Should Private Equity Invest in College Sports?

We believe that sports teams and leagues are among the best assets on the planet, and are likely to weather the ongoing media reshuffle and AI upheaval to become stronger than ever.

Now, a potential new sports investment category has emerged: college sports. Over the last few weeks, news that Florida State is looking to raise private equity has been the talk of the town. We have had multiple members of our network ask our thoughts on the topic. Are college sports the new ideal asset? Or are they fools gold? Frankly, no one knows the answer. But there are a few questions to be considered:

1. How to handle the non-profit arm? Sports teams have always had a complicated relationship with non-profit status. The NFL kept its non-profit designation for 73 years and only dropped it in 2015. So, in many ways, investors are fairly comfortable with complicated legal structures for teams/leagues. Higher education does come with its own wrinkle—an ultra powerful donor base. Because so many of these teams can only function with the support of devoted boosters, maintaining tax-free status and donor happiness will be a very fine line to walk. We imagine that the structure will be similar to how Silver Lake did their deal with the New Zealand All Blacks by putting the media rights in a new, for-profit company that is jointly owned. College sports will likely support a similar structure.
2. What risk are investors underwriting? In our minds, a decent amount of the risk with these transactions comes down to how much you trust your lawyer. College athletics have used grant of rights agreements, which are supposedly “ironclad”, to extract huge fees from schools trying to leave. For this Florida State deal, public estimates have ranged from $120M to $500M just to escape the contract. Investors will need to trust that they can accurately underwrite the legal risk that schools can leave and how much it will cost to do so. Perhaps the biggest risk is continued conference realignment and what the next iteration of the NCAA looks like. If there are eventually two power conferences and your school is on the outside looking in, it will be very difficult to compete with the larger schools/conferences.? Of course, investors will also be underwriting the traditional risk of any sports team for things like market size, monetization, etc.
3. Which firms should schools partner with? Navigating the world of media companies is going to be a new experience for many of these colleges. Learning to operate from an environment of where every monetization opportunity needs to be filtered through the lens of the school to the lens of the newco will require partnering with experienced operators. They will want investors who can offer services beyond capital—they will want partners with operating experience.

There have been two simultaneous, momentous changes occurring in college sports.

First, NIL deals have empowered athletes as entrepreneurs and employees. Second, sports conferences have been collapsing and consolidating as media rights deals become more complicated. Importantly, all of this complication has happened because the deals are more lucrative. As the price has risen to billions of dollars a year, they’re literally shaping the budgets of these athletic departments.

Both of these topics are huge trends changing the landscape (and are worthy of their own pieces of writing) but they are emblematic of the increasing professionalization of American collegiate sports. In the not too distant future, athletes will get paid as 1099s and the market will look similar to the academy system in European sports. In that world, these investments will be very similar to pro sports investments where investors will have to underwrite the strength of the league (the conference), the economics of the team (the school), and their ability to add value.

The genie has been let out of the bottle. Internet virality and discoverability has transitioned these teams from community events to Grade A media assets. Change is coming for all these schools—it will be interesting seeing who they choose to partner with.