Private Equity in College Sports?
- Thread starter Brevity Frog
- Start date
It would make it truly for profit, which would change literally everything.
Eight
Member
i am not the smartest guy by any stretch, but it you can sell an ownership stake in it that sounds like a business.
They will want a return on their investment, the higher return the better. The first thing im wondering if I’m an investor is why are we funding tennis, golf, volleyball, track, rifle, and softball if they aren’t making money. Then there are about a thousand other questions after that.
ticketfrog123
Active Member
Most sane people agree college sports is a media and events focused business. It’s just under a non-profit umbrella.
This shouldn’t have any effect on paying players, it’s a legally separate entity that holds the media rights for a conference.
Eight
Member
seems this would start to blur lines as babyface pointed out in the other thread who ponies up this type of money without some type of potential return on their investment?
most schools don't run in the black and i have no clue on conferences, but it you are paying out to investors then how long can you claim to operate under that non-profit umbrealla
This might be a really dumb question, but can you pay investors dividends out of the operating cash flows of a non-profit entity? Or are you saying the conference itself would be for profit but the entities within the conference would be not for profit? I'm already confusing myself but this arrangement would seem impossible.
ticketfrog123
Active Member
I’m not a lawyer or non-profit expert, but the paying out money (regardless of definition of investor) is exactly what non-profits do.
Red Cross distributes funds to those in need. Boys and Girls Club I would guess as well, etc.
Pretty sure non-profits have sought additional capital (debt or “private” equity) to grow the size of their marketing campaigns or other uses. Hasn’t jeopardized their non-profit status.
Eight
Member
huge difference in distributing funds and repaying investors and those non-profits have volunteers and they have employees.
pretty sure those employees have the same workplace rights as employees who work for for profits in regards to benefits, wages, hours, over-time etc....
what they don't have is a group of individuals who operate in a fashion similar to college scholarship athletes and i would guess you aren't going to correlate a college athlete with a volunteer.
my question is not whether or not college athletics is a for profit or non-profit, but how do you say the athletes are not employees and entitled to the revenues generated by their works when you would be paying an investor for putting up capital
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Red Cross distributing money to people in need (regardless of the definition of "in need") would seem to be way different than paying out dividends to equity investors. Non-profits seek additional capital through donations that can then be used as tax deductions, I don't believe the Red Cross for instance is owned by private equity. At least I'm pretty sure that's how it works.
ticketfrog123
Active Member
Sorry I was a bit confusing. The media rights of all conferences produce a large profit to fund the conference, all of which are non-profit entities. Each member of a conference is also a non-profit entity.
Yes, the investors here would get some sort of dividend. I haven’t flipped through all materials, but the important stuff probably isn’t public.
Typically, new investor is subordinated (read next in-line) to prior investors or in this case the conference members.
An (hypothetical, simplified) arrangement could be:
Investor contributes $100mm for X%.
Pac-12 makes $1,400mm today with (14?) members each receiving $100mm. If revenue exceeds $2,000mm ($2B), then investor gets paid until they recoup $100mm investment and make a satisfactory ROI per agreement terms.
The most difficult part of this and what makes this whole deal highly unlikely is: what’s next?
Private Equity makes money through selling their ownership at a higher price than they purchased. Realistically, they can sell back to conference or another Private Equity company. The minority ownership piece limits severely what other PE companies would have real interest.
Don’t think a sale to a network like ESPN or ABC would happen. Maybe Netflix or Hulu but that’s a huge IF.
ticketfrog123
Active Member
I think people are getting tripped up on the concept of investment.
This is more like a loan scenario, with no control of the business. Maybe a vote on the board.
I can absolutely loan the Red Cross money today if they agreed, or were short on fundraising. They would have to pay me interest and principal in a traditional scenario.
Brevity Frog
Active Member
Good point. A loan is not the same as private equity which wants a profit share. This sounds like the latter.
CryptoMiner
Active Member
This is not a loan it is an equity interest. Payback is from profits, no guaranteed returns, no principal returns and residual interest remains even after return of capital.
Far from a loan.
Deep Purple
Full Member
Not a business expert by any stretch, but after 25 years in the public charity sector, I've got a pretty fair grasp of tax law in regard to charitable enterprises. Any charity in which private individuals stand to materially profit from an investment automatically loses its nonprofit status. The business itself can profit to no end and still remain officially "nonprofit." But as soon as any share of the profit accrues to private individuals, investors or otherwise, you are automatically a for-profit enterprise and no longer tax-exempt.
I wonder if the Pac 12's potential new business plan accounts for this new tax liability in balance against the revenue increase from private equity?
Perhaps they think they can seek an exception that would allow them to subscribe private investors and still remain "nonprofit." If so, it wouldn't be unheard-of, but it is very rare. Or perhaps they've done the math and figure they can financially do better as a for-profit enterprise, even with the added tax liability.
Deep Purple
Full Member
What you describe is certainly legal and do-able, but it has major drawbacks. It's considered a very poor business practice for a nonprofit. Charities get rated by watchdog organizations on their fiscal responsibility. For example, a university or other charity that spends endowment principal to cover operating costs takes a huge hit in these ratings and is usually put on probation by the academic accrediting agencies for unsound finances. It also draws unwanted attention from the IRS and the state attorney general's office, who are required to monitor nonprofits to protect prospective donors from irresponsible charities.
The case of a collegiate athletic conference is different of course... but I wonder how the member universities would regard this extra scrutiny and potential risk to their nonprofit, tax-exempt status?
LeagueCityFrog
Active Member
Big 12 goes back to 12 with Arizona and Arizona State and the Pac-10 goes back to 10.
ticketfrog123
Active Member
The loan was illustrative. Obviously debt is not equity.
Private equity does not want a profit share. They want an ownership interest they can sell or flip at a later time.
This is a short term solution & quasi partnership to work towards making the conference competitive in terms of media payouts.
Not a long term “buy and hold” play.
