LA Times: Private Equity firms invest in baseball because revenue is plentiful

[jsnpritchett]

Can't wait for the finance bros on the board to check in on this one, since we were told the ROE for owning a team was soooooo bad...

From the article: 

"We’re big believers the asset values in the industry are going to grow,” Jordan Solomon, co-founder of Arctos, said at the Sloan Conference.

MLB commissioner Rob Manfred awkwardly suggested last month that the stock market might make for a less riskier investment than ownership of an MLB team, but data does not support that contention. From 2002-2021, MLB teams appreciated in value at an average of 669%, according to data presented at the conference, with the S&P stock index appreciating 458% in the same time."

[Lazorko Saves]

6 hours ago, jsnpritchett said:

finance bros

Don't be hateful.  Can you disagree with someone without getting hateful?

 

So here's a few things to consider about that article:

1. Why is 2002-2021 the correct time frame to evaluate investment returns?  Will other periods show the same thing?  (Remember, they did not in the case of the Braves valuation, which we went thru more recent valuation window).  If you look at the Forbes history, you'll see fairly flat valuations from 2002-2014, then a big jump from 2015-2017, decelerating again from 2018 to now.  Which window best represents what will happen to future valuations?

2. The total return quoted here is for average MLB franchise.  Not total valuations of all franchises.  Do you know why Shaikin would do that?  Have you considered what the median valuation looks like?  Or what the total appreciation return would be the 24 teams excluding the big ones (NYY, LAD, BOS, CHC, SF, NYM)?  If you want to assert that owning the Yankees is a great investment, I might agree with you on that.  Not so much the Royals, Pirates, Twins, Mariners, etc.

3. The S&P return for 2002-2021 is incorrect.  My guess is Shaikin is excluding dividends, which is a freshman-level mistake.  It hugely affects rate of return numbers.

4. The franchise valuation does not agree with the only publicly available one, the Forbes estimates.  No idea where Shaikin got his.

5. The Forbes valuations do not include capital expenditures or owner-subsidized negative cash flows which must be included in cost basis for correct calculation of returns.  If the Arctos ones do, then his disagreement with Forbes is even bigger.  Owning the S&P 500 doesn't require you to build a new stadium, so the cost basis for owning the S&P 500 is whatever you put in at investment date - that's it.  Not necessarily true for MLB owners, unless they have operated cash flow positive every single year.

6. Note the Arctos guy is projecting outsized future returns and currently under-valued assets.  That's what private equity funds specialize in.  If you read his statements carefully, he's not asserting outsized returns in the past 2002-2021 time window.  Bill Shaikin is the one making that assertion, while making elementary financial errors.

Remember what was asserted - that owning an MLB franchise in the past has led to "obscene" returns not available to us common people. 

The Arctos guy is *maybe* asserting that will be true in the future.  You and Bill Shaikin are asserting that has happened since 2002, but Shaikin has got the basic math incorrect.

Edited March 14, 2022 by Lazorko Saves

[Lou]

6 hours ago, jsnpritchett said:

Can't wait for the finance bros on the board to check in on this one, since we were told the ROE for owning a team was soooooo bad...

Not one person said this. 

[AngelsLakersFan]

4 hours ago, Lazorko Saves said:

If you want to assert that owning the Yankees is a great investment, I might agree with you on that.  Not so much the Royals, Pirates, Twins, Mariners, etc.

LOL

[Dollar Bill]

7 hours ago, Lazorko Saves said:

Don't be hateful.  Can you disagree with someone without getting hateful?

 

So here's a few things to consider about that article:

1. Why is 2002-2021 the correct time frame to evaluate investment returns?  Will other periods show the same thing?  (Remember, they did not in the case of the Braves valuation, which we went thru more recent valuation window).  If you look at the Forbes history, you'll see fairly flat valuations from 2002-2014, then a big jump from 2015-2017, decelerating again from 2018 to now.  Which window best represents what will happen to future valuations?

2. The total return quoted here is for average MLB franchise.  Not total valuations of all franchises.  Do you know why Shaikin would do that?  Have you considered what the median valuation looks like?  Or what the total appreciation return would be the 24 teams excluding the big ones (NYY, LAD, BOS, CHC, SF, NYM)?  If you want to assert that owning the Yankees is a great investment, I might agree with you on that.  Not so much the Royals, Pirates, Twins, Mariners, etc.

3. The S&P return for 2002-2021 is incorrect.  My guess is Shaikin is excluding dividends, which is a freshman-level mistake.  It hugely affects rate of return numbers.

4. The franchise valuation does not agree with the only publicly available one, the Forbes estimates.  No idea where Shaikin got his.

5. The Forbes valuations do not include capital expenditures or owner-subsidized negative cash flows which must be included in cost basis for correct calculation of returns.  If the Arctos ones do, then his disagreement with Forbes is even bigger.  Owning the S&P 500 doesn't require you to build a new stadium, so the cost basis for owning the S&P 500 is whatever you put in at investment date - that's it.  Not necessarily true for MLB owners, unless they have operated cash flow positive every single year.

6. Note the Arctos guy is projecting outsized future returns and currently under-valued assets.  That's what private equity funds specialize in.  If you read his statements carefully, he's not asserting outsized returns in the past 2002-2021 time window.  Bill Shaikin is the one making that assertion, while making elementary financial errors.

Remember what was asserted - that owning an MLB franchise in the past has led to "obscene" returns not available to us common people. 

The Arctos guy is *maybe* asserting that will be true in the future.  You and Bill Shaikin are asserting that has happened since 2002, but Shaikin has got the basic math incorrect.

Thanks for reading. The returns for the S&P and franchise sales were taken from data presented at the conference, as the story says, so I can't speak to how they were calculated. But I would note that the Forbes valuations are estimates, as you say. MLB teams do not open their books to Forbes, so Forbes does its best to assess revenues, expenses, etc., and then estimates a franchise value accordingly. The true value, of course, is what someone is willing to pay for it. When the Dodgers hit the market a decade ago, Forbes estimated the franchise value at $800 million. The team sold for $2.15 billion. The Mets sold for more. The Marlins sold for $1.3 billion, the Royals for $1 billion.

Accounting is a big part of this, of course. That's why McCourt split what we used to know as "the Dodgers" into a baseball company, a stadium operations company, and a parking lot company (and Guggenheim added a media company). That's why Arte is trying to develop the Angel Stadium parking lot -- not via the Angels, but instead through a company called SRB Management. That was one of the points the Arctos guy made: there are ancillary opportunities available, and those revenues are not shared -- not with other owners, and not with the players.