Perhaps it isn't inevitable that private equity will make a big college sports splash

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You might have missed this amid all the news about EA Sports College Football 26, various College Football Playoff proposals, and the latest SEC Supremacy PowerPoint, but there was an important update out of Big 12-land last week.

I believe FOS was first to the story that the Big 12 is “just not ready to jump in yet” with any private equity partnerships. Via the interview:

Big 12 Commissioner Brett Yormark would also state in the interview that potential plans to sell Big 12 conference naming rights are also “on pause.”

In late February, the Big 12 reviewed various bids for capital infusions, although those bids, per Yahoo’s Ross Dellenger, were not about equity. Other major conferences, such as the Big Ten and SEC, have also hired banks to formally explore the process of potentially bringing in capital partners. Other conferences, such as the AAC, have also expressed interest in potentially bringing in a capital partner.

At the start of the year, you’d be forgiven for thinking that a major private equity, or capital, investment in college sports was all but inevitable. All schools and conferences need an infusion of money to help offset revenue sharing costs, and partnerships with institutional investors can also bring new relationships and expertise to athletic departments. Potentially doing a deal with an entity that knows a ton about the entertainment business, real estate development and/or digital broadcasting does make a certain amount of intellectual sense.

But now it’s June. To the best of my knowledge, nobody has actually executed a deal yet, even though there’s been lots of sniffing around on both sides.

And interestingly enough, there doesn’t appear to be a ton of deal flow with the NFL either

I fully understand that this is not completely an apples to apples comparison here. But stick with me for a second.

Recently, the NFL changed rules to allow private equity firms to purchase minority stakes in teams. But then a funny thing happened….not very many firms actually did it. In fact, two particularly large PE firms that were part of the NFL’s approved partners, Blackstone and CVC, have reportedly walked away from the process. 

The NFL is the most popular sports league in the United States, and NFL franchises have enjoyed massive valuations for years. Why wouldn’t an institutional investment fund want a chunk of a team? Even lousy teams are worth hundreds of millions, if not billions, of dollars.

So why aren’t more PE firms buying into teams? Well, via FOS, here’s one possible reason:

Hmmm…you mean to tell me that even though an asset is potentially very valuable, the investment becomes less attractive if the PE firm can’t secure meaningful governance power , and they can’t quickly flip the asset?

You know where else that’s going to be the case? College sports.

Yormark alluded to this in the FOS interview, but based on the vast majority of conversations I’ve had with commissioners and athletic industry staffers, the appeal of a private capital or equity partnership generally isn’t just about the cash. After all, schools have other options to raise capital (like regular ol’ banks)…but borrowing money from First National Bank of San Marcos or whatever doesn’t come with expertise on how to grow new licensing revenue.

So if you’re limiting yourself to strategic partners who can bring something besides cash to the table, then you’re looking at a smaller number of partners. If you can’t make the deal worth it to that small number of investors, then you don’t have a deal.

Typically, PE firms aren’t in the business of holding assets for years and years. It’s more common for an investor to come in, quickly grow revenues (or slash expenses, or both), and then try to flip that asset. If you don’t have direct influence on how the organization operates, it’s much harder to drive up profitability enough to quickly sell. The NFL doesn’t allow these institutional investors to make decisions…and it’s hard to imagine public universities would be willing to grant substantially more flexibility.

After all…nobody wants to get blamed for letting Mega Capital Partners liquidate the women’s soccer program.

So if the requirements of a sale limit the direct influence a strategic partner can exercise, and if those requirements make it harder to flip the asset, well…it might not be as attractive an investment vehicle for private equity or capital. You do the due diligence just to make sure, of course, but what seemed very exciting in January might be substantially less exciting once everybody has had three months to really get into the spreadsheets.

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Could it still happen? Sure.

You only need one investor and one athletic entity to love an idea in order to make some sort of deal. If I had to make an educated guess, I’d say it is substantially more likely that an athletic conference ends up securing a strategic partnership, as opposed to a school, like Florida State considered.

Once (or I guess if?) House is eventually settled, investors may decide there is a teensy bit less regulatory uncertainty, making it easier to make revenue or expense projections. Could additional action from the courts oorfederal government create an environment more conducive to this type of dealmaking? Sure. Could an investor, or conference, get desperate enough to get something executed, even with significant uncertainty? Sure.

One thing I am trying to get better about doing is knowing when to be skeptical of the latest thing making the rounds in sports business. Sometimes, like NIL collectives, the development legitimately is massive. But sometimes, like with SPACs or the Metaverse or NFTs, the hype remains hype.

My crystal ball is cloudy, and I have a hard time knowing what I’m going to make for dinner in three days, let alone where the industry is headed. But I’m not shocked we haven’t seen much in the way of big deals yet. It’s entirely possible things stay that way for the immediate future.