Chart of the Week #33: Field of Returns - Alpha as a Measure Sports Investment Performance

For active managers in public and most private markets, outperformance, or ‘alpha’, can be measured using performance against well-tested benchmarks. In contrast, sports investors lack regular and reliable pricing data with which to assess their performance. Those benchmarks that have existed in sports are based on appraisals, which risk introducing biases.

In creating the Ross Arctos Sports Franchise Index (RASFI), we believe that we have built one of the first purely data-driven sports franchise benchmarks using a robust transaction dataset.

When measuring alpha in a closed system of such as North American Big 4 transactions, it’s important to understand that alpha will always sum to zero across all transactions. That is because any benchmark, RASFI included, is a weighted average of all assets within the market. When considering all investments and transactions together, the market itself becomes the benchmark, and as a result any positive alpha must be offset by negative alpha.

But the variance of alpha outcomes across transactions can be quite informative, for example:

• In control transactions which occurred over the last five years, the greatest variation of alpha – either greater than 2% or less than -2% - occur in transactions with short duration holds (i.e., change-of-control transactions within 10 years).
• During longer hold periods (≥10 years) less than one-third of transactions significantly out- or underperform (>2% or <-2% alpha). While a ±2% alpha may seem small, even small positive alpha, sustained over long periods, can result in significant outperformance. Take for example one NBA transaction which had an alpha of just ~1.6%. However, given the transaction was a 41-year hold, the control owner achieved a 333x MOIC (or nearly double the ~180x MOIC of RASFI over the same time-period).
• The NFL has the tightest spread of alpha, which indicates consistent performance relative to RASFI and difficulty for investments in NFL franchises to generate sustained excess returns.

The potential sale of the Celtics is one transaction we are closely watching, and depending on what alpha ownership were to achieve, it would have significant impact on implied valuation and returns:

1. 0% Alpha vs. RASFI: $3.8Bn TEV and 10.7x MOIC
2. 2% Alpha vs. RASFI: $5.6Bn TEV and 15.7x MOIC
3. 0% Alpha vs. NBA Franchises Only: $4.2Bn TEV and 11.7x MOIC
4. 2% Alpha vs. NBA Franchises Only: $6.2Bn TEV and 17.1x MOIC