advantages vs. disadvantages

Buyer Advantages & Disadvantages

Buyer Advantages:

  • Ability to direct investment towards specific team(s)

  • Discretion over valuation/price

  • Control over holding period

  • Potential direct benefits (i.e. access to information, perks)

Buyer Disadvantages:

  • Potential scarcity

  • Must be approved by team and league

Seller Advantages & Disadvantages

Seller Advantages:

  • Sell at, or above, fair market value (function of scarcity)

  • Profitability directly correlated to sale above acquisition price

  • Market liquidity (strong for small LP stakes)

Seller Disadvantages:

  • Length of process

indirect ownership

Buyer Advantages:

  • Managed fund

  • Diversity

  • No vetting by team or league

  • Take advantage of inefficiencies (if fund can acquire LP stakes at a significant discount)

Buyer Disadvantages:

  • No ability to direct funds toward any particular team (Fund decides)

  • No discretion over value/price (Fund decides)

  • Profitability is net of management fees, including hurdle

  • No control over holding period (Fund decides)

Buyer Advantages & Disadvantages

Seller Advantages:

  •  Faster liquidity

 

Seller Disadvantages:

  •  Divest at steep discount to fair market value (essential to model)

Seller Advantages & Disadvantages

direct ownership