Game on: Why family offices are investing in sports — and how to get in on the action
It is easy to become enamored with the idea of owning a sports franchise, whether it’s being a part of a favorite childhood team, rubbing elbows with athletes or the cachet of sitting in the owner’s suite. And if your team is enjoying a winning season, well, what’s there to lose?
For a better understanding of why family offices are investing in sports, tips on how to break into the game and issues to be cautious of before diving in, we talked with an entrepreneur; a senior wealth adviser; and a partner, portfolio manager and COO of a multi-family office.
Sato is the founder of Kaizen Reserve Inc., a venture capital advisory firm for family offices and corporations.
How do family offices become interested in investing in sports?
It doesn't take any coaxing for family offices to become interested in sports and entertainment. Just look at the upper echelon with the NBA, for example. There are only 30 teams in the league, and their valuations rise each time a new billionaire owner buys a franchise, which also dominates headlines. Even if they don't buy a team, family offices are often passionate about sports and want to be involved. Many family offices also see firsthand the amount of money that is spent on their progeny's sports activities and would like to have ownership through direct investment instead of only “paying rent.” That desire has increased dramatically since Time magazine pronounced youth sports to be a $15 billion market in 2017.
What are your clients’ current investments in sports?
Without commenting on any one in particular, they can range from vertical software companies and consumer wellness brands to pickleball teams and emerging golf concepts. The key is to work with the family office to develop or refine its investment thesis as it relates to sports/entertainment, and then be sure to build a portfolio that achieves its objectives.
There was one instance where a family was perfectly fine losing money on an equestrian startup, as long as it helped advance a sport that was important to them.
What tips would you provide to other family offices interested in investing in sports?
First, zoom out and consider the ancillary spend in any sport where you're investing. For example, we've had a lot of experience in golf. And far too often, there is tunnel vision around the equipment and course businesses, which are rather finite. But the addressable markets expand significantly when you consider the total spend associated with the golf industry, including apparel, beverages, travel and technology. For instance, roughly the same amount of people now play “off-course golf” via simulators as on traditional courses (turf golf). In any sport, there is often a bigger pie than what meets the eye.
It's also important to be proactive and get into desirable deals instead of waiting for them to come to you. Most family offices have incredible deal flow and are inundated with opportunities, but a lot of our value is sourcing the right deals beyond just evaluating things that cross their desk.
Kodomichalos is a senior wealth adviser and senior vice president of Wilmington Trust, a leading provider of personal and institutional wealth, trust and financial services. Wilmington Trust is a fully owned subsidiary of M&T Bank.
What is the reality of family offices investing in sports?
Realistically, the buyer universe of those able to buy a majority interest in a North American major league sports team doesn’t usually include too many family offices.
If you think about it, the [NFL’s Washington] Commanders went for $6 billion. Let’s put it down to a majority: 50% is going to cost you $3 billion. So, you've either got to have the assets you can leverage or the cash, and that reduces the buying pool dramatically. Most leagues do not let you put any debt on the actual team itself, so you have got to come up with the cash. That means you've either got to have the assets to leverage or access to other people's money to control the transaction. And I would argue that, other than the existing team owners, there are maybe 20 single buyers who could afford to buy a team on their own.
After that, everyone else has to work it out and say, “OK, I've got to go around to friends and family to pick up a couple of bucks here and there to make the numbers.”
Coming back to the family office, the issue is you have got to be able to work nicely in the sandbox with others. And then you've got to be approved by the leagues, so that’s another issue for people in family offices. Especially if the principal is still around or if they're first-gen and don't always like giving up their financials and having that scrutiny on them. This is also why it's sometimes more valuable to be a minority-interest holder than a majority owner.
The best way to do it is to first partner up with a consulting group and get a minority interest to see whether it's something they want to do before they jump in with both feet and suddenly say, “OK, we just got the whale by the tail — what do we do next?”
What do you think is a promising way for family offices to break into investing in sports?
There may be more value in Europe, because it's not as hot a market as the U.S. And similarly, there's probably more value in some of the MLS [Major League Soccer] teams than there is in the major sports teams [in baseball, football, basketball and hockey] because they're still growing, and there's still a lot of growth to fund.
But that's a market exercise because I understand, for example, that San Diego had to pay $500 million for just the license to get the new expansion team in the MLS, and that's even before doing anything — that's just to get the ability to put a team together. And so there's more value in potentially purchasing a team than on the expansion side.
What should newer family offices consider before investing in sports?
To me, the biggest mistake many family offices make — and especially those that haven't institutionalized, like the younger family offices that are still working out who they are and what they are — is not realizing that liquidity is their biggest trap. They don't think about it because they say, “I’m going to do this deal with my friend,” and then they suddenly realize: “Well, hang on a second. I’ve just soaked up all my liquidity.”
This issue of investing in a sports franchise is probably an even longer lock-up than expected. Not only are they writing that first check, but there'll be multiple checks if it's in growth mode and having to replace infrastructure. Are they ready for that treadmill?
In addition to liquidity, there’s the level of engagement they want to have in the day-to-day operations, the management of the team and their expectations of returns on their investments.
As a partner, COO and portfolio manager at Proficio Capital Partners, a multi-family office, Sussman helps manage more than $3 billion in assets and advises on several billion more.
How did your family office become interested in investing in sports?
Two of the founding families in our firm have direct exposure to NBA franchises — one is a very large owner of one of the teams, and then one of our other founders has a minority interest in another NBA team. So it’s always very close to what we do; we pay close attention to that world and have been interested in it from an uncorrelated-asset perspective.
Proficio manages portfolios around efficient-frontier, really complex diversification methods. We like to invest in stocks and bonds, but we also focus on uncorrelated alternatives, given our view of asset classes and valuations and where the world may be going.
Uncorrelated assets are extremely important because we want to have exposure to them, especially in times where there's much more economic uncertainty, where we have a return even in times of market volatility. If we look at past history, owning sports franchises or being exposed to sports-related types of assets, we’ve basically proven that there's not a lot of volatility in the valuations there as affected by market cycles. And so that's what we're solving for.
What other investments does your family office have in the world of sports?
Our family office has been in business since 2014; before that, the investments in the two NBA franchises had occurred. But since then, we've added to that type of exposure by making an investment in a sports agency that represents professional athletes.
What we've also seen throughout history is that players’ salaries, even in times of economic uncertainty, trend higher, people are getting paid more and more to play. And so having exposure to those contracts — because agents get a cut in most cases, a 5% cut of contracts — it's a really good business now. It's capital-light. You’re investing in people, so there's not a ton of expenditures associated with it. But you are taking a risk through finding the right people to invest in, essentially.
It's a very diversified agency representing athletes in a lot of different sports. They’re more of a new-age agency since they focus on some of the influencer, advertising and marketing aspects, not just structuring the contracts — which the new-age athlete really appreciates and is drawn toward because there's a lot more avenues to create wealth, rather than just the contract.
If you believe that athletes are going to make more and more money over time and then have more avenues to create wealth via marketing and influencing, that's definitely an asset class that we're going to want to have exposure to.
Even though we had those two direct exposures to basketball teams, we also invested in a private equity fund that is one of the first of its kind to go out and buy minority stakes in other NBA teams, like the Phoenix Suns.
For people to go out and purchase minority or majority stakes in these assets, there's only a certain amount of them around. And what we found is these owners are willing to go out and pay a higher price in order to get these ownership stakes.
What do you think is an emerging area in regard to investing in sports?
Specifically for the NBA, what is interesting is there are all these other income streams that they're unlocking. There’s talk of a new media contract and television contract. There’s also NBA Europe that they’re talking about. What we've seen is that as the world continues to evolve, they're unlocking new ways to monetize. Owners and the league are always looking at new ways to monetize, to find new avenues to create wealth and income.
What we see is an uncorrelated-asset class that has trended higher, that has real scarcity value, and we want to have that in our portfolio.