Private Equity Bets Big on College Sports, and Everybody Wins
As PE firms explore investing in college sports, we believe universities, student-athletes, investors and fans all stand to gain.
How much is Howard University’s men’s basketball team worth?
$300 million, according to Coach Kenny Blakeney.
When Blakeney reportedly began pitching investors on a 33% stake in Howard’s men’s basketball program for $100 million, it sent waves across the college sports industry. Not just because that’s an ambitious valuation, but because it defied how we historically view college sports.
For our entire lifetimes, college sports were about… the education. Sure, there’s $18 billion-plus in TV deals, tickets and sponsorships involved. But if you asked Nick Saban or NCAA President Charlie Baker a few years ago, they’d repeat the party line: College sports are run by non-profit universities and played by student-athletes – with an emphasis on student. College sports are not a business.
When Blakeney valued Howard Basketball like a financial asset, he challenged that norm.
Increasingly, college sports are viewed through a financial lens, not unlike professional sports. In 2021, the Supreme Court delivered a landmark ruling, stating the NCAA’s limits on student-athlete benefits violated antitrust laws. This paved the way for athletes to be compensated – and set off a major wave of changes to state, NCAA and school regulations.
Without diving too deep into those regulations, three years later, college athletes are now signing off-the-field endorsement deals, receiving direct donor payments, and in some cases even unionizing. It’s all changing fast. And nobody knows for sure where we’ll end up.
But the cat is out of the bag: College athletes are demanding financial incentives, colleges are compensating athletes to keep their recruiting classes competitive, and college sports are looking a whole lot more like professional sports.
All the while, the NCAA continues to lose its grip on enforcement in this wild west environment. The governing body has lost multiple court cases and conceded a major court settlement with antitrust regulators, as state governments have taken more control over regulation. Schools are now less worried about complying with the NCAA and more worried about staying competitive—ahead of the NIL curve.
Investors have grown interested in this changing landscape. Private equity firms are already exploring partnerships with athletic departments to stabilize their businesses and fuel growth in this next phase of college sports.
We’ll explain why PE’s entrance should be a win-win-win: for college sports programs, student-athletes, institutional investors, and most importantly, the fans. Private capital can simultaneously bolster a struggling college sports industry, usher in a new era of fan experience, and drive attractive financial returns.
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Since the 2021 Supreme Court ruling, it’s become clear: College sports are broken.
First, very few sports programs at very few schools drive the lionshare of revenue. Consider that in 2022:
14% of D1 schools drove 53% of D1 revenues. Those 51 of 364 are the Power 5 schools: Michigan, Alabama, Texas, etc.
Of these 51 schools, the median athletic department generated $71 million in revenue but $86 million in expenses – relying on school budgets and donor funds to break even.
This is because college football, and to a lesser extent college basketball, drive the vast majority of revenues through massive TV contracts, sold-out stadiums, and brand licensing deals. Football and basketball subsidize dozens of less popular, but similarly expensive sports like lacrosse and soccer.
See here the disparity across sports:
Michigan Football might seem like a massive business: paying their new coach $6 million per year, selling the fourth-most merchandise of all schools, selling out the Big House’s 107 thousand seats, and playing in the National Championship in front of 25 million TV viewers.
But Michigan Sports as a whole – accounting for 29 D1 teams and their expenses – is a less attractive business.
When the NIL floodgates opened, colleges had to pay up to recruit the best players and compete. But given their shaky financial positions, college programs lunged for short-term solutions.
To grow revenues in the near term, schools jumped to the highest-bidding conferences. For example, Texas ditched the central US’ Big 12 for the south’s SEC. Washington, Oregon, USC, and UCLA all left the west coast’s Pac-12 for the midwest’s Big 10. Short-term, these schools got a portion of larger media deals. But long-term, the realignment torpedoed decades-old conference rivalries, stacked college football’s talent across fewer conferences, and pissed off a lot of fans. College football is starting to look like the canceled UEFA Super League plans.
To lure top recruits and stay ahead of the game, schools raced to set up NIL collectives - “unaffiliated” organizations that funnel donor money to student-athletes. These school collectives already essentially treat student-athletes as employees, while bending the spirit of NIL rules to get there. Clearly, it’s fair to question the sustainability of collectives as primary funding sources for recruits. They’re often competing with school booster clubs for the same pools of donor money, there is already a sense of “donor fatigue” kicking in, and they’re the primary drivers of the chaotic and unpopular mess known as the transfer portal.
This isn’t the end of college sports’ problems. In March, Dartmouth Basketball voted to unionize, which will likely go to federal court. Many legal experts agree there’s little constitutional justification against student-athlete unionization. Long-term, more college athletes will unionize and take inspiration from professional leagues like the NBA, where players and owners split revenues 51%-49%. So the NCAA and schools will have to share an even larger piece of the pie with the athletes.
To add one final problem: College athletic programs are not staffed like corporations. NBA and NFL teams have dozens of commercial staffers, backed by hundreds in the league office. Relatively, college programs are run like local businesses. That’s why universities have historically partnered with sports marketing agencies like IMG and Learfield to commercialize their rights.
The college sports landscape has been flipped on its head, and the athletic departments are not equipped to adapt on their own.
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That’s where institutional capital comes in.
PE firms specialize in two things:
Providing businesses with access to capital
Bringing operational improvements to those businesses
When considering the recent boom of institutional sports investments, it's no surprise that PE is attracted to the college sports market.
Over the last decade, sports properties have emerged as an incredibly hot asset class, and leagues have decided to lean into institutional investors, bringing much needed liquidity to high net worth team owners as valuations increased.
Meanwhile, institutional investors realized that stakes in pro teams can drive 15-20%+ IRRs. Media rights deals continue to climb in value; demand for sports is largely recession-proof; and teams are inherently scarce assets with high barriers to entry.
As soon as leagues began loosening regulations around 2019, firms like RedBird, Sixth Street, and Arctos Partners bought equity stakes in NBA, MLB and NHL teams.
Despite its challenges, college sports represent a similarly attractive opportunity to deploy capital.
College football is the second-most popular sport in the US, accounting for viewership and attendance.
Of the top 200 telecasts of 2023, NCAA football had more games than any league besides the NFL. College football had 17 games and college basketball had 9 games in the top 200, compared to 15 for the NBA and 7 for MLB.
College sports also has something that pro sports don’t have: alumni bases. NFL fans root for their favorite team. NCAA fans root for their favorite team and their alma mater. That means more brand loyalty and less price sensitivity.
Private equity firms are experts in navigating complex regulatory environments and changing market dynamics. So they’ve begun exploring partnerships with college sports programs.
Sixth Street and Florida State University have discussed establishing a jointly-managed holding company that would manage FSU’s commercial rights. RedBird and Weatherford Capital co-launched a fund to offer schools $50-$200 million in upfront cash for a share of future revenues.
Some schools have even gone outbound to investors. Howard University’s men’s basketball coach has begun pitching PE firms to buy a 33% stake in the basketball program for $100 million. It’s an objectively ambitious valuation, but indicative that college sports are leaning into growth stories.
Nobody knows the ideal financing structure for college sports because so many big questions remain, for example:
Will student-athletes successfully unionize? If so, how much more of the pie will they negotiate from the schools?
For revenue-generating sports, will universities spin them out into separate entities that can bring on strategic investors and grow revenues?
For loss-leading sports, how will the universities continue to fund their operations, staff salaries, facility upgrades, and other expenses?
The one thing that isn’t a question is the long-term, massive consumer demand for college sports – and those secular trends captivate private equity.
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So it’s a win-win for college sports and PE. But what does all this mean for fans?
We’d argue the college sports fan experience has plenty of room for improvement. Think of all the ways the NCAA football and basketball experience falls short when compared to the NFL and NBA:
Too many games are boring blowouts, where a team of Alabama or Duke future pros steamrolls some future accountants.
Tickets for games in Cameron Indoor, Tiger Stadium and other college venues are obscenely hard to buy, and the in-stadium hospitality options are worse than the pro leagues.
EA Sports’ NCAA Football video game took ELEVEN YEARS to release a new version because of player rights issues.
How could private equity fix these issues? Well, here’s a thought exercise for what a revamped college sports landscape could look like with private equity involvement:
Each major college program spins out their revenue-driving sports – generally football and men’s & women’s basketball – into a separate entity. Each entity is majority owned by their respective school, but is also open to outside investment.
Meanwhile, colleges keep their loss-leading sports as part of the university to be funded by school budgets and donors.
Each entity can take on investors and adopt for-profit operating tendencies, building out their commercial teams, preparing annual budgets, and investing in growth initiatives.
Schools recognize student-athlete unions, which leverage partners like Athletes.org to negotiate for athlete revenue share and benefits.
A new governing body outside the NCAA institutes rules around salary cap, enforces athlete contracts, and provides transparency to both member programs and fans.
Schools work between the governing body and conference to schedule the highest-quality matchups throughout the season regardless of geography.
Again, this is just one potential structure. But there’s a lot to like for every party. Colleges could financially stabilize their sports programs and tap into new growth opportunities with access to private capital. Private equity firms could drive returns for their LPs on the back of this growth. And most importantly, fans would experience a new era of their favorite college sports, marked by long-term stability, more consistent matchup quality, and enhanced fan engagement.