Theo Epstein, former general manager of the Red Sox and then the Cubs, recently announced that he is joining a “private equity firm dedicated to buying minority shares in professional sports teams,” according to the Wall Street Journal. There are and will be more such firms. And eventually, those private equity firms will want to do what venture firms do: cash out and take their assets public.
It’s not a stretch to imagine teams launching their own IPOs (initial public offering) and becoming public corporations. It’s not difficult to envision a corporation, which is itself publicly traded, that holds interests in various teams, or a mutual fund or ETF of such corporations. Sports franchises, including those of our national pastime, are becoming securitized like never before.
As chronically low interest rates have pushed more investors to look further afield for yield, anything that can be sliced and packaged and publicly traded can join the retail investable universe. And has. And now, it’s Major League Baseball’s turn, with other sports not far behind.
In the fall of 2019, MLB announced that it would allow investment funds to buy minority shares in MLB teams. Team ownership has historically been limited to individuals, albeit very wealthy individuals, who may have entertained minority owners or limited partners if they needed cash. With teams valued in the billions now, it was becoming a problem finding enough individual investors with that kind of cash. So, the closely held ownership structure began to open up for the first time in over a century.
In the last decade, MLB teams have proven to be a good investment, although, as with any somewhat closely held and rather illiquid investment, transparency is lacking and figures are rough. Team values are difficult to estimate, as a franchise usually also includes the real estate it plays on and the broadcasting deals or networks it commands.
And, values and returns are uneven. While the New York Yankees have had an annualized return of about 14% since George Steinbrenner bought them for $8.8 million in 1973, other franchises have not done nearly so well. According to estimates published by Forbes, however, in the last decade values have risen, and teams are profitable (although stats from last season, as with everything else, may be asterisked).
Roughly half of team revenues come from gate receipts and other stadium income, and half from media deals, both national and local. The value of media is growing, as more outlets become available, and as teams sign longer and more lucrative deals with streaming services. The largest single expense is payroll, and despite the highly publicized multi-million-dollar, all-star deals, each team must mind its salary cap. Given that the largest source of revenue (media) is growing and the largest expense (payroll) is capped, the increasing profits go straight to the bottom line, hence the interest from more investors.
Forbes estimates that in 2019 the 30 teams’ average profit margin was about 14 percent, with average revenues around $345 million and average operating profits of about $50 million. Average valuation multiples had price-to-sales at about 4.5x and price-to-earnings (P/E) at about 45x; as a comparison, the S&P 500 had an average P/E of about 25x, indicating that teams are expensive relative to investments such as stocks. If teams are actually overvalued, it is a good time for owners to slice off pieces to sell.
While teams are, so far, not available to retail investors as publicly traded shares, they are open to private equity funds, venture capitalists, and institutional investors, like pension funds and college endowments. This new ownership may change the faces in the dugout, not just in the owner’s box.
Institutional investors have a fiduciary duty to advocate for maximum returns to shareholders (their clients). This could be good discipline for otherwise extravagant individual owners, but it could also change decisions about who gets signed or traded, with more attention paid to the bottom line. If it comes down to making less profit but having a chance at a championship season, not all owners may make the same call.
But, of course, “it ain’t over ‘till it’s over.” Baseball has faced these kinds of ownership challenges before: some said it would never survive losing the reserve clause and adopting free agency (1975). It has long been big business, and now is increasingly investable as well. Going forward, our beloved pastime will be played in the markets as well as at the ballpark.