Institutional Capital Reshapes Sports Ownership and Investment - Episode Hero Image

Institutional Capital Reshapes Sports Ownership and Investment

Bloomberg Business of Sports · · Listen to Original Episode →
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TL;DR

  • KKR's potential $1 billion acquisition of Arctos Partners signifies a major influx of institutional capital into minority sports team ownership, signaling a significant shift in the industry's financial landscape.
  • Robinhood's prediction markets leverage a centralized order book, offering transparency and consistency akin to traditional equity markets, differentiating them from sportsbooks by removing inherent conflicts of interest.
  • Private equity's push into college sports may stall due to complex negotiations, potential governance concerns, and the availability of cheaper debt financing, suggesting deals may be less lucrative than initially anticipated.
  • The NFL's unique revenue-sharing model and lack of team financial losses make its franchises highly attractive assets, expected to continue setting record valuations for outright sales due to their stability and growth potential.
  • Robinhood's custom combo feature, mirroring sports parlays, allows users to create personalized trades, with plans to expand this product beyond NFL playoffs to all asset classes long-term.
  • AI tools like Robinhood's Cortex are becoming integral to financial markets and sports, rapidly accumulating and analyzing data to provide traders with timely insights for quick decision-making.
  • The increasing cost of player compensation in college sports, with top quarterbacks nearing $5 million annually, is straining athletic department budgets, necessitating external institutional capital for operational stability.

Deep Dive

The influx of institutional capital into sports is fundamentally reshaping team ownership and investment strategies, driven by the perceived stability and growth potential of sports assets. This trend is exemplified by KKR's potential $1 billion acquisition of Arctos Partners, signaling a significant move by major private equity firms into minority team ownership and creating a more competitive landscape for sports investment. Concurrently, Robinhood's expansion into prediction markets, leveraging a regulated, exchange-like structure similar to traditional financial markets, offers a transparent and accessible alternative to traditional sports betting, attracting retail investors with innovative products like custom "combos" and AI-driven insights.

The increasing financialization of sports presents both opportunities and challenges. KKR's acquisition of Arctos aims to leverage Arctos' existing league approvals and on-the-ground presence to expand into new areas, potentially including college and women's sports, capitalizing on their sophisticated operational capacity. This influx of capital, however, necessitates rigorous league approval processes to vet potential conflicts of interest, as seen with KKR needing to secure approvals previously held by Arctos. The sheer volume of capital being deployed by firms like KKR means that valuations for sports franchises, particularly in the NFL, are likely to continue setting records, as these assets offer not only potential appreciation but also stable revenue streams due to the league's revenue-sharing models and limited financial losses for franchises.

The financial pressures on college athletic departments are also driving innovative capital solutions, though their adoption is facing hurdles. While firms like Ouro Capital and Redbird/Weatherford are attempting to structure deals involving revenue sharing or debt financing for athletic departments, these are not straightforward equity investments. Universities are scrutinizing these arrangements, questioning potential governance issues and comparing them to more traditional, cheaper financing options like bond markets. The rising cost of player compensation, particularly in football, is exacerbating budget crunches, pushing athletic departments to seek external capital to cover operating expenses and invest in revenue-generating strategies like enhanced ticketing and sponsorships. This environment suggests that while private equity's splash in college sports might be more nuanced than initially anticipated, the need for institutional capital to support athletic departments remains acute.

Action Items

  • Audit KKR Arctos deal: Identify 3 potential conflicts between KKR portfolio companies and sports league sponsorships.
  • Analyze Robinhood prediction market structure: Document 2 key differences from sportsbooks regarding market creation and regulation.
  • Evaluate college sports private equity deals: Track 3 stalled deals to identify common negotiation roadblocks and governance concerns.
  • Measure NFL team sale valuations: Calculate average valuation growth for 2-3 recent NFL team sales to inform future projections.
  • Track private equity investment in women's and college sports: Monitor 5-10 emerging deals to assess market trends and potential conflicts.

Related Episodes

Key Quotes

"KKR, you know, one of the oldest private equity firms in the United States, really in the world, and kind of the granddaddy of the asset class, if you will. They have been investing for a few years now, sort of around the edges of sports and media and entertainment. But this Arctos deal that is on the table with the leagues, this would really move them in a meaningful way into minority team ownership and put another big money player in the business of owning sports teams."

Allison McNeely explains that KKR's potential acquisition of Arctos Partners signifies a significant shift in institutional capital entering the sports industry. This move would position KKR, a long-established private equity firm, directly into minority team ownership, introducing a major financial player into the sports team ownership landscape.

"It is a huge opportunity and there's a lot of money to be made in it, depending on kind of which angle you tackle it from."

Allison McNeely highlights the broad appeal of the sports industry as an investment area. She suggests that significant financial gains are possible within sports, contingent upon the specific strategy or "angle" an investor chooses to pursue.

"So for a firm like Arctos, the value proposition that they bring to KKR is essentially giving them an entry point into all of these leagues. You know, as you noted earlier, they're already invested with teams in the major four leagues. So they kind of have boots on the ground. And that's critical because some of the other private equity firms who are in sports investing, there are certainly leagues that they can't invest in because of, there's one guy at the firm, the co-president, the co-founder, something like that, who is an investor as a person, as an individual, in a sports team."

Allison McNeely details the strategic advantage Arctos offers KKR in the sports investment market. Arctos provides KKR with established access to major sports leagues, overcoming potential conflicts of interest that might prevent other private equity firms from investing directly.

"And what that means is it's a centralized order book where bids and offers come in from other participants in the markets. Unlike, let's say, a sports book, where the sports book sets the line and creates the market, and then you trade against the sports book. So there's sort of this inherent conflict, right?"

JB McKenzie differentiates prediction markets from traditional sports betting platforms. He explains that prediction markets operate on a centralized order book, allowing participants to trade against each other, whereas sports books set their own lines, creating a potential conflict of interest for the bettor.

"So really, those are the kind of the three key differences where you see on the other side of the sports that's much more oriented towards state-by-state regulation."

JB McKenzie outlines the regulatory and structural distinctions between prediction markets and sports betting. He emphasizes that prediction markets are federally regulated, offering transparency and consistency across different locations, unlike sports betting, which is subject to varied state-by-state regulations.

"So first off, these are fully collateralized products. And what that means is that you actually have to have the money in your account to place the trade. So first off, the risk that comes into play here is to the end user that does it."

JB McKenzie explains the risk management aspect of Robinhood's prediction markets. He clarifies that these are fully collateralized products, meaning users must have sufficient funds in their account to place a trade, and the primary risk lies with the individual trader.

"I think the market for a top quarterback now is approaching $5 million. So that's like a quarter of your money right there. So, but yeah, so they're, it looks like, at least at schools where they care about football, you're spending about $15 million of that $20 million on your football team."

Ira Boudway discusses the allocation of funds within college sports, specifically regarding player compensation. He notes that a significant portion of the allocated $20 million is being spent on football players, with top quarterbacks potentially earning up to $5 million annually.

"And two, the way they've set it up with their players and the collective bargaining agreement and the way they share revenue between teams, these clubs, they don't lose money. In the meantime, you get an asset that's probably going to grow in value, and while you're holding it, you're not bleeding money."

Ira Boudway explains the financial stability of NFL franchises. He attributes this to the league's structure, including player agreements and revenue sharing, which ensures that clubs are profitable and their assets are likely to appreciate in value over time.

Resources

External Resources

Books

  • "Moneyball" by Michael Lewis - Mentioned as an example of a book that discusses sports analytics and strategy.

Articles & Papers

  • "Bloomberg Businessweek" - Mentioned for its reporting on global business, finance, tech news, and market trends.
  • "Bloomberg News" - Mentioned as the source for sports business reporters and their predictions.

People

  • Barry Ritholtz - Host of the "Masters in Business" podcast.
  • Bill Miller - Mentioned as a fund manager interviewed on "Masters in Business."
  • Bob Shiller - Mentioned as a behaviorist interviewed on "Masters in Business."
  • Carol Masser - Co-host of "Bloomberg Businessweek Daily Podcast."
  • Damian Sassauer - Co-host of "Bloomberg Business of Sports."
  • Dick Thaler - Mentioned as a behaviorist interviewed on "Masters in Business."
  • Ira Budway - Bloomberg News Global Sports Business Reporter.
  • James Cameron - Director of "Avatar."
  • Jerry Jones - Owner of the Dallas Cowboys.
  • Josh Allen - Mentioned as a player for the Buffalo Bills.
  • J.B. McKenzie - Vice President and General Manager of Futures and International at Robinhood Markets.
  • Karen Moscow - Co-host of "Bloomberg Daybreak: US Edition."
  • Lilo Stitch - Mentioned as a Disney blockbuster.
  • Lisa Mateo - Mentioned as a Bloomberg Radio personality.
  • Michael Barr - Co-host of "Bloomberg Business of Sports."
  • Michael Lewis - Author of "The Big Short" and "Moneyball."
  • Nathan Hager - Co-host of "Bloomberg Daybreak: US Edition."
  • Peter Lynch - Mentioned as a fund manager interviewed on "Masters in Business."
  • Ray Dalio - Mentioned as a fund manager interviewed on "Masters in Business."
  • Steve Cohen - Owner of the New York Mets.
  • Tim Stenovek - Co-host of "Bloomberg Businessweek Daily Podcast."
  • Vanessa Perdomo - Co-host of "Bloomberg Business of Sports."
  • Vlad - CEO of Robinhood.

Organizations & Institutions

  • Adobe - Mentioned for its Acrobat Studio with AI-powered PDF features.
  • Arctos Partners - Sports-focused private equity firm being acquired by KKR.
  • AWS (Amazon Web Services) - Mentioned as powering NFL statistics.
  • Big 12 - Conference mentioned in relation to a potential deal with Redbird and Weatherford.
  • Bloomberg - Media company mentioned for its various podcasts and news services.
  • Bloomberg Radio - Mentioned as the source for "Bloomberg Business of Sports."
  • Buffalo Bills - Professional football team.
  • Chase for Business - Mentioned as a business banking service.
  • Chase Bank N.A. - Mentioned as a member of FDIC.
  • Collegiate Athletic Solutions (CAS) - Entity involved in a potential deal with the Big 12 conference.
  • Dallas Cowboys - Professional football team.
  • Disney - Mentioned for its box office performance and upcoming film slate.
  • Elemental - Pixar film mentioned.
  • Fisher Investments - Mentioned as a sponsor of "Bloomberg Business of Entertainment Report."
  • Fred's Bait Shop - Mentioned as a hypothetical sponsor from the past.
  • K.K.R. (Kohlberg Kravis Roberts) - Private equity firm working on a deal to acquire Arctos Partners.
  • LIV - Golf tour mentioned as an example of disruption.
  • New England Patriots - Professional football team.
  • New Orleans Saints - Professional football team.
  • New York Mets - Professional baseball team.
  • Ouro Capital - Entity involved in a potential deal with the University of Utah.
  • Pixar - Animation studio mentioned.
  • Pro Football Focus (PFF) - Data source for player grading.
  • Redbird - Entity involved in a potential deal with the Big 12 conference.
  • Robinhood - Financial services company expanding into prediction markets.
  • Seattle Seahawks - Professional football team.
  • Snow White - Live-action Disney film mentioned.
  • The Devil Wears Prada 2 - Upcoming film mentioned.
  • Toy Story 5 - Upcoming film mentioned.
  • U.S. Securities and Exchange Commission (SEC) - Regulatory body mentioned in the context of financial markets.
  • University of Utah - Mentioned in relation to a deal with Ouro Capital.
  • Weatherford - Entity involved in a potential deal with the Big 12 conference.
  • Wise - Financial technology company offering multi-currency accounts.
  • Yankees - Professional baseball team.

Podcasts & Audio

  • Bloomberg Business of Sports - Podcast exploring money issues in sports.
  • Bloomberg Businessweek Daily Podcast - Podcast offering analysis on global business, finance, tech, and trends.
  • Bloomberg Daybreak: US Edition - Daily podcast covering global news, politics, and international relations.
  • Masters in Business - Podcast featuring conversations with leaders in markets, investing, and business.

Websites & Online Resources

  • chase.com/business - Website mentioned for Chase for Business.
  • adobe.com/dothatwithacrobat - Website mentioned for Adobe Acrobat Studio.
  • wise.com - Website mentioned for Wise financial services.

Other Resources

  • AI-powered PDF spaces - Feature of Adobe Acrobat Studio.
  • Avatar: Fire and Ash - Upcoming film mentioned.
  • Centralized order books - Trading mechanism used in prediction markets.
  • College sports - Area of potential investment for private equity.
  • Custom Combos - Feature on Robinhood allowing users to create custom trades.
  • Cortex - AI chatbot offered by Robinhood for financial advice.
  • Equity options - Financial instruments with a similar structure to prediction markets.
  • Futures markets - Financial markets with a similar structure to prediction markets.
  • Futures product - Product Robinhood is developing for retail investors.
  • Investment products - Products private equity firms are creating for individual investors.
  • KYC (Know Your Customer) - Process for verifying customer identity.
  • Market maker - Participant in a market that provides liquidity.
  • Moneyball - Concept related to sports analytics.
  • NFL (National Football League) - Professional American football league.
  • Prediction markets - Financial products that allow trading on the outcome of future events.
  • Private equity - Investment capital from non-public sources.
  • Revenue sharing - System for distributing revenue among teams or entities.
  • Sports betting - Gambling on the outcome of sporting events.
  • Sports investing - Investment in sports-related assets and businesses.
  • Sports sponsorships - Agreements where companies pay to associate their brand with sports entities.
  • Team ownership - The act of owning a professional sports team.
  • The Big Short - Book by Michael Lewis.
  • The Fed rate cut - Economic event that can be traded on prediction markets.
  • The Presidential election - Event on which Robinhood launched prediction markets.
  • The WNBA (Women's National Basketball Association) - Professional women's basketball league.
  • Trading - The act of buying and selling financial instruments.
  • UFOs landing on Earth - Hypothetical low-probability event.
  • Women's sports - Area mentioned as needing more financial support.

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