On The Podcast: Private Equity’s Sports Investing Playbook
Pitchbook: News & Analysis
31 August 2021
Adam: Certainly, RedBird has been on the news a lot here over the past few months for making this push into pro sports investing. We’ll get into the specific deals later, but just broadly, what do you think is driving these institutional investors now getting involved in the pro sports arena? It seems like it’s really picked up here over the past few years.
Rob: It’s definitely picked up. Maybe I’ll spend a moment or two on RedBird, put this into context, and then we can talk about that.
Adam: That sounds good.
Rob: I think it is important for listeners to understand who we are and how sports fits into it. We invest in four sectors. We’re in sports, TMT, consumer and financial services. Those sectors feed each other, and there’s a synergy between those sectors. When we get into sports, I’ll explain more what that means. We were founded by a gentleman by the name of Gerry Cardinale who’s the founder, CIO, CEO of our firm. Gerry spent 20-plus years at Goldman Sachs as a partner investing in their private equity area, really building businesses alongside entrepreneurs, founders, and family offices.
That is who we are. That is what drives us and drives our sourcing. Why is that important? To answer your question is as follows. Gerry was part of a team that actually founded and created the YES Network, which broadcasts the Yankee games here in New York and was really the first regional sports network to lead the way, doing a lot of those media deals down the road. He also founded a company called Legends Hospitality with Jerry Jones. When the New York Yankees were building their stadium, the Dallas Cowboys were building their stadium.
Sports for us is actually a continuation of what he’s done his whole career. When we talk about why sports seems to be hard and sports investing is hard, we’ll get into what we do and how that foots with the rest of the industry, but sports for us is not a new activity.
Adam: This was a natural, I guess, progression in a way.
Rob: 100%. Even before I got here, four years ago, Gerry had hired a gentleman by the name of Alec Scheiner. Alec was formerly a very senior professional inside the Dallas Cowboys and had built the business side of sports organizations before. Without commenting on what other people are doing, because I think what many of these other folks are doing are actually really smart strategies in and around an area that does have a fair amount of dislocation and requires professional management. I’ll tell you what we do and then it will frame the rest of the sports PE landscape.
Very simply put, we partner with rights-holders to find businesses that are undervalued or under-monetized, and we help them build those businesses to create a company with lasting terminal value. We are not typically team buyers where we take a stake in a team, we’re usually looking to help grow that franchise and grow that business. What is a rights-holder? It could be a team owner, but it’s also a media rights owner. It could be concessions, food and beverage, ticketing, live events. It could be anything in that ecosystem. I’ll give you a couple of examples of what that actually means and I’ll bring it to life a little bit more.
We built a company with the NFL called On Location Experiences where the league came to us and said, “We have 20 percent of the Super Bowl ticket inventory every year. We’d like to figure out how to commercialize a business around it.” We partnered with the NFL to EBITDA from 7 to 16 million over two and a half years, ultimately sold the business at a 2.4x just before the pandemic. We did that in a way where we created a live experiences business around the ticketing where we gave our customers five-star treatment.
We would bring them to the location, we would entertain them with private concerts, put them on the field. When the players come out, those fans in the stands doing snow angels in the confetti at the end of the game, those are our customers.
Adam: It must be nice.
Rob: The idea was, we took that from one event to 150. We did that for different sporting events and music festivals and concerts and for US Open tennis and the Final Four. We look at sport as this area where there are a lot of those opportunities where you can build a business alongside a key rights-holder, like the NFL, and create something really interesting for another buyer on the backend.
Adam: From what it sounds like you’re saying, you guys differentiate yourself by really getting in with the companies, by really partnering with them, because for a lot of the sports deals that I’ve covered and seen so far, it’s like the firms take a real passive stake and they’re not really involved in operations. From what I can tell.
Rob: It goes to the larger thesis and question that you asked about why is there so much more ink around this and why are people getting into it? There are lots of different ways to play it. There is the angle of other firms who will take a minority stake in a team because they’re able to buy it at a discount because so many existing owners want liquidity. That’s a valid strategy. We don’t really do that at RedBird, not because we think it’s not a valid strategy, but because we actually prefer to have some area where we have influence control, shared control, outright control, where we can influence that outcome, and create the business.
We did it with On Location. We also own a company now, Adam, called OneTeam Partners where we partnered with the NFL and Major League Baseball Players Association around their collective rights. Think about things like the Madden video game for football, the show video game for baseball, and, FTs trading cards, things like that where, again, you have a rights-holder that has a series of rights where there’s a lot of value that can be unlocked. That’s the kind of thing that we really pile into and gravitate toward.
Adam: Certainly. Then, of course, the big deal this year, maybe the most high profile in your firm’s history, I hope that’s not an overstatement, but partnering with Fenway Sports Group, buying a stake in the parent company of the Red Sox, Liverpool FC, Roush Racing, and NESN. I’m probably missing a couple of other things, but how did that deal come together? This is a milestone, I guess, in private equity and sports investing.
Rob: Very kind words. I appreciate that ,and I appreciate you saying that. This is a case of some of the best assets in sports with some of the best operators in sports. This is not the case of a mismanaged business or an undermanaged business. This is the case of something that’s already really great where you have this global platform of premium assets with great management in Boston and in Liverpool with the businesses that you mentioned in between. Our concept is to really help them grow. We are involved in their strategic growth committee. We are involved on their board.
We have active dialogue about M&A, about real estate, about expansion, about what to do with the media rights, and where that goes. We think a lot about streaming. We think a lot about gaming and all the things that come with that. Ultimately, I think this can be a much bigger, broader platform. We’re really doing it together in concert with them. It’s a pretty tight partnership.
Adam: Can you explain how LeBron is involved? He joined Fenway Sports Group as an owner. When this investment—when it closed, or if it’s still—is it closed officially? I know the agreement is there.
Rob: Our investment in Fenway?
Adam: It’s closed. Got you. LeBron and Maverick Carter are part owners in that entity?
Rob: Yes. Without going into too much of the inside baseball, no pun intended, there is actually a pretty long history between LeBron and Maverick and the principals at Fenway. There have always been things that we can and should be doing together and this involvement helps to foster that going forward.
Adam: Got you.
Rob: Just a history with the partners.
Adam: You’ll see LeBron private equity and the Boston Red Sox and PE coverage every day. … Certainly when it came across my inbox, I was, you got to write about that. I’m a former sportswriter.
Rob: This was more of a preexisting relationship between many of the founders.
Adam: Got you. You’ve seen the athletes get more involved, I guess, here over the past few years in the VC and PE landscape.
Rob: For sure.
Adam: Another example of RedBird [and] these partnerships.
Rob: We take a holistic view, Adam, in sports, and we can talk about the other things we do in the other sectors too if you like. We take a holistic view in sports. In this fund, we’re investing out of our third fund right now, it’s a $2.6 billion pool of capital. It’s about a third in sports. When you break out the sports properties, we own a piece of the YES Network with the Steinbrenner family and Amazon. We own a piece of Fenway Sports Group, obviously, with their management team and ownership. We own the XFL, which we bought out of a bankruptcy with Dwayne Johnson and Danny Garcia.
We own OneTeam Partners where we have the agreements with folks like EA around video games and Panini with trading cards. We did a SPAC with Billy Beane and Luke Bourne. You go down the list of the things that we’ve done and then you start to think, where did these companies help each other? How do they help each other grow? We think now that I’ve gone through assets, we think about things like content and distribution. We have premium content with YES Network and with NESN, we have premium content in Skydance, which is our business that we own with David Alison that’s focused on predominantly Netflix, Apple, Amazon and premium content there.
How do those two things feed each other? How do they work together in a direct consumer world, in a streaming world? It’s really interesting to see this group of companies that’s not—it doesn’t look like a group of companies that are single line items in a PE fund that are unrelated; it actually looks more like Liberty Media, where you have a lot of different content and properties coming together that should be feeding each other to create value. It goes back to your question, how do you think about sports and what’s going on with minority owners and passive owners versus active? We think about this as an ecosystem that’s closed and how we can help these companies create value with each other.
Adam: Live sports, that is like the final frontier that’s holding cable news, it’s really keeping cable news, I don’t want to say alive [or] afloat. This is the hottest product [that] really remains. To have exclusivity to that has got to be—It’s only getting more valuable.
Rob: I think if you extrapolate your question, it’s more about the value of premium content today. If you look at what’s going on with the content wars and how much folks like Netflix are spending on content, it’s not too dissimilar. What is premium content mean? We know that in the New York market, Yankee games are really sticky content. Live Yankee games are really sticky content. It’s a very low churn customer base, whether those customers are getting it through terrestrial channels over cable versus streaming. The concept is, what can you do with that content? How can you create value?
We’ve thought about things like putting some of these regional sports networks that we own together and creating a bigger RSN. We think a lot about direct consumer. We think a lot about what’s going on with legalization of sports gaming in certain markets and certain cities and using our RSN and streaming platforms for that. It’s not too dissimilar to Netflix owning some of this content and driving a subscriber base, that’s entirely how we’re thinking about live content in sports.
Adam: Great. What are some of the risks with investing in the sports world? You have seen some blowback from fans, from leagues about the push towards more financialization, even though it’s already here. Some deals, not yours, of course, have fallen apart. Is that a risk that you guys consider when you’re doing due diligence?
Rob: Yes, I’ll tell you the way Gerry invested at Goldman and the way we invest here is an extension of that. We call it success-based investing. When we think about downside risk, we’re generally looking to generate a two and a half times or better over a four- to six-year hold. On the downside, we’re generally looking to get our cost spaces back through some form of either contractual cash flow or structuring a deal. When you ask what are the risks? We had a pandemic, we had a lack of live sports for a long time. We had no fans in the stands.
How did we think about YES Network that was supposed to be broadcasting live games in that instance? Nobody underwrote a pandemic going into that. Clearly, none of us had any idea about that, but we thought carefully about the cash yield in that business, the liquidity on the balance sheet, and the low leverage on the way in. Same thing with Fenway. we technically closed our investment in Fenway and underwrote it in the middle of the pandemic when there were no live fans in the stands. You think a lot about what is the stickiness of the season ticket subscriber base when things come back. What do the cash flows look like from the RSNs?
For us, we think about life in a much shorter band of outcomes where our worst case should be around costs back and our best case may never be a 10X, but hopefully it’s in that 2.5 to 3.5x zone. We don’t like taking binary risk, we don’t like taking tech risk, we don’t like taking team-specific risk or market-specific risk. That’s, I think, ultimately where people get in trouble.
Adam: Do you guys use a lot of leverage for these deals?
Rob: We don’t. Generally speaking, we avoid auction processes and sale processes which, for folks who know us well and have done their work, you can look in our portfolio and everything comes to us from an entrepreneur or a partner looking to solve a problem or looking to grow and incumbent in that and come for us in that is creating a capital structure that we can grow into. We do lever a transaction, usually, we’re levering two or three years in after we’re very comfortable with the business, after there’s cash flow, and after we can feel good about having that cash flow support the leverage. We’re not big users of financial leverage.
Adam: Got you. When you say, are you referring to a dividend recapitalization you would do two or three years in when you own a portfolio company? Got you.
Adam: Are those risky? I hear both sides of that argument sometimes with private equity taking a little debt out. I guess you’re paying yourselves and you’re paying your institutional investors when you do that, right?
Rob: Yes. The answer is, it depends like everything else. I think the way we think about life, OneTeam Partners is a good example. We have zero leverage on that company. That company is run rating now in excess of $100 million of EBITDA. The reason I say it depends is, if we decided we were going to pay ourselves a dividend, what would be a prudent amount so that we’re not over-leveraged in the event something bad happens to the company? That’s how we think about life. When we underwrite our two and a half times multiple of money, we don’t underwrite multiple expansion in our deals and we don’t include a lot of financial leverage to get there. It’s really about organic business building.
Adam: You touched a little bit on the pandemic there as one of the risks. Obviously, nobody could have foreseen, maybe some scientists could foresee the event coming, but not something you would necessarily write into, when you’re doing due diligence, what if a pandemic happens, what will be the impact if there’s no live sports for six months? In some ways, it seems like that has made private equity firms like yourselves more valuable. The thought of bringing in a strategic partner, it’s become almost an obvious way to go for a lot of these teams and leagues. Just what was the impact of the pandemic on your guys’, on your deal flow, on your business. You’ve obviously emerged from it doing quite well. What’s it been like?
Rob: Fair question for everybody.
Adam: Maybe too broad.
Rob: Not just investors in what we do. We actually wound up deploying a fair amount of capital during the pandemic. We used the uncertainty around the pandemic and lack of fans in the stands to put bets on that we thought would be smarter long-term bets, based on things like long-term contractual cash flow and/or structure. We invested in a business called Main Event on the consumer side of our business where comp stores, same source sales for the same week, year over year, up over 60%.
We invested in another consumer business called Jet Linx where it’s also performing quite well. We closed Fenway Sports Group during that period of time. During periods of dislocation, whether it’s a pandemic or a market pullback, this is something that I saw really effective when I was at JPMorgan, if you’re able to have the courage of your conviction to put capital out, and you can sit across the table from a founder or an entrepreneur and say, “I will be there for you and I’m here for you right now,” it’s actually, Adam, extraordinarily powerful, because if they know that you’re with them and you want to build a long-term business with them over the next four, or five, six years, and you’re with them in the middle of a pandemic, they’re going to trust you and go with you.
I hope we came out stronger. I think and I believe that we came out stronger out of the pandemic for it and having the courage of our conviction when we did is I think paying off for us now with some of these assets.
Adam: Speaking of companies impacted by the pandemic, you guys bought the XFL, as you mentioned, with Dwayne “The Rock” Johnson—our future president, perhaps.
Adam: Why invest in the XFL? It’s been, as the sports skeptic in me, we’ve seen a couple of different iterations of it. I think your guys’ plan is to launch it again in 2023. What’s the thesis behind this investment? Why do you think it can succeed? I guess this will be the third version of it. Right?
Rob: Yes. You probably read as well, when we did the deal and made the investment, we bought it as part of a bankruptcy process. We came in with Dwayne and his partner, Danny Garcia, who by the way, she is an outstanding business person too in her own right. The idea, Adam, is to create a live entertainment and global production and media company that’s rooted in live football. This is not just us, as others have seen and said this, there is demand for spring football, for a legitimate spring football product. We think this is a year-round entertainment company with spring football at its roots.
We delayed it, clearly to make sure the foundations are in place. When I say foundations, we’re talking about things like media rights and distribution and sponsorship and franchises in different markets and what families or institutions may want to participate in franchises. On a risk-adjusted basis, we don’t have a ton of capital deployed yet to it, but we have capital earmarked. That’s what success-based investing means, is, we’re going to deploy a lot more capital if we have a clear line of sight into making sure the cash flow covers whatever larger investment we make in the asset.
Gerry’s really close to this one. He spends a lot of time with Dwayne and Danny personally, as well as the league and our stakeholders trying to think through what the right steps are. The idea here is to go slowly so that you don’t skip steps and don’t make mistakes so that you can really create something of value. I have to tell you, Dwayne’s social media presence is second to none on the planet. It’s going to be a global business or based in North America. I would not be surprised if you saw a global footprint coming out of this thing.
Adam: I followed the second version of the XFL, the Seattle Dragons, my hometown. I watched a bunch of their games. It was unfortunate that the pandemic happened when it did for the XFL because it seemed like they were starting to hit their stride, and that was even with you guys partnering with them.
Adam: I have to imagine you feel excited about really building the infrastructure. Have you picked a commissioner?
Adam: How far along are you?
Rob: Not yet.
Adam: It’s pretty much in its infancy.
Rob: It’s early.
Adam: If you need anybody, give me a call. I’ve got a lot of ideas.
Rob: I love it.
Adam: I kid. One other offbeat question I had for you is, how close is RedBird monitoring what’s going on with the NCAA and NIL rights and the move to let athletes profit off their name, image, likeness? You’ve seen some activity there with institutional investors maybe rumored for giving loans to schools during the pandemic. Other, perhaps, opportunities for athletes to brand themselves and make a little money. Is that an area that RedBird’s interested in, or maybe not so much?
Rob: It’s an area we know really well. Going back to our OneTeam Partners business, that is what OneTeam Partners does. The commercial agreements that we have with the National Football League Players’ Association, the Major League Baseball Players’ Association, WNBA, and a bunch of other players’ associations—those are effectively the unions. When you are an NFL player, anything that involves more than six athletes, according to your collective bargaining agreement, you’re agreeing to sign your rights over, your name, image, and likeness to the union.
When you see a player’s face on the cover of the mat and video game, he is getting the same check that a kicker might be getting for participation in that. The unions drive that value for the players collectively. With NCAA, it’s still emerging. I think they’re still figuring it out. I think you’ll have individual players doing their own thing locally in certain markets and then you’ll have more marquee players that are going to attract bigger brands. I think there’s a world that still has to negotiate itself and figure out, but we’re super close to it and we think it’s super interesting.
Adam: It just seems like the Wild West right now. You see it very early with the Miami Hurricanes, every player getting a huge donation from that owner in Miami. I can’t even imagine what’s coming down the pike here over the next few years. I’m a Washington State alum, which is a small school. We’re very much on the outside looking in with the big money guys, but I like to follow it nonetheless.
Rob: I think it’s a very relevant question that’s going to become more relevant over the next couple [of] years.
Adam: Yes, for sure. Hey, that’s all I got for you today. I really appreciate you taking the time to answer a few questions.
Rob: No, I appreciate it too. I think next time, I’d love to talk to you more about cricket and what we’re doing over there and that’s very interesting —
Adam: Yes, let’s do it. Tell us about your investment and pronounce the team name for me, so I don’t flub it in front of our thousands of listeners.
Rob: Sure. We made an investment in a club called the Rajasthan Royals in the Indian cricket Premier League, the IPL. This is one, Adam, where I think it’s a really interesting watch this space. The IPL isn’t really broadly known here in the US. The IPL has eight clubs. It’s a closed infrastructure. It’s a closed league, which is different than some of the other leagues that you see and some of the other teams. What it means is that the IPL is actually very profitable. Every club in the league is profitable, because it’s a closed league, and the only real other league that’s closed and profitable like that is the NFL.
We invested in the Royals media rights and the IPL have grown 5X since the last renewal in 2017. The media rights are currently owned by Disney through their Hotstar platform. That accounts for 30% of all paid Disney+ subscribers globally.
Rob: We just think we have something really interesting here on our hands. Clearly, we think the media rights are going to be way more valuable on the renewal in ’22. You have population growth, obviously, and tremendous pent-up demand and interest in viewing and streaming cricket globally. It’s our first investment in cricket. It’s our first investment in India, but it’s a logical extension of the analytical work we do with Toulouse, our football club in France, and our partnership with Billy Beane and Luke Bourne on the analytic side. That’s a space where I think you’ll see us, and frankly, I think you’ll see some other PE firms getting involved over there.
Adam: Cricket, obviously, you mentioned, it’s not big in the US, but it’s hugely popular in India and even worldwide. The games can last days. That is a very attentive audience if you can—
Rob: It’s interesting.
Adam: —if you can tap into that market. They take tea breaks because they’ve got to eat and it’s really—
Rob: It’s interesting that you say that. Part of the value proposition of the IPL is actually to shorten the games and have a defined amount of time so that they can’t last for days so that the eyeballs do stay on the game. You nailed it. 100%, you nailed it.
Adam: We will certainly watch as you guys branch out into these areas because some really cool innovative stuff that’s going on.
Rob: Awesome. I appreciate your time and the ability to speak to you and your listeners. We think the world of you all obviously and anytime we can be of help to you, whether it’s, we didn’t talk about FIG or any of the other stuff we do, we talked about sports today, but anything we can do to help you, we’re always here.
Interviewer: Awesome. I appreciate it, Rob.
IN THIS EPISODE
General Partner, RedBird Capital Partners
Prior to joining RedBird, Robert spent ten years at JPMorgan, most recently as Global Head of the Alternative Investments Group—a hedge fund, private equity/credit and real estate platform with over $80 billion in assets under supervision. He managed the firm’s relationships with General Partners for commingled funds as well as for direct investments and was instrumental in building the group from $20 billion in AUS to over $80 billion. Robert originated public and private investment opportunities, and constructed alternatives portfolios for many of the firm’s most sophisticated clients in multiple jurisdictions globally. Prior to JPMorgan, Robert worked for four years as a Director at North Street Partners, a private equity investment firm that specialized in lower-middle market transactions. Prior to North Street, Robert spent six years at Bernstein Investment Research & Management, where he was a Vice President in the firm’s wealth management division.
During his tenure at JPMorgan, Robert was also President of J.P. Morgan Alternative Asset Management (“JPMAAM”), a $13 billion hedge fund solutions provider that served both institutional and retail investors globally. He helped to lead the group’s efforts into liquid alternatives and a more fully developed separate account capability for clients. He also
served on the Private Bank’s Global Investment Review Committee, the Private Equity Portfolio Advisory Committee, the firm’s Commercial Real Estate Council, the Investment Management Americas Operating Committee, and the Private Bank Investment Team.
In his current role, Robert is responsible for overseeing all operational functions of the firm as well as its capital partnerships. Robert has helped to build RedBird from $650 million in AUM with 18 employees in 2017 to over $5 billion in AUM and 50 employees today. He is also active on the Firm’s investment committee and is a Board Member of Vida Capital, a RedBird Series 2019 portfolio company.