On Wednesday, Bloomberg reported that private equity funds are launching - at least one, Galatioto Sports Partners - to raise capital that potentially could be invested in buying “shares” of baseball teams. Shares of baseball teams don’t trade on any public market (shares of many European soccer clubs do), so it’s not like you or I could go run to Charles Schwab, buy a handful of shares, and call ourselves part owner of the Royals.
Instead ownership of baseball teams, and really most sports franchises, “trade” in the private market. The private market really means a few specific things. One, there is no transparent price. You can’t open up your Bloomberg terminal and look up what the going rate is for Houston Astros shares. Unlike publicly traded shares, pricing typically takes place after interest is expressed. Potential buyers have an idea roughly of what it would cost them, but they can’t do the math of what it would require to take ownership (51% of outstanding shares times market price of shares).
Second, things in the private market often require an illiquidity discount. If you have two identical assets but one of them can change hands every single day but the other can only change hands once a decade, then the latter would require some sort of discount. A buyer isn’t going to pay the same price for something that they have to wait nine years and 364 days to get out of if they want.
On the other hand though, it seems sports franchises have traded mostly at a premium, likely due to the prestige factor of being an owner. It seems like every time a team gets sold, the public reaction is “wow that’s a lot of money” reflecting that premium. Matt Levine of Bloomberg put it perfectly when he said “(sports teams ownership) is only incidentally an operating business; it is mostly a status object and a luxury fan experience.”
As an owner, you get to interact with world class athletes and tell them what to do. You get to have press conferences, be in the headlines, set prices, be in multi-million dollar contract negotiations, and have your name on a big plaque in the lobby that says in 100-point font “OWNER!” and if you’re lucky enough, hoist a trophy. I would imagine, on the whole, being an owner of a major sports team would be mostly fun. There are other businesses you can invest in if you are a billionaire and you want steady and predictable annual cash flows back into your pocket or want to be able to check your net worth on paper at any given moment. But mostly you own a sports team because you want to say you own a sports team. Owners are already rich. They aren’t checking their net worth every day.
So now wealthy individuals might have the opportunity to buy/invest in a Major League Baseball team. Traditionally those shares have been hard to come by and they don’t get traded often. Most MLB teams don’t have 100 owners who all own a partial amount of the team, they are mostly consolidated amongst a few names or have just a single owner (or single family owner). But with the potential advent of a semi-public market, at least one that is more public than it currently is, a team could have 100+ owners in some capacity.
Look, there is still likely to be only one or two major principal owners. What Bloomberg reported is just “trading” amongst limited partners, which refers to mostly hands-off owners called limited partners (such as John Sherman with the Indians) because their liability is limited - they can’t lose more than their investment. General partners have full liability for everything. If they take on too much debt and can’t pay it, they are still personally liable, so they get to make all the decisions. It would be something if general partnership was semi-actively traded.
So I guess the question we have to ask is...does this matter? I mean no, not really. There is no real evidence or cause for concern that MLB teams are going to be mismanaged or valuations will run wild and cause a bubble. This is mostly just a method for wealthy individuals to make private transactions in a private market between themselves.
Technically there is an existing model of this in professional sports with the Green Bay Packers. They are a “publicly owned” NFL team in the sense that ownership is shared among over 360,000 individual owners, many of them I’m assuming aren’t billionaires. These shares though are not really active. Packers owners can’t sell their shares to others (you can gift it one time to an immediate family member). If you want to sell your shares you can, but it can only be sold back to the Packers franchise and it’s basically being sold for nothing. You can’t really go and buy new shares either. They’ve only raised capital a few times in history, the most recent to finance upgrades to Lambeau Field in 2013.
The Packer shares come with essentially little benefit. You don’t really get an equity interest (i.e. profits from the team), you don’t get any dividends, and you don’t get free tickets or get to show up at Packers headquarters and say “where is my office?” or demand a player be traded. However you do get some say at the shareholder meeting and the rights to buy shareholder exclusive merchandise, so it’s not all meaningless I suppose.
So this proposal is the next step up from the Packers ownership model. You get all the benefits of being an equity owner - when the franchise is sold you get some of the profits - and you can probably also schmooze with the general partners of the franchise. You aren’t going to be making baseball operations decisions or sitting in on free agent negotiations, but you can call yourself an owner of the team more than Packer fans are.
If there any concerns, they would be (1) Galatioto Sports Partners (GSP) launches a fund and buys some limited partner shares of teams; (2) a bunch of other private equity funds launch too and buy some limited partner shares of teams too; or (3) GSP and the other private equity funds mostly trade those shares between themselves, which leads to valuations of those shares going back-and-forth to be highly inflated.
But I don’t see a problem here. I mean, this transaction is mostly isolated to the private equity funds, so it’s not like some systemic issue that would affect the pricing of the team. Do we really care if private equity funds lose their money investing in over inflated assets?
You could extrapolate the price of the limited partner shares to get a price for the club as a whole. If a one percent ownership stake is going for $1 million, then the entire valuation of the club would be $100 million. And then if tomorrow that one percent gets traded at $2 million, then the club value would be $200 million.
But that’s assuming in the rarity that a team gets sold they are pricing the sales based off the limited partner transactions. That probably won’t be the case, and if it is, we are just back to billionaires buying things at over inflated prices and losing money. The concern would be if to buy the team, the billionaire had to take on a bunch of debt that could put the team into trouble, but MLB has rules in place that prevents teams from taking on too much debt (clubs can take on a maximum debt of 12x their operating income).
Really, this will just be another way mostly for rich people to trade amongst themselves and stay rich. More than a year ago, Institutional Investor “warned” us a bit that this was going to happen when they said that the NFL’s next billionaire owner wouldn’t be a person.
Caporale says the trend will develop once existing owners who decide to sell their teams discover they are unable to find individual buyers. “They will be the ones to start making arguments in the league that this needs to be allowed,” he predicts.
At least one major league, which Caporale declined to name, had consultants looking into the issue, and one of those consultants recommends letting private equity funds into the ownership business, he says.
“It’s unfortunate that they haven’t been allowed to participate over the last five to ten years, because they would have received great returns, probably better than some of the other companies they invested in,” Caporale notes.
This is all a natural match. Private equity funds are looking to make as much money for their limited partners are possible. Pro sports valuations keep going up. Franchise owners who want to sell are struggling to find potential owners who can write a check for $1B+. Now that is probably the next next step. Right now the proposal is only for limited partners to trade their shares. Eventually though, it seems like private equity will come for the general partner shares as well.