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PitchBook
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The Weekend Pitch |
May 3, 2020 
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Presented by Secfi |
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For most of the 20th century, there was little overlap between the worlds of high finance and professional sports. But finance follows the money. And in more recent decades, the economics of pro sports have exploded. In 2018, the big four pro leagues in the US—the NFL, NBA, MLB and NHL—combined to generate some $40 billion in revenue.
The relationship between sports and finance has changed in two big ways. The first is that Wall Street wants a piece of the action. The second is that pro sports teams are behaving a lot more like Wall Street.
Welcome to The Weekend Pitch. I'm Kevin Dowd, and you can reach me at weekend@pitchbook.com. Even with on-field action at a standstill because of the coronavirus, two new funds have emerged that highlight the deepening ties between finance and sports. That's one of eight things you need to know from the past week: |
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In more ways than one, the Philadelphia 76ers exemplify the growing connections between sports and finance.
(Mitchell Leff/Getty Images Sport) |
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1. Game on
The first of those two new funds comes from a new firm called Arctos Sports Partners, which registered more than $430 million in commitments with the SEC this week. An Axios report shed light on the firm's unique ambitions. Founded by a mix of executives from private equity and pro sports, Arctos is aiming to raise between $1 billion and $1.5 billion for a fund that will purchase passive, minority stakes in sports teams across the US and Europe.
The concept of private equity firms taking stakes in pro sports franchises isn't a novel one. Less than six months ago, Silver Lake agreed to invest $500 million in the parent company of Manchester City. Platinum Equity is the official owner of the Detroit Pistons.
But the idea of an entire fund dedicated to buying stakes in teams is new—and one that reflects how owning a sports team has transformed from a vanity project into a savvy investment.
The best example might be the NBA, where teams owned by private equity tycoons were dominating the league in 2020 before the season came to a halt. In 2010, a group led by venture capitalist Joe Lacob paid $450 million for the Golden State Warriors. A year later, a group led by private equity pro Josh Harris handed over $280 million for the Philadelphia 76ers. The Warriors are now worth some $4.3 billion, and the 76ers have a valuation of about $2 billion, according to the latest Forbes estimates. The prospect of a near 10x return in 10 years is enough to raise some eyebrows.
Other instances abound of investors staking their claim in pro sports. Hedge fund manager David Tepper bought the Carolina Panthers in 2018. Fellow hedge fund pro Steve Cohen attempted last year to buy the New York Mets. And several VCs were investors in the American Alliance of Football, a fledgling pro league that came to an ignominious end last year.
In general, skyrocketing revenues have led to skyrocketing valuations. In recent decades, instances of an owner selling a pro sports team for less than the purchase price have been few and far between.
That immense valuation growth has also made it harder for teams to find minority investors. Investment firms are part of a shrinking group of prospective buyers with deep enough pockets to make a deal. In fact, Bloomberg reported last year that the NBA was pondering a new investment vehicle that would allow investors to buy minority stakes in multiple teams.
Now, at Arctos, the practice of investors putting capital into pro sports is being institutionalized. The NFL doesn't allow private equity funds to buy stakes in their teams, but it appears that pretty much every other major pro league will be on Arctos' radar. And on Thursday, a potential target emerged: The website Sportico reported that the San Antonio Spurs are selling off a minority stake.
This week's other notable sports-related fund shouldn't come as a surprise to basketball fans. Sam Hinkie, an MBA who worked at Bain & Company before a controversial stint as general manager of the 76ers, has raised $50 million for a new seed- and early-stage vehicle, again according to Axios.
Hinkie's approach exemplified how Wall Street's quant-based revolution has now come for pro sports. In the post-"Moneyball" era, teams have increasingly embraced the quantitative over the qualitative. It's cliché, but it really has been a revenge of the nerds, with front offices across every sport relying more on algorithms and data and less on hunches and the eye test.
In many ways, during his stint in Philadelphia, Hinkie ran the 76ers as if it were a VC fund. Like a portfolio company, not every player a team acquires will work out. So by hoarding draft picks and cycling through a rotating cast of other young players, Hinkie was able to get more bites at the apple. The key to a successful fund is often one or two standout investments; the key to a successful basketball team is often one or two stars. So in the draft, Hinkie prioritized risky players with high ceilings and low floors, aiming for one or two home runs instead of a steady stream of singles.
These sorts of team-building theories are just one way financial thinking has transformed the way sports are played. In basketball, teams have embraced the three-point shot like never before. In baseball, a focus on data has changed everything from where defensive players are positioned to the plane of batters' swings.
Hinkie's new fund will reportedly invest in sectors other than sports. But as recent history has proven, the line between finance and sports seems to be growing blurrier by the year.
2. Earnings season
An unusually painful earnings season continued this week for publicly traded private equity firms, with Apollo Global Management reporting a $2.3 billion net loss and Carlyle logging a $612 million loss. Apollo's private equity portfolio depreciated by 21.6% in Q1, the exact same figure Blackstone reported the week prior, while Carlyle's depreciated by 8%. The S&P 500 fell by about 20% over that same span.
3. Layoffs roundup
News of major job cuts across the startup landscape is unfortunately becoming difficult to escape. This week brought reports of up to 950 layoffs at Juul Labs, nearly 1,000 layoffs at Lyft and more than 350 lost jobs at Deliveroo. About 13% of the workforce at Lime is now believed to be out of a job, and Automation Anywhere is reportedly cutting more than 10% of its staff. For the whole of the US, another 3.8 million jobless claims were reported last week, taking the count of Americans who have filed for unemployment in the past six weeks past 30 million.
4. SPAC of all trades
A special-purpose acquisition company backed by Social Capital raised $360 million in an IPO this week, mere days after another SPAC backed by the firm conducted a $720 million offering. The listings are part of a wave of SPACs that have been hitting Wall Street in recent days, with the aim of providing other companies an avenue onto the public markets that sidesteps much of the traditional rigamarole of an IPO. |
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Social Capital's first SPAC conducted a reverse merger with Richard Branson's Virgin Galactic last year.
(Drew Angerer/Getty Images News) |
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5. Insta-profits
With demand soaring amid a pandemic, Instacart is planning on turning a $10 million profit in April, the grocery delivery provider's first-ever foray into the black, The Information reported this week. The company is said to have sold some $1.4 billion worth of groceries during the first two weeks of April alone. This week also brought proof that a locked-down population doesn't guarantee profits for a food-delivery company, in the form of Blue Apron, which reported a net loss of $20.1 million for Q1 alongside falling revenue.
6. Dot-org debate
Late this week, a nonprofit group known as ICANN that oversees domain names on the internet rejected a planned deal for another nonprofit group to sell the .org domain registry to a little-known private equity firm called Ethos Capital, a move that had sparked much controversy among internet activists since it was first announced last year. ICANN cited the fact that such a leveraged buyout would have required loading $360 million in debt onto the acquired nonprofit as a primary rationale for its decision.
7. Fintech funds
Andreessen Horowitz added even more resources this week to its bet on the future of cryptocurrencies, closing its second crypto-focused fund on $515 million. It wasn't only firms raising new funds for fintech: Stash, a startup behind an investing and savings platform, brought in a $112 million funding round this week from LendingTree, T. Rowe Price and several VCs, reportedly taking its valuation to more than $800 million.
8. The unicorn herd
Add Procore Technologies to the list of companies waiting on an IPO because of coronavirus fallout. After filing to go public in February, Procore is now waiting on a listing and has instead raised $150 million in new VC at a $5 billion valuation, Bloomberg reported this week. Recent days also brought something that's become much rarer: a new unicorn. Figma, a creator of collaborative design software, banked $50 million in funding at what Forbes reported could be a $2 billion valuation.
View the full list online |
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| Rep. Alexandria Ocasio-Cortez (D-N.Y.) speaks on Capitol Hill earlier this year. (Mario Tama/Getty Images News) |
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In recent months, Elizabeth Warren and Alexandria Ocasio-Cortez have taken the lead on a number of progressive efforts aimed at shrinking the power of private equity firms. My colleague Adam Lewis wrote this week about their latest move, as the senator from Massachusetts and the congresswoman from New York introduced legislation that would bring a halt to big mergers and acquisitions during the coronavirus pandemic.
With Republicans in control of the Senate, the chances of any such bill passing seem remote. But even the idea was surely met with horror by a number of investors. After all, as PitchBook's Q1 2020 North American M&A Report details, the pandemic is already presenting dealmakers with a world of problems. |
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Over the past two months, PitchBook's analysts have been churning out reports and notes that examine what a global pandemic will mean for the private markets. This week, they launched a new research series called Quantitative Perspectives, which will rely on a strictly numbers-driven approach to describe the lay of the land.
The series debuted with a deep dive into how the US private equity industry is set to respond to a period of serious economic turmoil. Packed with charts related to dealmaking, exit activity, fundraising and more, it's a unique, informative and very visually appealing way to stay ahead of the curve. |
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| (Tim Robberts/Stone/Getty Images) |
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Things change during a crisis. For venture capitalists, the societal and economic upheaval caused by the coronavirus may mean significant shifts in strategy. And for the LPs that give their money to VCs, it could mean adjusted expectations for the amount of distributions coming their way.
Our analysts put out a new note this week using data from past periods of economic duress to examine how VC firms behave in a crisis.
For some augmented and virtual reality startups, the changes wrought by the pandemic are much more welcome. PitchBook's James Thorne wrote this week about how "VR is having a moment" in the age of the lockdown. |
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Alas, only a secret single octopus
(TheSP4N1SH/iStock/Getty Images Plus) |
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In the easiest decision in the history of this very prestigious award, it is my very distinct pleasure to bestow startup of the week honors upon Secret Double Octopus, an Israeli startup specializing in password-free authentication that recently raised a $15 million Series B.
Do I know what octopuses have to do with passwordless security? I do not. Do I care? Not particularly. Am I sad that the company's website is only DoubleOctopus.com, with nary a "secret" to be seen? A little bit. Upon learning this, did I check to see if the SecretDoubleOctopus.com domain is still available? You can bet your bottom dollar I did. |
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Recommended reads
In recent years, entrepreneurs have turned growing portfolios of Airbnb listings into miniature real estate empires. In a pandemic, the bill is coming due. [The Wall Street Journal]
Why is the coronavirus so confusing? [The Atlantic]
Grocery delivery is having a moment. Will it continue once concerns about COVID-19 fade away? [Protocol]
The inside story of the passengers, workers and captain aboard the Princess Diamond, the cruise ship that turned into a floating catastrophe. [GQ]
A Pulitzer Prize-winning science writer on what the coronavirus crisis reveals about American medicine. [The New Yorker]
Dangerous conditions and low pay for critical workers has been a growing topic of discussion in recent weeks. It's like 1902 all over again. [Bloomberg]
The coronavirus crisis is bringing many things to a grinding halt. Medical-debt collection isn't one of them. [ProPublica]
The story of Michael Shattuck, a 42-year-old from Wisconsin who wants to run a marathon every day for the rest of his life. [Outside]
Warp drives are science fiction, not reality. But an undergrad in Alabama drew a standing-room-only crowd at an engineering conference by asking a simple question: Do they have to be? [Gizmodo] |
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Quote of the week
"We will definitely see an uptick in defaults and an uptick in restructurings. The question is: Is it a 2,000-foot mountain or is it Mt. Everest?"
—William "Tuck" Hardie, a managing director at Houlihan Lokey, speaking to The Wall Street Journal about the prospect for widespread distress and bankruptcy in the wake of the coronavirus |
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The Weekend Pitch is produced by editor Kevin Dowd.
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