The Private Equity College Sports Hellscape Thread

[huskymedic]

 

[CL82]

You think college football is a failing business?

No, I do not, but you already knew that.

I do think that getting into a private equity deal so that you can use the money invested to try to keep up with the Joneses of the P2 is in a devastatingly bad play.

 

[Kolumbo]

No, I do not, but you already knew that.

I do think that getting into a private equity deal so that you can use the money invested to try to keep up with the Joneses of the P2 is in a devastatingly bad play.

I did not already know that. You just made three statements indicating that college football is a bad investment. "failing businesses," "turn things around," "typical of toddlers."

It could be bad, or it could be genius. I don't make those types of investment decisions. I think it is certainly worth looking into if you end up with 33% of the relevant college football inventory.

 

[CL82]

I did not already know that. You just made three statements indicating that college football is a bad investment. "failing businesses," "turn things around," "typical of toddlers."

It could be bad, or it could be genius. I don't make those types of investment decisions. I think it is certainly worth looking into if you end up with 33% of the relevant college football inventory.

Come on Kolombo that's not what I said in the least. You're too good at a poster to stoop to posting red herrings.

What I said, pretty clearly unequivocally, is using PE money to fund operating expenses is a bad play. You understand the difference between those two statements right?

 

[UConnJim]

No, I do not, but you already knew that.

I do think that getting into a private equity deal so that you can use the money invested to try to keep up with the Joneses of the P2 is in a devastatingly bad play.

Personally, I think PE investing in college athletics is a bad idea. But, there is a play for PE to make money of they are allowed to. At most P4 schools, the football program makes money and with proper investment and management could make more money. The money drain for athletic departments comes from the other sports and administrative overhead. So, if you could cut sports and administrative overhead, PE could make a return on investment. Let's say the athletic department became football, men's and women's basketball with the appropriate number of women's scholarships (Title IX) along with cutting administrative bloat and most AD's make money. Then the rest of the sports either self fund, are funded separately by the university, or become club sports.

I'm not advocating for the above, but maybe some school may try it.

 

[Kolumbo]

Come on Kolombo that's not what I said in the least. You're too good at a poster to stoop to posting red herrings.

What I said, pretty clearly unequivocally, is using PE money to fund operating expenses is a bad play. You understand the difference between those two statements right?

You gotta be fair here too. You claimed that funding operating expenses is a bad idea and to support your claim, you cited failing businesses. College football is not a failing business. Ergo I tried to follow your logic. So where did I lose your train of thought?

Also of Big 12 note. All except BYU, TCU and Baylor are large public universities. Football can make a ton of money, taxpayers can fund the non-revenue sports. And the privates are pretty wealthy anyway. And if the B1G or SEC comes knocking, I'm sure there will be very hefty exit fees which the PE guys have in ironclad writing.

I also think the Big 12 map is advantageous, on a tangent here. If you grow up in the Southwest and and prefer to be closer to home, the Big 12 is your conference.

 

[Hamms30]

You think college football is a failing business?
If you don't see college football as an extremely lucrative business for its owners, I'm not sure what else to tell you. Especially if there are 3 power conferences going forward.

I think college football is in a massive bubble right now and all this realignment crap is just somebody blowing into the straw blowing it bigger and bigger. Conferences are cannibalizing conferences. Teams are foregoing years of distribution payments just for a seat at the table.

edit: posted before I finished my thought.... The more this goes on, it's going to alienate teams that are in these power conferences i.e. Indiana, Vanderbilt, Illinois .. all the schools that have no shot at a national championship. With the new movements that could include schools like Oregon and Washington now.. That will lead to disengagement from fans. Once that happens the advertising money goes away and where do we think the money from these media networks that are funding these conference deals come from.

Now lawyers are getting involved because the money is too big. Now there is 20% revenue sharing on the table. It's happening in front of us.

 

[FfldCntyFan]

How does the investor make money in these scenarios? It’s not like you can sell the company once it increases in value.

There would normally be a structured waterfall with a subordinate preferred return. This is where it woulg get very dangerous for the schools.

Funds received from operations (after hold backs for expenses and scheduled reserves) are distributed through the waterfall. If the investors (PE fund) doesn't receive a full anticipated portion (revenues are lower than expected) the shortfall accrues interest and cannot be repaid until there is an excess from a future waterfall. This is part a on how the PE fund gets what would eventually amount to a near usury level return.

The preferred return is normally based on the finds initially advanced, offset by projected cash flows over the life of the agreement. The critical parts here are that cash flows should increase over time, leaving the early payments as a more difficult hurdle to overcome. There often is additional language (which on the surface appears to help the borrower but in reality is there to ensure compounded preferred return interest) that doesn't allow pref payments until an additional reserve has been reached (preventing on time payments unless there is a considerable surplus) and often, as this reserve is not among the mandatory reserves, most of the surplus funds (when they arrive) are also run through the waterfall for distribution.

I know of too many cases where a PE firm appeared to be an angel investor until a few years in, when the true nature of the return of funds structure was realized. The schools that end up involved with this would be better off looking for loan sharks.

 

[Hamms30]

There would normally be a structured waterfall with a subordinate preferred return. This is where it woulg get very dangerous for the schools.

Funds received from operations (after hold backs for expenses and scheduled reserves) are distributed through the waterfall. If the investors (PE fund) doesn't receive a full anticipated portion (revenues are lower than expected) the shortfall accrues interest and cannot be repaid until there is an excess from a future waterfall. This is part a on how the PE fund gets what would eventually amount to a near usury level return.

The preferred return is normally based on the finds initially advanced, offset by projected cash flows over the life of the agreement. The critical parts here are that cash flows should increase over time, leaving the early payments as a more difficult hurdle to overcome. There often is additional language (which on the surface appears to help the borrower but in reality is there to ensure compounded
preferred return interest) that doesn't allow pref payments until an additional reserve has been reached (preventing on time payments unless there is a considerable surplus) and often, as this reserve is not among the mandatory reserves, most of the surplus funds (when they arrive) are also run through the waterfall for distribution.

I know of too many cases where a PE firm appeared to be an angel investor until a few years in, when the true nature of the return of funds structure was realized. The schools that end up involved with this would be better off looking for loan sharks.

Happened at a company I worked at. Hedge Fund 1 wanted a capital infusion. Hedge Fund 2 provided it with a PIK structure to protect their investment. Few years later, Fund 2 was the majority owner and Fund 1 was up a famous creek without any rowing implements.

 

[pj]

There would normally be a structured waterfall with a subordinate preferred return. This is where it woulg get very dangerous for the schools.

Funds received from operations (after hold backs for expenses and scheduled reserves) are distributed through the waterfall. If the investors (PE fund) doesn't receive a full anticipated portion (revenues are lower than expected) the shortfall accrues interest and cannot be repaid until there is an excess from a future waterfall. This is part a on how the PE fund gets what would eventually amount to a near usury level return.

The preferred return is normally based on the finds initially advanced, offset by projected cash flows over the life of the agreement. The critical parts here are that cash flows should increase over time, leaving the early payments as a more difficult hurdle to overcome. There often is additional language (which on the surface appears to help the borrower but in reality is there to ensure compounded
preferred return interest) that doesn't allow pref payments until an additional reserve has been reached (preventing on time payments unless there is a considerable surplus) and often, as this reserve is not among the mandatory reserves, most of the surplus funds (when they arrive) are also run through the waterfall for distribution.

I know of too many cases where a PE firm appeared to be an angel investor until a few years in, when the true nature of the return of funds structure was realized. The schools that end up involved with this would be better off looking for loan sharks.

Yes. It's crazy for the schools to do this, they get a bit more money if things go well and they get disaster if things go poorly. “Neither a borrower nor a lender be; / For loan oft loses both itself and friend.”

 

[FfldCntyFan]

Happened at a company I worked at. Hedge Fund 1 wanted a capital infusion. Hedge Fund 2 provided it with a PIK structure to protect their investment. Few years later, Fund 2 was the majority owner and Fund 1 was up a famous creek without any rowing implements.

This happens more often than most realize, with seasoned professionals who have been in the business for decades being the ones who end up overlooking some seemingly innocuous item that ends up putting the borrower in an insurmountable hole.

I find it very difficult to believe that a group of academics with a handful of attorneys on retainer will be able to avoid this potential pitfall. The best they could hope for is for cash flows to sufficiently exceed expectations to the point where all obligations are met timely. If that happens, the schools will end up seeing less cash than they would have if they never got involved with a PE firm.

 

[Hoophound]

There would normally be a structured waterfall with a subordinate preferred return. This is where it woulg get very dangerous for the schools.

Funds received from operations (after hold backs for expenses and scheduled reserves) are distributed through the waterfall. If the investors (PE fund) doesn't receive a full anticipated portion (revenues are lower than expected) the shortfall accrues interest and cannot be repaid until there is an excess from a future waterfall. This is part a on how the PE fund gets what would eventually amount to a near usury level return.

The preferred return is normally based on the finds initially advanced, offset by projected cash flows over the life of the agreement. The critical parts here are that cash flows should increase over time, leaving the early payments as a more difficult hurdle to overcome. There often is additional language (which on the surface appears to help the borrower but in reality is there to ensure compounded
preferred return interest) that doesn't allow pref payments until an additional reserve has been reached (preventing on time payments unless there is a considerable surplus) and often, as this reserve is not among the mandatory reserves, most of the surplus funds (when they arrive) are also run through the waterfall for distribution.

I know of too many cases where a PE firm appeared to be an angel investor until a few years in, when the true nature of the return of funds structure was realized. The schools that end up involved with this would be better off looking for loan sharks.

Great stuff.

 

[Kolumbo]

I think college football is in a massive bubble right now and all this realignment crap is just somebody blowing into the straw blowing it bigger and bigger. Conferences are cannibalizing conferences. Teams are foregoing years of distribution payments just for a seat at the table.

edit: posted before I finished my thought.... The more this goes on, it's going to alienate teams that are in these power conferences i.e. Indiana, Vanderbilt, Illinois .. all the schools that have no shot at a national championship. With the new movements that could include schools like Oregon and Washington now.. That will lead to disengagement from fans. Once that happens the advertising money goes away and where do we think the money from these media networks that are funding these conference deals come from.

Now lawyers are getting involved because the money is too big. Now there is 20% revenue sharing on the table. It's happening in front of us.

I agree it's in a big bubble and there will be ramifications. However, I don't think it will be as bad as we might think, even if many programs are alienated. The greedy bastards are going to get rich. The CFP is going to make college football even more popular so the revenue will continue to grow. We love sports way too much for it to not grow.

I didn't realize it had to be spelled out

Big 12 is making desperate moves to keep up with the others.

Yes, the Big 12 may be making desperate moves, as well it should. Do whatever it takes to be #3. If it gets 2, 3, 4 teams into the college playoff every year, that's a huge success. The alternative is to whither and become another AAC making no money.

 

[CL82]

Ergo I tried to follow your logic. So where did I lose your train of thought?

Golly I don't know, maybe when you deviated from what I actually said, repeatedly?

Again, there's nothing wrong with paying operating expenses, it's a pretty huge problem if you are borrowing money to pay operating expenses. This isn't hard stuff.

 

[huskymedic]

 

[hoopsfan22]

Maybe it's going to be a PGA vs. LIV golf thing with college football.

 

[Rufus]

Not private-equity related, but related to paying of athletes...........

Feds: Title IX will apply to college revenue share

The U.S. Department of Education said Title IX rules will apply to future revenue dollars payments that schools share with college athletes but declined to offer guidance on how schools should distribute the money between men and women.

www.espn.com

 

[CJasmer]

Not private-equity related, but related to paying of athletes...........

Feds: Title IX will apply to college revenue share

The U.S. Department of Education said Title IX rules will apply to future revenue dollars payments that schools share with college athletes but declined to offer guidance on how schools should distribute the money between men and women.

www.espn.com

Great. I would argue that paying athletes the amount they brought into the university is the fair early to compensate athletes. But Title IX lawyers will of course argue women athletes should get 50% of the revenue. Good thing Title IX does not apply to NBA or WNBA players would get huge increase in pay at the expense of NBA players.

 

[CJasmer]

Great. I would argue that paying athletes the amount they brought into the university is the fair early to compensate athletes. But Title IX lawyers will of course argue women athletes should get 50% of the revenue. Good thing Title IX does not apply to NBA or WNBA players would get huge increase in pay at the expense of NBA players.

Wanted to say fair way not fair early.

 

[huskymedic]

 

[JMick]

I've been thinking more about the private equity stuff and it keeps getting funnier. So what happens if they decide that one of their schools is underperforming? Do they get to be the scapegoats for conference leadership to finally start the great culling of all the crappy teams in big time conferences?

 

[uconndogs]

Well, I'm a finance guy and for the life of me I can't figure out where PE fits into college athletics. What gets monitized to generate returns for investors? Assuming you address that minor issue, how do you begin to assess risk when you can't possibly know what your payroll costs are going to be.

Total head scratcher for me......

 

[Hamms30]

Well, I'm a finance guy and for the life of me I can't figure out where PE fits into college athletics. What gets monitized to generate returns for investors? Assuming you address that minor issue, how do you begin to assess risk when you can't possibly know what your payroll costs are going to be.

Total head scratcher for me......

Guessing a percentage of revenues or a piece of distributions that normally go to the schools since they'd be buying in for an equity stake and not a loan.

 

[uconndogs]

Guessing a percentage of revenues or a piece of distributions that normally go to the schools since they'd be buying in for an equity stake and not a loan.

Which I have to believe will call into question non-profit status for tax purposes. You may be right, but the whole thing just feels so bizarre to me....

 

[The Yakk]

Well, I'm a finance guy and for the life of me I can't figure out where PE fits into college athletics. What gets monitized to generate returns for investors? Assuming you address that minor issue, how do you begin to assess risk when you can't possibly know what your payroll costs are going to be.

Total head scratcher for me......

Guessing a percentage of revenues or a piece of distributions that normally go to the schools since they'd be buying in for an equity stake and not a loan.

The reason PE investors are interested is for a chance at a piece of every single dime of revenue that passes through the school.

It is not obvious to you because your thinking is constrained by a basic ethical sense that is completely lacking among the PE crowd.

The PE investor looks at one these big P4 state schools--or maybe a conference full of these schools--and sees 25,000 undergrads times $20,000 average annual tuition = $500,000,000 coming in every year. Hopefully in perpetuity, since these schools are institutions. That's before even counting the athletic department revenue.

Why not grab 5% or 10% of that and let the schools worry about how to keep running on what's left? Mundane stuff like attracting and paying top faculty; maintaining state-of-the-art facilities; keeping class sizes small--none of that is any concern to the PE investor.

The reason there is PE interest in these conferences is definitely not because of the great economic potential of their football programs. It's because these particular schools are the ones most likely willing to be swindled into putting their entire revenue streams in play. So yes, the deals will be sold/presented as investments in a school's athletic program. But if a school has a few years of poor performance, or declining ticket sales, or a reduction on their media payments, does anyone really believe that the investor will not have access to the school's tuition stream as compensation?

This might end up being one of the safest/most lucrative investment opportunities ever, at least until the public realizes that the school has been gutted and we stop sending our kids there. The PE crowd is betting that will take a very long time, and that's probably a good bet.