The most important unanswered questions about private equity and college sports

Good morning, and thanks for spending part of your day with Extra Points.

The funny college sports business news of the week dropped yesterday afternoon, amid reports that the Big 12, along with at least Conference USA, the MWC and the AAC, are considering massive new sponsorship deals that would actually change the name of the conference. Between that and the NCAA announcement last week that corporate logos will now be permitted on football fields, well, you have plenty of runway for jokes.

But to me, the biggest news actually came a little earlier, with CBS reporting that the Big 12 is also considering a private equity investment for as much as “20% of the conference”, an investment that could provide a cash infusion up to $1 billion. The firm in question is CVC Capital Partners, a company based in Luxembourg.

I had actually orginally planned to write an entire newsletter full of jokes about potential naming and coporate sponsor rights…but honestly, once I thought of “The Allstate 12 Conference, Presented by Luxembourg”, I couldn’t think of anything funnier.

The idea that private equity could decide to enter the college athletics space isn’t totally new. The Pac-12 tried to recruit investors back in 2018, Florida State is openly courting investments now, and multiple other PE and institutional investment arms are signalling they’d like to be involved in college athletics.

I asked plenty of folks about this idea at NACDA, and I imagine I’ll continue writing about it over the next month or so. But rather than proclaim resolutely that ALL PRIVATE EQUITY INVESTMENTS IN COLLEGE SPORTS ARE BAD, which would be easy to do, allow me to instead, posit a few questions about future potential deals….

What, exactly, is the PE group buying?

When the Pac-12 tried to work with private equity back in 2018, they sought to combine a variety of assets, like conference media rights, Pac-12 network production assets, archival content, “merch rights” data rights and more into a “NewCo”, which would then sell an equity stake to investors.

It isn’t immediately clear from the reporting from CBS, The Athletic and elsewhere exactly what league assets would be rolled into whatever CVC, or anybody else, would buy.

This is a very important distinction. As one AD of a major P4 program reminded me last week, not everything that private equity might want to invest in is actually for sale.

For example, a private equity company could theoretically to purchase a stake in the multimedia rights of each conference school…assets like their in-stadium signage, radio broadcast rights, scoreboard adverts, etc. After all, a massive fund that invests in multiple sports and marketing companies could potentially have access to scale or new expertise that could drive new value to those assets.

But at the P4 level, the conference offices don’t own those rights…those belong to the schools. And in most cases, the schools have already sold those rights to various MMR companies, like PlayFly, Learfield or JMI. Would a PE firm be prepared to buy out those contracts? Are the multimedia rights assets held exclusively by the conference lucrative enough on their own?

A PE firm that buys into a professional sports team or league could also buy into stadium or real estate assets…but in college, stadiums and surrounding real estate holdings are usually owned (directly or indirectly) by the state. Even if a school could be persuaded to let an outside investor own part of State U’s football stadium, would the state government allow that? Could it?

Buying into the future Tier 1 broadcast rights feels like it will be standard in any potential deal between a conference and institutional investors. What else can get bundled an agreement will depend a lot on the specific schools and their various ownership constituencies.

What kind of control will the PE group want, and when do they want it?

Typically, a massive institutional investor doesn’t just fork over large swaths of money and then walk away. In other industries, it is more common for private equity firms to seek majority stakes in businesses, and then use their influence to make the original firm more efficient and profitable.

But institutional investors (which can include other entities beyond traditional PE firms) could also buy minority stakes, which appears to be the case in the reported Big 12 deal. But schools and conferences should also quadruple-check their contract to understand exactly how much influence over decision-making their new business partners will have. Could an outside investor push the conference to raise ticket prices? Add (or remove) specific events? Stop the sponsoring of specific sports? Fire staff? What happens to the PE firm if all the school presidents constantly vote down their ideas and interests?

PE firms also don’t buy into anything as charity…they want to eventually sell that asset. But since nobody has sold an equity stake in a college athletic conference before, we don’t really know what sort of schedule a liquidity event might take. Will a PE firm be patient enough to potentially wait two media rights contracts before cashing out? Will they look to grow revenue (and slash expenses) quickly enough to get in and out in under five years? How will schools manage their desire to uh, maybe work to grow at a different timetable than their investors?

Why does the conference need the cash infusion, and why can’t they raise it any other way?

As I understand it, part of the reason the Pac-12 was so interested in selling an equity stake back in 2018 was that many of the league’s members needed a bunch of cash in a hurry. There were facility projects that needed to be started (or finished), athletic debt that needed to be retired, and salaries that needed to be raised. Oregon State, Cal and Washington State couldn’t really afford to wait six years for a new TV deal to really kick in…if they could, they could have really used a cash influx ASAP.

That’s not exactly the situation for most Big 12 schools, and in the post NIL, post transfer portal era, I’m not sure anybody will have exactly the same need for facility project fundraising as they did in 2018.

Sure, there’s an abstract desire to grow revenue distributions to pull Big 12 teams closer to those in the Big Ten or SEC, but what, exactly, is this cash infusion going to be used for? Is this just to have more money to pay players as part of House revenue sharing? Is it going to be invested in conference projects that could improve member distributions over time? Is it just to give some coaches raises, or to keep a particular roster from being raided? How much will the Big 12 even be allowed to tap into this money for athletes?

Consider this. The Cleveland Cavaliers do not exist to perform charitable works for the Greater Cleveland Area, or to beat the Detroit Pistons, or to further the world’s understanding of basketball, even though the group may do all of those things on a regular basis. My beloved Cavaliers exist to make money. They are a business, just like every other professional sports team and league.

The Ohio State Buckeyes do not technically exist just to earn revenue, even though the university badly needs them to earn lots and lots of revenue. They exist as a marketing arm for the university, as an entertainment product for the state of Ohio, to fund dozens of other athletic programs, to provide educational access and enrichment for students, and to beat Michigan and contend for national titles. Ohio State athletics is a business…but its also one that is run like a non-profit, not to maximize shareholder value.

Those are two different potential value propositions to investors…which is potentially a problem, since CVS or Blackrock or anybody else doesn’t actually care about Big Ten titles or APR or university marketing goals. They want to make money. What happens when schools invest their PE money into winning, or any other those institutional goals…but doesn’t help the PE company improve their bottom line? What happens if you take that money, hire great coaches, win a Big 12 title, and don’t improve revenue enough? Will those wins be worth the painful cuts that come later?

When individual public athletic departments need to raise money beyond what they can get from donors, they often can get it from a bank, or via municipal bonds. After all, P4 public schools generally have strong credit ratings, and are backed by the state government. Almost all P4 private universities have healthy endowments, enrollment trajectories and donor support. Southern Nazarene might have trouble borrowing a lot of money, but Oklahoma State wouldn’t.

So why, exactly, does the Big 12, or anybody else, need money from private equity that they couldn’t raise any other way? Is this the least risky long-term play?

Finally, who has to face the music if the deal goes bad?

According to the American Council on Education, the average university president had only been at their current school for 5.9 years, down from 8.5 years in 2008. Leading a major university is increasingly becoming a “Get In and Get Out” sort of gig. Those same dynamics may even be more prominent for athletic directors….or heck, conference commissioners. Lest we forget, Kevin Warren didn’t even last five years at the Big Ten. Neither did George Kliavkoff at the Pac-12, even though that was, uh, a slightly different situation.

Selling a 20% equity in your league’s future media rights, and potentially other assets, is not a small decision. But the positive headlines and biggest benefits from that decision are more likely to be frontloaded. What happens if in four years, the deal looks increasingly wrongheaded, but the commissioner and half the ADs and presidents in the conference have left? Who gets the blame? What kind of flexibility will the new leaders have to address those problems? What tools or norms are out there to not incentivize leadership to take a cash grab without sticking around to clean up the mess?

I’m not saying that every deal with a potential outside institutional investor is bad. Honest.

I understand the financial pressures all athletic departments are facing right now. If schools are to share revenue with athletes, continue current sport sponsorship offerings and operate without massive cuts to lower-income employees, just about everybody is going to need to raise money in unconventional ways. Stuff that would have seemed unthinkable before, like adding corporate logos to football fields, or even changing the name of the dang conference, is very thinkable now.

There could very well be deals out there that are the best possible solution for schools and conferences. I’m not an investment professional, and it isn’t my butt in the jackpot if an athletic department is $12 million short at the end of the year, so I acknowledge that I could be completely wrong.

But I worry that these investment models aren’t great fits for what college athletics is right now…or least, what it is still desperately trying to be. This current crop of leaders has not done a very good job at effective long-term thinking, regularly choosing to prioritize short-term gain and comfort at the expense of long-term stability.

It’s one thing to do that by say, hiring a Bobby Petrino. It’s another thing when you’re selling a chunk of your entire dang conference.

In both cases….I sure hope whoever signs on the dotted line knows what they’re doing.

Thanks for reading, everybody. I’ll see you on the internet next week.