The Private Equity College Sports Hellscape Thread

[UConnJim]

Having worked in financials and investor relations, and talked to so many buy side and sell side hedge fund types since I left sports journalism…

Unlocking value? To what end is it required for the school to unlock its value?
What does unlocking value have to due with the quality of the product?

When PE says unlocking value, I hear that they want liquidate the intrinsic value of the enterprise. They want to liquidate and take for earnings what other people built. It is stealing 200 plays year if sweat equity.

As an example, newspapers and what the hedge funds do this is an extreme).

Their idea of unlocking value of legacy newspapers is liquidating the brand reputation of 200 years to raise prices and provide less content while maintaining reputation.

Imagine how long it would take Coach or Louis Vutton to start compromising quality before the brand = commoditized quality?

There is a time when you can go super cheap with low quality, and the brand will still deliver sales at premium prices.

Eventually, quality catches up and you destroyed the brand equity.

For 100 years college football has built this brand equity. Who is a PE firm to unlock and extract it?

There is growth equity investing and not all PE shops are focused on cutting costs... Believe it or not, investing in college sports would be relatively low risk if the colleges (or conference) are providing a financial guarantee. Using my $100 million Big 12 example, the risk per current school is $6.25 million plus the return, say 15% and remember the PE firm can lever the investment and make say a 30% return relatively risk free.

Right now, the Big 12 can't offer Clemson and FSU a bigger media deal than the ACC, but what if the Big 12 could offer them each an additional $15 million per year from PE over 4 years until the Big 12 negotiates the next media deal and the next CFP conference payout which presumably will be higher revenues?

 

[Kolumbo]

Kudos for trying to make the actual numbers work, but I doubt any investor would be interested in your scenarios. Too much uncertainty and not a high enough return. Most of the "finance guys" in this discussion at least seem to agree with that.

The investors sniffing around this space are thinking a lot bigger. They are not interested in investing in the athletic departments or the conferences; they want to own the schools themselves. People are never going to stop spending money to send their kids to Big Midwestern University, or so they believe.

The reason your fellow finance guys refuse to see it is because they are hung up on what they learned in b-school. Like, "the schools are non-profit and how can someone make a profitable equity investment in a non-profit?" But I guarantee, none of that stuff is going to stop the investors.

Personally, I doubt there will ever be an actual deal that gets done. I think the various school presidents and trustees will be smart enough to avoid being plundered, and without the plunder I don't see the investor interest. But who knows?

First, I am reading that it is all about athletics revenue and investing in the Big 12 Conference. I don't see anything about investing in the actual schools. If it is about having equity in the schools, that would seem to be very complicated.

Second, I could see a large influx of capital helping the Big 12 distance itself from the ACC. By making the right additions, the Big 12 would be much closer to the P2 and the ACC would be the best of the G6 - pending the outcome of the ACC membership changes of course. In that scenario, Big 12 revenue would certainly grow quickly while the ACC's would drop off. I don't think it will happen, but that is the scenario we're laying out.

Third, perhaps the media deal would be structured to pay the conference say 90% of the total payout and pay 10% directly to the PE Fund. In this way the conference members would still be getting more money given the revenue growth and the PE Fund would get its revenue stream. The percentage and time period would impact the ROI. Even if the Big 12 members don't get significantly more than they get now, they are getting stability and solidifying their positions in the "P3"

So I see how it could work given the right circumstances.

 

[UConnJim]

Having worked in financials and investor relations, and talked to so many buy side and sell side hedge fund types since I left sports journalism…

Unlocking value? To what end is it required for the school to unlock its value?
What does unlocking value have to due with the quality of the product?

When PE says unlocking value, I hear that they want liquidate the intrinsic value of the enterprise. They want to liquidate and take for earnings what other people built. It is stealing 200 plays year if sweat equity.

I didn't address your point about unlocking value. I have been preaching for over 5 years that UConn football has the most potential financial upside of any sport at UConn and it is the path to getting a conference bid. So, why hasn't UConn invested in football? It seems UConn's strategy has been we will invest in football when we get a P4 invite and have higher revenues. Wrong answer. You have to invest to grow!! This is the biggest lesson anyone in finance could have taught UConn. The competitors for P4 bids, Louisville, Cincinnati, UCF, Houston, SMU all invested in football and their investment paid off.

Newspapers are a bad comparison to UConn football as newspapers are a shrinking asset and UConn football has potential to be a growing asset. Unlike newspapers, UConn football has the potential to increase revenues per year by 3x to 5x+. That is unlocking value.

 

[JohnFSilver]

There is growth equity investing and not all PE shops are focused on cutting costs... Believe it or not, investing in college sports would be relatively low risk if the colleges (or conference) are providing a financial guarantee. Using my $100 million Big 12 example, the risk per current school is $6.25 million plus the return, say 15% and remember the PE firm can lever the investment and make say a 30% return relatively risk free.

Right now, the Big 12 can't offer Clemson and FSU a bigger media deal than the ACC, but what if the Big 12 could offer them each an additional $15 million per year from PE over 4 years until the Big 12 negotiates the next media deal and the next CFP conference payout which presumably will be higher revenues?

What’s the upside for PE? More money, taxes are an issue if PE is in there.

this would be a way to spin off football and make it a 40-50 team league, which is much more manageable than 130.

 

[JohnFSilver]

I didn't address your point about unlocking value. I have been preaching for over 5 years that UConn football has the most potential financial upside of any sport at UConn and it is the path to getting a conference bid. So, why hasn't UConn invested in football? It seems UConn's strategy has been we will invest in football when we get a P4 invite and have higher revenues. Wrong answer. You have to invest to grow!! This is the biggest lesson anyone in finance could have taught UConn. The competitors for P4 bids, Louisville, Cincinnati, UCF, Houston, SMU all invested in football and their investment paid off.

Newspapers are a bad comparison to UConn football as newspapers are a shrinking asset and UConn football has potential to be a growing asset. Unlike newspapers, UConn football has the potential to increase revenues per year by 3x to 5x+. That is unlocking

That isn’t true. UConn football is not a business.

I agree that UConn’s media rights are under valued. By who benefits from unlocking the value?

How does UConn, and UConn fo

I didn't address your point about unlocking value. I have been preaching for over 5 years that UConn football has the most potential financial upside of any sport at UConn and it is the path to getting a conference bid. So, why hasn't UConn invested in football? It seems UConn's strategy has been we will invest in football when we get a P4 invite and have higher revenues. Wrong answer. You have to invest to grow!! This is the biggest lesson anyone in finance could have taught UConn. The competitors for P4 bids, Louisville, Cincinnati, UCF, Houston, SMU all invested in football and their investment paid off.

Newspapers are a bad comparison to UConn football as newspapers are a shrinking asset and UConn football has potential to be a growing asset. Unlike newspapers, UConn football has the potential to increase revenues per year by 3x to 5x+. That is unlocking value.

What is UConn footballs value? It generates negative cash flow from operations. It isn’t going leverage the Sherman center

Its value is in its brand and its fanbase.

UConn and PE would be a brand play. Game day and performance is a loss leader. To what extent does football enhance the university brand.

That is the only way they will generate cash u til they sell more.