Good morning, everybody. This is Michael Cembalest with the June 2024 Eye on the Market, something a little bit different this month. I've written a piece on sports investing, given some of the changes that are taking place in the leagues regarding the ability of private equity firms to take ownership stakes, and I thought this would be an interesting topic to get into.
I haven't written about sports before, sports franchise investing before, for a very obvious reason. If you look at the people that own—the control owners of U.S. sports franchises, they tend to be worth anywhere from $1 billion to $10 billion or more. And so owning a sports franchise, with a few exceptions of a handful that are publicly traded, is generally not something that is attainable by the average diversified institutional or individual investor.
We have a chart in the deck here that shows all the control owners in the four major U.S. sports leagues in terms of their estimated net worth. But that's changing now. Four of the five leagues have already established the ability for private equity firms to own stakes and to own multiple stakes in different teams.
Some leagues allow sovereign wealth funds to invest. The NFL decisions are all still pending, but from the information we're getting, eventually those rules will be codified as well sometime shortly. So I wanted to take a deep dive into sports investing. I'm not going to do that on this podcast. There's lots of different topics, but I'm going to tell you what's in the piece that we did publish.
We start out by looking at what private equity funds are planning on investing in and lending to. So the access to this kind of diversified sports approach is probably best obtained through some kind of private investment in a diversified fund. And here we show a grid of franchise ownership, collectibles, video games, fantasy sports betting, related real estate facility development, player management and analytics software, media rights and streaming, different aspects of the actual day-to-day business in terms of venue management, tickets, operations, certain kind of apps related to that.
And so that's kind of a broad description of the big categories that some of the funds that are looking at sports are considering investing in. I want to walk you through the table of contents because that'll give you a sense for what's in the piece for people interested in this kind of stuff. So we start out with looking at the leagues in terms of the major four leagues in the U.S. valuations, recent transactions, debt levels, operating margins.
And when you start looking at that data, it really does indicate that there's an enormous value to being a sports monopoly, where 50% to 70% of the revenues are shared national broadcast rights. We get into the streaming wars, which are tremendously positive for a lot of these sports networks, but we also get into the decline of the regional sports networks, which is mostly negatively affecting baseball and, to a lesser extent, hockey and basketball.
We look at in-person attendance trends, ticket price inflation. And then we get into this issue of parity, because I consider parity to be enormously beneficial for anybody that would consider owning a sports franchise or delegating that investment right to somebody else. Because the chances of them making a mistake and buying a terrible team and not making any money are much lower in leagues that have sports parity.
And so we first look at evidence of parity in U.S. sports leagues compared to European soccer using some algorithms that look at the concentration of winning across time and different leagues. And then we look at the impacts of what those drivers are, specifically some details on revenue sharing. But we also look at things like how the salary caps work in each league and the draft.
And then even within the draft, we look at the difference between the locked-in salaries and rookie contracts compared to average salaries in each league. That, combined with the fact that the draft is inversely related to performance, ends up being a very powerful parity driver in the leagues. We take a brief detour into European soccer, and we discuss the four Rs—relegation, rising player salaries, rotten returns to public investors, and regulations, some of which are related to tax evasion and money laundering.
And then we take a look at international and emerging sports, with an update on U.S. soccer, F1, which is becoming more popular in the United States, and then a whole bunch of startup efforts in various sports, whether it's drone racing, bull riding, sailing. Anything where your pulse goes up when you're playing it, I would consider to be a sport. We look at the issue of stadiums and subsidies. This is a controversial source of tremendous value to sports teams owners, mostly because the vast majority of economic studies show that the amount of benefits to a community in terms of hotel occupancy, retail sales, payrolls, payroll taxes and things like that are lower than the value of the subsidies that are given to sports owners.
We look at apparel, image management and player management as examples of adjacent sports-related businesses that some of these private equity firms might be looking at, which are interesting. We take a deep dive for a moment into the Supreme Court rulings that allowed the sports betting industry to explode, warts and all, by looking at the explosion in sports parlays and the fantasy sports regulatory arbitrage, which you can read about if you're interested.
We then write about the esports winter. This is kind of the poor cousin of sports investing. The fundamentals are terrible. There have been lots of layoffs and league terminations. And the company that went public via SPAC has lost almost all of its value. The esports story, it's not a sport, and it's not a good investment. Those two things go together.
And then we have some appendices. We take a look briefly at how the U.S. sports leagues function as unregulated monopolies under the Sherman Act. We look at the worst team that money can buy, some examples of teams where owners overspent relative to the wins they got.
We look at the best basketball players of all time, which is a project I did with my son where we presented some of the results to David Stern and Kiki VanDeWeghe a few years ago. And then we look at the Ronaldo effect of departing players. So that is a summary of what we have in this piece. We thought it was an interesting thing to write about, given some of the changing rules on minority ownership and some of the investment opportunities that are cropping up about sports and sports-related investing.
So enjoy the piece. And I'll be back with you in July with a terrifying look at the underperformance of U.S. small cap. Until then, see you later. Bye.
(DESCRIPTION)
Title card: JP Morgan, Eye on the market. JP Morgan. June 2024, a piece of the action. Image: a foosball table. Video feed on the right. The speaker Michael Cembalest has short hair glasses and a dark sweater. He addresses us from a virtual backdrop which shows a room with a decorated bookcase and a window overlooking a city.
(SPEECH)
Good morning, everybody. This is Michael Cembalest with the June 2024 Eye on the Market. Something a little bit different this month-- I've written a piece on sports investing given some of the changes that are taking place in the leagues regarding the ability of private equity firms to take ownership stakes, and I thought this would be an interesting topic to get into.
(DESCRIPTION)
Slide, a graph labeled net worth of major league sports team control owners. In the vertical axis there are US billions log scale from 0.1 to 100 dollars. There is an increasing line comprised of dots. The four different colored dots correspond to different national league sports, NBA, NFL, MLB, and NHL.
(SPEECH)
I haven't written about sports before, sports franchise investing before, for a very obvious reason. If you look at the people that own, the control owners, of sports franchises, they tend to be worth anywhere from $1 to $10 billion or more. And so owning a sports franchise, with a few exceptions of a handful that are publicly traded, is generally not something that is attainable by the average diversified institutional or individual investor.
We have a chart in the deck here that shows all the control owners in the four major US sports leagues in terms of their estimated net worth. But that's changing now.
(DESCRIPTION)
Slide, a table labeled North American leagues private equity rules. There is a table with six columns labeled years first allowed, maximum private equity ownership of a single team across firms, maximum private equity ownership of a team by a single fund, Number of teams of fund can own, and sovereign wealth funds permitted. The first column is simply the list of National League sports such as NBA, MLB, NHL, MLS, and NFL.
(SPEECH)
Four of the five leagues have already established the ability for private equity firms to own stakes and to own multiple stakes in different teams.
Some leagues allow sovereign wealth funds to invest. The NFL decisions are all still pending, but from the information we're getting, eventually, those rules will be codified as well sometime shortly. So I wanted to take a deep dive into sports investing.
I'm not going to do that on this podcast. There's lots of different topics, but I'm going to tell you what's in the piece that we did publish. We
(DESCRIPTION)
Slide. A table with nine different columns labeled teams, collectibles, video games, Player slash talent, real estate, betting, media, operations, and leagues.
(SPEECH)
start out by looking at what private equity funds are planning on investing in and lending to, right? So the access to this kind of diversified sports approach is probably best obtained through some kind of private investment in a diversified fund.
And here, we show a grid of franchise ownership, collectibles, video games, fantasy sports betting, related real estate facility development, player management and analytics software, media rights and streaming, different aspects of the actual day-to-day business in terms of venue management, tickets, operations, certain kind of apps related to that. And so that's kind of a broad description of the big categories that some of the funds that are looking at sports are considering investing in.
(DESCRIPTION)
Slide. A table of contents. Text: What are private equity funds planning on investing in and lending to? Valuations, transactions, debt levels and operating margins for the four major US sports leagues. The streaming wars and the decline of regional sports networks. In-person attendance trends and ticket price inflation. League parity benefits owners in US sports leagues, but not in Europe. Primary drivers of professional sports parity: revenue-sharing, the draft and salary caps. European soccer: relegation, rising player salaries, rotten returns to public investors and new regulations. International and emerging sports: an update the MLS, F1 and start-up efforts in various sports. Stadiums and subsidies: a controversial source of value for sports team owners. Adjacent businesses: examples in apparel, image management and player management. Sports betting: Supreme Court rulings, parlays and fantasy sports regulatory arbitrage. The esports winter continues: poor business fundamentals, layoffs and league terminations. Appendix 1: US sports leagues mostly function as unregulated monopolies under the Sherman Act. Appendix 2: The Worst Team that Money Can Buy. Appendix 3: The best basketball players of all time. Appendix 4: Valuations, revenues, debt and operating income by team. Appendix 5: The Ronaldo effect of departing players.
(SPEECH)
I want to walk you through the table of contents, because that'll give you a sense for what's in the piece, for people interested in this kind of stuff. So we start out with looking at the leagues in terms of the major four leagues in the US' valuations, recent transactions, debt levels, operating margins.
And when you start looking at that data, it really does indicate that there's an enormous value to being a sports monopoly where 50% to 70% of the revenues are shared national broadcast rights. We get into the streaming wars, which are tremendously positive for a lot of these sports networks, but we also get into the decline of the regional sports networks, which is mostly negatively affecting baseball and, to a lesser extent, hockey and basketball.
We look at in-person attendance trends, ticket price inflation. And then we get into this issue of parity, because I consider parody to be enormously beneficial for anybody that would consider owning a sports franchise or delegating that investment right to somebody else, because the chances of them making a mistake, and buying a terrible team, and not making any money are much lower in leagues that have sports parity. And so we first look at evidence of parity in US sports leagues compared to European soccer using some algorithms that look at the concentration of winning across time in different leagues.
And then, we look at the impacts of what those drivers are, specifically some details on revenue sharing. But we also look at things like how the salary caps work in each league and the draft. And then even within the draft, we look at the difference between the locked-in salaries and rookie contracts compared to average salaries in each league. And that, combined with the fact that the draft is inversely related to performance, ends up being a very powerful parity driver in the leagues.
We take a brief detour into European soccer, and we discuss the four R's-- relegation, rising player salaries, rotten returns to public investors, and regulations, some of which are related to tax evasion and money laundering. And then we take a look at international and emerging sports with an update on US soccer, F1, which is becoming more popular in the United States, and then a whole bunch of startup efforts in various sports, whether it's drone racing, bull riding, sailing-- anything where where your pulse goes up when you're playing it would consider it to be a sport.
We look at the issue of stadiums and subsidies. This is a controversial source of tremendous value to sports teams' owners, mostly because the vast majority of economic studies show that the amount of benefits to a community in terms of hotel occupancy, retail sales, payrolls, payroll taxes, and things like that are lower than the value of the subsidies that are given to sports owners.
We look at apparel, image management, and player management as examples of adjacent sports-related businesses that some of these private equity firms might be looking at, which are interesting. We take a deep dive for a moment into the Supreme Court rulings that allowed the sports betting industry to explode, warts and all, by looking at the explosion in sports parlays and the fantasy sports regulatory arbitrage, which you can read about if you're interested.
We then write about the esports winter. This is kind of the poor cousin of sports investing. The fundamentals are terrible. There have been lots of layoffs and league terminations. And the company that went public via a SPAC has lost almost all of its value.
The esports story, it's not a sport, and it's not a good investment. Those two things go together. And then we have some appendices. We take a look briefly at how the US sports leagues function as unregulated monopolies under the Sherman Act.
We look at the worst team that money can buy-- some examples of teams where owners overspent relative to the wins they got. We look at the best basketball players of all time, which is a project I did with my son where we presented some of the results to David Stern and Kiki Vandeweghe a few years ago. And then we look at the Ronaldo effect of departing players.
So that is a summary of what we have in this piece. We thought it was an interesting thing to write about given some of the changing rules on minority ownership and some of the investment opportunities that are cropping up about sports and sports-related investing. So
(DESCRIPTION)
Title card: JP Morgan, Eye on the market. JP Morgan. June 2024, a piece of the action. Image: a foosball table.
(SPEECH)
enjoy the piece, and I'll be back with you in July with a terrifying look at the underperformance of US small cap. Until then, see you later. Bye.
(DESCRIPTION)
Logo. JP Morgan.
