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Private equity is coming for baseball next

Leveraged investments in baseball teams are a huge red flag.

MLB: San Diego Padres at Miami Marlins Steve Mitchell-USA TODAY Sports

Go to any shopping center on Anystreet, USA, and you’ll probably find a few abandoned stores jammed between the new Chopt or Sweetgreen, and none are more ever-present than a Toys R Us. Toys R Us was at one time the largest toy reseller in the United States, selling product in over 800 stores and booming through the 1980s and into the 1990s, right before their market share was cut into by the likes of Amazon, Ebay, and online resellers.

That wasn’t the reason they went under, though that was the media’s perception. Instead, what actually killed it was a $6.6 billon deal in 2004 in which the toy conglomerate was purchased by KKR and Bain Capital, two prominent private equity firms. Essentially, as this excellent Splinter News post put it, private equity has an easy path to growth:

  • Purchase a business holding using funds gathered from a group of investors
  • Minimize committed liquid assets by purchasing the holding with debt, in what is popularly referred to as leveraged buyout
  • Reduce the operating expenditures of the holding to increase margins, and charge fees for management consulting and, obviously, debt payments

This is, as the article puts it, akin to “[ing] your neighbor’s house. You put down the down payment. You own the house. But your neighbor has to pay off the mortgage.”

The result has been an explosion in private equity profits; they reached as high as 300% returns since 2000 as an industry. For Toys R Us, this meant up to “$425 million to $517 million in interest” payments and a total of $200 million in fees. The end result was, despite the company showing consistent revenue numbers and shrinking losses with the rebound of the economy, it completely bled out by its total closure in 2018, and was revived as a zombie online store (run by Target) at the end of last year. The real, material loss was that 33,000 workers lost their jobs.

This story, unfortunately, is not unique in the recent American experience, especially in media and entertainment. Since the 1980s and the deregulation of the financial sector, leveraged buyouts became increasingly popular, and then even more vulturous as firms became exposed by the changing winds caused by the internet. Your local paper, for example, was possibly purchased by it, like the Denver Post. It was purchased by AGC, and it resulted in the firm borrowing “$248.5 million from newspaper workers’ pension funds, and had the newspapers take on $200 million in debt to finance its own investments.”

Splinter News itself was shut down by the firm Great Hill, and even Sports Illustrated, the once great sports media titan, was acquired by a firm called The Maven, which immediately let go half of 40 staff members despite the fact its own company is hemorrhaging cash.

The ravages on the American worker are obvious, and its pervasiveness has become an almost undeniable feature of the powerlessness of the current weakened labor movement, who without unions or protections, could walk into a skeleton crew in as quickly as a business day.

Well guess what folks, it’s coming to baseball! This was reported just five days ago in Bloomberg:

“Major League Baseball is now allowing investment funds to take minority stakes in multiple clubs, a move that lets the league capitalize on sky-high team valuations... One sports banker is already taking advantage of the change. Galatioto Sports Partners has created a $500 million vehicle -- the GSP Baseball Fund -- to invest in teams... Prior to creating GSP in 2005, Galatioto was managing director of sports advisory and finance at Lehman Brothers.”

Oh, Lehman Brothers, can’t see any issues with what happened with them post-2005! Regardless, the issues with this could be rife. While still sidelined as “minority investors”—so we won’t necessarily see a hostile takeover of a team—the implications for the worker or for the player’s union are obvious.

Let’s say a private equity firm seizes up to 40-45% of team ownership through buying shares of the team’s valuations, hoping to make returns on that with increasing valuations. They could institute sweeping changes through the ownership group to make their likely-leveraged-investment pay off even more dividends.

They could ensure the team is forced to comply with all luxury tax thresholds, for example. They could cut staff in the front office, or in development, operations, or stadium operations. We’re already seeing some cuts coming to the minor leagues, where early plans show up to 42 teams being eliminated under a consolidation plan. A private equity-run ownership could institute further consolidation and other underhanded tactics to break possible union-forming activities.

If privately-held, consistent ownership groups are already tightening the belts, there’s really no telling what anonymous ownership funds would be capable of pushing for or instituting, and unlike other industries, they would exist in an anti-trust-exempted setting where they could unilaterally set economic rules without Sherman Act interference.

Teams are already bought with debt, so I guess we should have some solace in knowing the horror is already here; ownership groups consistently mortgage their teams, like the Marlins, for example, forcing future owners to put more of their revenue towards debt than actual salary and operations. Private equity’s entrance into this would merely accelerate this process, and take already financially stable teams and turn them into the Toys R Us of baseball.