Private equity and college sports? Sounds like a disaster
College sports are a business, but their ties to educational institutions mean they’re not a business business, ya know? That building tension has manifested itself in the upheaval we’re witnessing as massive reorganization looms. Private equity firms love to capitalize on such moments of panic and uncertainty, so their recent interest in college sports – and let’s be real, college football – fit with their natural predatory patterns.
But without formal business enterprises to capture, how can PE investors actually get a toehold in college football? That question has made their involvement in the sport seem fanciful in the past. Yet, where there’s a will for an institution to live beyond its means, there must be a way for a PE firm to profit.
Holly Anderson and Spencer Hall of Channel 6 recently laid out what the relationship between PE and college football programs will look like once some school eventually takes the plunge. Essentially, PE investors would act as private lenders to athletic departments, rather than taking actual ownership stakes in them. Programs would get substantial infusions of cash right away; PE firms would get a piece of the athletic departments’ future revenues at a specified rate of return.
This explains why Florida State is at the center of PE’s potential encroachment on college sports. (Aside from the general fondness for get-rich-quick schemes in the Sunshine State.) Fearing a future in which they get left behind programs in the Big Ten and SEC, the Seminoles want out of their long-term arrangement with the ACC. The ransom FSU would owe to get out of that timeshare of a membership is obscenely expensive. However, the difference in media revenues means the school could actually come out ahead in the long run by securing a spot in one of the two power conferences.
A mountain of cash from a PE firm would thus enable FSU to disentangle itself from the ACC and begin pursuing new relationships with better cash flows.
The kicker: If the athletic departments of state institutions can’t meet their future payments to their benefactors, taxpayers will likely find themselves footing the bill.
A private equity firm can’t sell off the assets of an athletic department like it would a foundering retailer or restaurant chain. However, the dangling knife of an unpopular bailout can provide enough pressure to force schools into dramatic cost-cutting measures. And the effects of those “operational efficiencies” won’t produce the kinds of athletic departments that sustain winning football teams.
Some programs may thrive with PE backing. For those that don’t, the vicious cycle awaiting them stands to turn these athletic departments into shrunken husks of what they were before they got in bed with PE.
In other words, private equity in college sports has the makings of a hell of a boondoggle.