Topic overview:
$50 billion was spent last year alone on the sports industry by institutional investors, investing in teams, leagues and sports related assets. In the last 12 months, the value of the top 50 sports franchises in the world has increased 30%. The world seems to have caught on that these assets have real and growing value as businesses, not just the historical view of the play thing of billionaires.
Watch (and read) to learn about sports as an asset class with some of the world’s best sports investors:
Ed
Welcome to Gerry, Kara and Matt to Hobart.
Sport is now more than ever at the epicenter of entertainment, media, technology, consumer. Gerry, can you begin our discussion today by digging into the Redbird Capital Partners approach and maybe for ease if you can use some of your investee companies as an example that can help illustrate this?
Gerry
Thanks for having me Ed. I’ve been investing in the sports industry for 20 some years and I joke that it’s really just been arbitraging incompetence and inefficiency.
We look at sports assets as great live event entertainment companies and we really try to run these as businesses. An arbitrage we see is that most of these companies are valued as a multiple of revenue and we think they should be valued on a multiple of cashflow.
One of the things I’ve seen is an unbelievable divergence between the valuations of these assets and the asset’s organizational infrastructure – the infrastructure just hasn’t kept pace and there’s a huge gap there. So fundamental to the value we bring as active investor is closing that gap with scalable capital and operational expertise.
Our model partners with the Rights Holders, the teams, individuals, and leagues, to build terminal value as businesses. We co-mingle operators with investors and the model really has been the same for 20 years.
We think of this like a great convertible bond because the Rights Holders contribute the rights on a very long term basis, giving us embedded downside protection via contractual revenues. Then our job is to take a dollar of contractual revenue and translate it into a reasonable dollar of cash flow.
Done right, this is a win for the teams in the leagues because they don’t have the expertise to do this themselves. In the old days, owning a sports team was really a hobby for rich people. Today they are really big businesses and need to be supported with capital that can transform them and benefit the whole ecosystem.
Ed
For those who might be less familiar with some of these terms, the term Rights Owner is typically associated with the owners of the teams and leagues, or individual players, while the Rights Holders typically are the distribution and media side of the model.
Rights Owners can sell the distribution rights for specific aspects of their IP to Rights Holders. Then Rights Holders are responsible for monetizing the IP in their own ways so broadcast networks, game creators, etc.
Gerry, can you give the audience some insight into the recent business model trends and the thinking behind some of the shifts Redbird is making in their approach?
Gerry
About 20 years ago George Steinbrenner, the owner of the New York Yankees, approached us after he had broken away from another family business owner, Cable Vision, who was acting as the Rights Holder on the distribution side.
George in a nutshell was saying, ‘Why am I getting paid a fixed fee when I’m the guy that’s taking the risk and I’m putting the capital in to put these players on the field to provide better entertainment content? I should be getting the terminal value appreciation, not Cable Vision.’
So we partnered with George and the Yankees to create a new model with the Rights Holder, ultimately leading to a multi-billion dollar business and the number one regional sports network in America.
This is a model that works for the owners who are invested in their organisations deeply, the George Steinbrenners and Jerry Jones’s, of the Dallas Cowboys. But it soon dawned on us that there weren’t enough owners in this bucket.
This led us to say to ourselves, ‘Well why don’t we vertically integrate and become the Rights Holder ourselves?’
So that’s what we’ve started to do.
We started the YES network in 2001.
We signed that deal the day before 9-11. By the end of the week we backstopped a $355 million private equity cheque and all we had was a piece of paper that said you now own 40% of the intellectual property of the New York Yankees, and we had to be on the air in April.
So that was the formative moment and it taught us a lot. We launched in April of 2002 with only five eighths of our subscriber base. Even with that we had $50 million of free cashflow. We won a seminal arbitration case and within another year we had all of the subscribers in the $9 million person tri-state area of New York, New Jersey and Connecticut. And that 50 million of cash flow went to $150 million. Mark that to market to today and that’s $450 million of free cash flow anchored by a 42 year media rights agreement at a 6% escalator.
When I retired from Goldman, I sold that asset to Murdoch for $4 billion at 13x cashflow in 2013. We bought it back as Redbird in 2019 for $3.5 half billion for 8x cashflow.
I started the network as a growth equity business. I bought it back as an infrastructure play. I mean, we’re now using the asset of the YES network as distribution for the IP instead of as a traditional cable network dependent on ads rev. We also built a digital network side-by-side to reach fans directly. It’s a fundamentally different model than when Murdoch owned it.
We’re doing the same thing with the Red Sox in Boston.
I don’t think there’s any way we could do what we do if we just showed up with a pot of money. And one of the things that I want is to temper all the irrational exuberance that I see in the marketplace, to really enhance the ecosystem. This is a very closed ecosystem. It’s an ecosystem where nobody really ever talks about anything below the revenue line. I need to not run professional businesses. Most people involved in sports or sponsorship people, nothing wrong with sponsorship people or advertising people and everything else, but these are now businesses. These are mini Disney’s. And with that has to come a transformation and a professionalization. We just got lucky because we’ve been doing this for 20 years and now we’re in a position where it’s sort, it’s like yeah, we’re watching this perfect storm.
And part of our responsibility is not only to have our capital be transformative and catalytic to enhance our partners and the ecosystem, but also to say to everyone else that’s jumping in who wants exposure to sports in their portfolio construction, to maybe think about how best to do that as opposed to just buying stuff.
Ed
For the deal junkies in the room, buying an asset back at half the value to which you sold it, is sure to prick a few ears up and get them excited!
Thanks Gerry for such deep insight into your philosophy at Redbird.
Changing gears slightly.
Kara
It’s such an exciting time to be here for so many reasons, you have the Women’s World Cup coming to Australia this Summer and the Matildas are an amazing team!
For me, the story of Angel City began in 2015 when I went just as a fan to the World Cup finals in Vancouver with my husband, my three daughters and my parents. I had been a sports fan my whole life, I played sport somewhat mediocrely.
Attending the World Cup was the most incredible experience as a sports fan in my life. Then I couldn’t find the jersey I wanted to buy. I went nine stores in Vancouver and LA and just couldn’t find what I wanted.
I couldn’t find merchandise!
I thought, am I the only one in the world that people don’t want take money from?
I want give you my money, why won’t anyone take my money?
It’s as if you had a 2-hour 90 minute Superbowl commercial and the website is down for four years.
From that moment on, I began creating relationships with people in women’s sports and that’s how I ended up crossing paths with Natalie (Portman, Co-founder). She’s a huge women’s soccer fan and one day in one of our regular conversations she texted Why don’t we buy a team?
On Instagram I could follow players, I could see other people following players, and I could see there was lots of interest there, but no one was commercializing it.
Investors were worried about the virtuous cycle of understanding demand creation. People who are now investors and on our board said to me, Kara, it’s just never going work because you’re never going get a broadcast deal and that’s how you make money in sports.
And now Angel City FC debuted in the 2022 season of the NWSL and we’re selling out our 22,000 seat stadium.
Ed
We’ve heard the importance of taking emotion out of the investment decision and yet we also know the power of highly emotional founders and what that can bring to the brand.
I’m going pick up on that because you do wear two hats: institutional investor, and passionate cofounder. How do you reconcile those two?
Kara
I think it’s a blessing and sometimes it’s uncomfortable because sometimes I’m sitting around the table as a co-founder and I feel like I want to be an investor and there’s a psychological relationship and a co-founder relationship that’s different.
In many ways gives me real perspective as an investor. I think somewhat differently with Angel City than I think now that I’m looking at other sports assets around the world, but I can appreciate that founder mentality. And I think the thing about these businesses, Gerry and I were talking about this beforehand, you have to be right brain and left brain.
Sports teams are our cultural institutions. These are the only places in the United States where you probably sit next to somebody from a different political party and can have a conversation with them and realize you like each other and that you’re human beings – it’s socially acceptable tribalism. That makes this industry so unique.
My founder mentality drives me to better understand the nature of the teams’ effect on the community. Community is such an important part of our organization, from day one, one of our co-founders Julie Uhrman, we credit so much of our success to-date to our ties to the LA community and to the connection we’ve been able to make authentically with women’s sports fans.
The short term, the long term, the heart and the numbers, they all have to kind of cohabit here in a way that’s I think different than public equities and other instruments and asset classes.
Ed
I agree.
Matt, you recently you led a bid to buy the Super Netball in Australia. Unfortunately, it fell over. What did you learn from that experience? I’m keen for you to bring the local lens to this panel.
Matt
It was really interesting. I obviously have a very different background, playing cricket as you know, I didn’t get to the baggy green as you did, but I played underage for Australia and Victoria and then moved into technology and spent the better part of the last 15 years as a founder and entrepreneur and more recently in venture capital, but I’ve always had sport in my blood. My mom grew up playing netball and was involved in the sport for 38 years.
It is interesting to me that sport has moved so fast internationally but in Australia it hasn’t moved from an administration point of view. Administration is a good description of how it’s run. It’s not as professionalised as it is in other parts of the world.
The story of the Super Netball deal is we were just on the first close of our VC fund and I was sitting on the beach in Fiji and I was reading about how bad netball was being financially run and I thought there has to be a better way. So I wrote a three-page pitch deck and sent it to two investors and they both called me in an hour and said we’ll fund it.
We thought privatizing the Super Netball League would take it to the next level and being the number one female sport in the country. It’s something I’m very passionate about.
We came in with an open-ended bid and actually we had a $100 million fund behind us and we said if it’s worth $60 million then we’ll pay $60 million. We put $6 million on the table to start with, and hoped they would open the books so that we were able to look at it more closely. But the board and the management decided that they didn’t want to entertain this. It was a really quick process in many ways.
Ed
Do you think the quality of sports administrators locally is causing friction for private capital coming into the market?
Matt
Oh, definitely.
There is a big contrast between the models of a federated structure that are bottom-up, like field hockey, when the administrative bodies in the states control and express their thoughts up to a national body, in contrast to a top-down model like say the AFL.
The AFL goes out and says, you know what? We’ve got an amazing entertainment brand sport, we’re going do a big broadcast deal, we’ve got great sponsors, we’ve got great fans, we’ve got great membership bases and we are going then distribute to the clubs.
I think there’s more value creation with a top-down model.
Ed
That’s interesting insight.
Let’s zoom out for a second.
I want the audience to get a sense of what’s driving value for these teams and leagues and franchises around the world. And there are some key value drivers.
The big trend you touched on Kara is the changing nature of media: how we’re consuming it, the coverage, the unbundling of cable, and more over the top large tech companies making bids to be sports Rights Holders.
Gerry, can you unpack the media landscape for us? How it’s changing and how the value exchange between the Rights Holders and the Rights Owners? It’s amazing how live sport is the last bastion of appointment tv. Really anyone can watch anything on demand except live sport. And we’re seeing it through the value of the rights.
Gerry
Media was always the silver bullet that bailed everybody out. Technology is disintermediating the consumption of content, but what I have found is that that content is the best “must carry” content in a local area. And where we traffic, we’ve been very fortunate, we traffic in local content that actually is regional, national and global.
When we reacquired YES, we made a bet that the cable bundle wasn’t going to die and we also saw this trend that is a proliferation of direct to consumer and a more fragmentated media space with all the streaming services. We made a bet that the rapid fan base wants multiple services and more content and they’re willing to pay a premium for it.
Everybody was proclaiming that the cable bundle was dead. The cable bundle’s never going be dead. That is the one pipe into the home that provides high speed internet, but it is also the one-stop-shop place where you can get bundled sports.
The middle of the bell curve of super fan to non-fan is really going be in cable bundle. And so what have we done? Well, we we’ve launched a direct-to-consumer product in the New York area side by side, the linear cable bundle.
I’ll give you the statistic last year, the YES network, this Yankee channel that we started, there were 7.7 billion minutes of that content consumed.
Now what’s amazing about that is more than the top 20 primetime shows on television combined.
We’re now partnering with groups like the New York Yankees and then individual players now with the digitization of intellectual property. So we’re partnered with LeBron James, we’re partnered with Dwayne Johnson, and we’re looking to create terminal value businesses even down through to the individual.
Ed
You called these teams like a mini-Disney and no one has monetized the fan or the consumer Disney have.
Kara, can you give us some insight into the changing nature of fan engagement, the customer or consumer proposition and how you are thinking about monetizing it?
I can’t think of an example of a first year team packing out stadiums. I think I’ve heard you say that over $30 million of sponsorship in year one? You must be doing something in stadia to create an experience that people want to come back for and allow you to very smartly monetize them.
Kara
I feel like the stock I should pitch here is women’s sports. And I think Angel City’s emblematic of it. In some ways it’s a huge blessing at Angel City that we didn’t have traditional revenue streams. We didn’t have a Nike, Adidas or a big broadcast deal that was driving revenue through, we didn’t have the $11 billion NFL contract. And so when we went out, we said, okay, how do we go from zero to big? I think it is necessity is the mother of innovation and we will get those revenue streams.
And we now don’t quote our revenue numbers publicly, but we have more revenue than a half to a third of the men’s football teams in the United States, many of whom are now valued at a $500 million to $1 billion dollars.
And we’ve grown our valuation probably 30 to 40x in the two and a half years since we started it. You bring in great operators and humility with that great operating.
In the first year our revenue has been ticketing revenue and sponsorship revenue, we’ve contracted north end of $40 million in sponsorship revenue.
We’ve brought in sponsors that have never advertised in sports before. Women consumers drive, 85% of the $7 trillion of consumer spend in the United States, so we have shoes and supplements and women’s alcohol along with Gatorade and Nike and the like. And we donate 10% of every sponsor contract. We put it into a community cause. So DoorDash, who is our Jersey sponsor, I think we’ll deliver 400,000 free meals to food to insecure parts of LA.
There is a massive arbitrage on sexism, I’ll say that.
So anyway, only to say that, I’m here make a stock pitch about women’s sports in your country because you can get venture like returns, but actually with growth equity like risk, if you pick carefully and most of the world is still waking up to this. So there is a window and time in your local community for the next three years.
It starts with community as I mentioned. Natalie, Julie and I walked through a game at LAFC and saw somebody waving a flag saying bring women’s football to LA and those were our first two community members, the Rojas. We now have seven groups. We manage them, they are our free fourth estate and they give us feedback when we do things that they don’t like.
There’s a lot of accountability, there’s a lot of purpose.
Authenticity in women’s sport is incredibly important. We’re held to a higher standard in that regard. And so now we have a full section that’s just our supporters groups, drum circles, slack channels. I ride an e-bike around before games and I go hang out with them and eat tacos and throw the tequila over my shoulder. And I think Ed, you’re going start our eighth supporter group?
Ed
Yeah, I’ve been live on the merch store and bought myself an Angel City pride round tank top!
Matt, one of the great value drivers for sport is obviously IP. And historically the power of this has been with the league owners or the franchise owner, but it’s now much about the player.
What’s the new wave of IP? Where’s this going? Whether it be Web 3.0 gaming, I know you’re involved in a fascinating company called Livewire. How are teams thinking about monetizing IP?
Matt
It’s super interesting. Livewire was our first investment in our venture fund. It’s a gaming tech company based in Australia, but in six countries already. And we’ve just started Live By sports actually in the last month. One of the fascinating things over the last 10 to 12 years, a lot of people in Australia would know, that the change from newspaper to classify to obviously online classifieds. And I was lucky enough to have a front row seat with Matt Rockman from Seek and Greg Roebuck from Carsales.com and also Lachlan Murdoch, who were investors in my first technology company.
The one slide from their deck that just got me said that 8% of media time was spent on linear tv with $55 billion of spend, while 37% of media time, and eyeballs, were on gaming with $1 billion spend. And history tells you that the money will always follow the eyeballs.
Now we’ve got an exclusive deal with Roblox, and now we’re talking to sports teams and leagues so that people can pause their Roblox game and watch the game live. So just like 10 years ago when people were doing rights deals, it was TV only and then it became TV and digital and then it became tv, digital, mobile. We think gaming will become part of the ecosystem of rights sponsorship in the future.
Ed
There’s a crazy statistic, I think there was 4 billion hours of FIFA, which is the soccer game for those that are uninitiated, played last year, and 2 billion of hours of watching people play FIFA.
There is certainly a dynamic that is changing in the world that probably slips our generation by.
Gerry, you’ve been at the heart of a lot of these IP deals and there’s been a shift from the team owner to the player. The player is a brand themselves these days. How are players thinking about monetizing their own IP and how are investors like yourself thinking about monetizing them?
Gerry
There’s the player individually and there’s the collective players. So the starting point, you have to look at that there is this NFT phenomenon and the individualization of intellectual property monetization really so far only for a certain select group: the Dwayne Johnson’s or LeBron James’ – Tom Brady hasn’t really been able to do it, show how hard it is.
So we were more fascinated with the collective players. And we were approached by the player unions of the NFL and Major League baseball. They came to us and it was interesting, they came to us because they wanted to start a venture fund and I thought that was odd. And I said, why do you want start a venture fund?
And they said that they’re looking at the Golden State Warriors in California who all are getting series B and C allocations and all these companies and they we want that for our players. And I said, well, I said, slow down a minute. I said, come in, let’s whiteboard this, let’s figure out what you’re really asking.
Let’s figure out what the right thing to do is.
Our conclusion was, we said, You guys as the union, you are the venture fund.
What we ended up doing is we took their collective licensing rights, really for the Madden Football video game on the NFL side and the Sony baseball game on the Major League baseball side, and we corporatized it.
We bought those rights to those games in perpetuity, capitalized it at a seven and a half times cashflow multiple. At the time it was $40 million of cashflow, so a $300 million valuation. And we created a company called One Team. We monetized our stake. We sold our stake just under two years later for a $2 billion valuation. We had grown that $40 million to close to $200 million.
How did we do that?
Well, when we did this deal, really getting to your point, I can’t tell you the outrage that I received from the other parts of the value chain, the leagues and the teams, the ownership called me and they said, what are you doing?
And I go, what do you mean?
They said, you’ve worked with us for all these years and now you’re partnering with the enemy.
I was like, who’s the enemy?
And they’re like “the players”.
I said, whoa, hold on. I said, you can’t have a game without the players. They’re your partner.
What was fascinating, and I thought I knew sports, but what was fascinating is you look at the value chain in sports, all the money went to leagues and teams, not players. All the money went to this two thirds of the value chain and none of the money ever came to one third of the value chain. Now that’s not sustainable, that’s anti Darwinian, that’s bad. And so what we did is we came in and we sort of leveled the playing field a bit. And I said to the NFL, I said, look, well, we’ll even show you.
Let’s partner you, the league, with you, the union, and let’s go together with us in the middle to Electronic Arts and let’s go renegotiate that deal.
And sure enough what we did is we increased the pie, but what we also did is we moved it from the vendor partner to the content owners. And that was really just an eye opener for me. I had not seen that before. It is something that we want to perpetuate. There is a huge opportunity to your point on players and with what you’re doing, it is huge opportunity to bring this kind of capital, this kind of professionalization, this kind of company building to collective players as well as to individual players.
Ed
Totally agree with that. And I know there are a lot of active players even in the Australian market who are thinking the same, ripping up sponsorships left, right and center.
I’ll move along to a topic close to everyone’s heart in this room. And that is valuation. Macro headwinds by every indicator and yet every time I look at a new sports valuation, it’s finger in the air, last transaction plus 30%. There’s huge opacity when it comes to the valuation of these teams.
You touched on it, Kara, in two years, how much of a valuation uplift you’ve seen. How are we to think about valuations in the sports market? Is there a bubble or you think it’s only moving in one direction?
Kara
Well, I mean, it’s an interesting market to be in. I spent the last 25 years in tech and have just moved over to sports. And it reminds me, when I started Venture Capital in ’99, I was 23 years old, and it was this little industry and I would cold call people, I’d circle names of tech companies in Boston and literally use a phone and call them. And they’d never heard from a venture capitalist before.
And sports sort of feels that way now even though it’s in the press so often in that it’s a very illiquid marketplace. It’s becoming more liquid, so you have
these big funds coming in. And so I think to answer your question more specifically, you’re always going have somebody’s boyhood or girlhood team that they may pay crazy amounts of money for but I actually think that the world is of waking up to the fact that these are scarce assets. You take the Premier League, you have 20 teams there in the world, the global sport. And so to some extent there’s characteristic of scarcity.
We’re are the only license to operate a team in the league we’re in. We’re in Los Angeles, one of the biggest markets in the world. So they’re like real estate or gold. And then many of these businesses are being run particularly around the world by people who just grew up in the sport but they haven’t been professionalized, they’re not ready for investment.
I think ultimately in every industry you have to drive value, and it’s just a question of creating sustainability of cash flow.
If you look at sports like football, racing tennis, other sports that are global in nature where the total addressable market is 7 billion, then we have a long way to go.
Look at the entertainment industry, which I think is multiple trillions of dollars in the United States alone, it’s not just broadcast revenue, it’s all the rights we’re talking about.
Then if you look at bringing women, people of colour and under-represented folks from tech and media into sports teams and leagues, we see an opportunity for greater efficiencies in operations.
I just went to the MLS cup finals, you guys have maybe never heard of it. It’s the soccer league in the United States, 10th or 15th best in the world. It was an incredible entertainment experience. I mean, it wasn’t the best soccer in the world, but it was one of the most entertaining games I’ve ever been to in the world. And so when you look at a domestic market in a sport that while these teams grow into those valuations maybe over 10 or 20 years. The long-term fundamentals I think are there.
Ed
I think it’s a great call out about the long-termism. And we’re seeing some interesting structures pop up.
Matt, witnessesed locally a deal recently between Silver Lake and the All Blacks, structuring with a separate commercial Co and the IP attached to that.
Can you give some color to these kind of structures that are popping up and why investors might be doing these types of deals?
Matt
Yeah, I think that was a really interesting deal and one that we talked about with netball, about centralizing the commercial assets into one unit.
Some sports are great at commercializing their assets and some sports aren’t so great at commercializing their assets. The bringing of experience and ability to do that, in a centralized position, all the way from national to grassroots, and vertically integrate sponsorships and rights and deals through that has been successful for the Allblacks and I think is definitely a different way to look at how sports operate.
I know there’s obviously funds out there that bid into sporting teams and leagues on pretty much a structured debt structure and they look at IRR and they don’t look at massive valuation increases.
So there are different models that can be used to both structure and justify a buy price.
Kara
Yeah. And one more thing I was just say, because I think people like data here. If you look at just for example, the Premier League, you have teams like Manchester United who are doing $300 million in commercial revenue. You have the teams at the bottom of the table who are probably doing $10 million.
So you look at that disparity and you say, well, Manchester United is a global brand, but there’s probably a lot of execution in-between here and here as you bring operators in. And as these become the most coveted rights and in-person experiences we have.
Ed
Gerry, as the person that’s traveled the farthest, you get the end note. Would you like to share your views on valuation in the current market of sports?
Gerry
I think I’ll be so bold to say that, yeah, there was a bubble. We’re in the middle of it, but it’s not lethal, right? And that’s interesting about it.
It’s very hard, and this is not just unique to sports, but I think it’s very, very hard to buy well and have your returns trajectory set-up from the buy. I think what you have to do is figure out how to own better.
Now the thing about sports is the reason why there’s a bubble is because people have discovered it. And I said in the opening, and the first thing I said here is that whenever anybody starts talking about something like sports as an asset class, buyer beware.
But again, it’s not lethal. I think there’s scarcity value. People like the fact that it’s non-correlated. People like the fact that it benchmarked against an index like the S&P. It’s very positively positioned.
But I look at that and I say that, you know, you gotta be careful. It’s that old Buffett aphorism that ‘when the tide is high, it’s great, and then when the tide pulls back, you see who’s wearing a bathing suit’.
And so this concept that this thing is always going keep going up is a problem. Now people want exposure to this non-cyclical, non-correlated asset class that has contractual revenue anchored by media and that has the potential for further revenue streams in gaming and gambling and digitization. They want that and they’re right to want that.
The question is how do you get that?
And I’d say to you that when you look at the auctions that have gone on for these teams, most recently I look at them and say, they actually were not that robust.
The irony is the equity research in sports is Forbes Magazine. That’s the level of rigor that goes on in sports. And it is what you said: you look at the last trade and you mark it up.
Now I look at that and I start to salivate, as I say, that is a great arbitrage opportunity. Guys like us can get in there and you know what we’re passionate about is owning better. There’s a great opportunity.
Yes, we’ll try to buy well. I think we bought AC Milan at a fair price, but well, certainly relative to what other trades that you’ve seen.
But what we’re really focused on is, Can we own it really well?.
Ed
Well said. Matt, Kara. Gerry, thank you so much for your time. You’ve all come a long way. Loved it. Thanks.
