Pro Sports’ Private Equity Pickle

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1:01congratulations you made the varsity the podcast my name is john arand and i'm pucks sports correspondent and host of this pod and today jason stein joins the pod now jason is the managing partner of sc holdings an investment firm that financially backs entrepreneurs looking to get into sports earlier this month he was part of an investment in major league pickleball, an investment that saw Apollo Sports invest$225 million into the league. So we're going to talk about how Jason invests, what he looks for before he commits capital. And yes, I'm going to voice my skepticism on the business of pickleball.

1:41You're really going to enjoy this one. But before we get to Jason, today is Wednesday, May 13th, and here's what I'm watching. It's Upfront Week in New York this week. That's the week that TV networks and now streaming companies give lavish presentations to ad buyers in the hopes that they will commit to buy ads on all of their shows. Now, for the past decade, at least, sports has become a bigger part of these presentations, which is weird. These presentations used to focus on entertainment, describing shows that are launching and trotting out TV stars. After all, ad buyers don't need the NFL to be explained to them.

2:18They know what it is. They know what the World Series is. But now, All of the networks are eager to trot out Roger Goodell or one of the all-stars. Last year, the NFL commissioner showed up at the Netflix presentation wearing a Santa-themed coat, in fact. In its Monday presentation, NBC made a point to highlight that Sunday Night Football is the most viewed series on primetime television for 15 consecutive years. And they're not alone in backing the NFL. Fox highlighted their Sunday afternoon ratings. ESPN made the Super Bowl a big part of its presentation. It's not by accident that the NFL will release its schedule this week.

2:55That's the linchpin for how networks sell the rest of their schedule. Networks love to have the schedule, of course, but the truth is they barely need it. The networks typically have multi-year deals with enough NFL advertisers so that they go into the week with around 35 % of ad inventory pre-sold. And by the time the upfronts wrap up, the networks usually find their advertising inventory is 80 to 85 % sold. So if you ever need to see just how powerful the NFL is in the current media environment, just take a look at one of the broadcasters' upfront presentations. It's hard to envision any one of these companies ever allowing the NFL to leave.

3:34Okay, now let's get to Jason Stein. Jason, first of all, thank you very much for joining the pod. You're somebody that's spent his career pretty much finding places to invest in and seeing investments in the sports business. So before we get into your specific investments and, you know, where you where you think, you know, the right place is to to invest in and within sports. How do you view how do you make your investment decisions? What what what are you looking for in typically sort of moving into it? Thanks for having me on, John. Good to be here. I'm a long-time listener and reader, so I appreciate being on.

4:19Long time fast time. Love it. Going back to my WFAN 660 AM days, Mike and the Mad Dog. Look, I'm an entrepreneur, and I build businesses in the sports and entertainment space, and I've been doing it for the last nearly 20 years. and investing is just a mechanism for me and my partners to find businesses that we love in sports and entertainment and help entrepreneurs build them or create them ourselves and bring in great operators to work with so i would say it first starts with passion and where passion makes opportunities where we try to live and whether that's youth basketball or cycling with um you know, Canyon Bikes, which is one of our acquisitions that we've done with Ron and Maverick or Health and Wellness with Athletic Greens or buying a Sanitam on a computer because it's fun and it's iconic and it's Americana.

5:18That's really where we try to live. Obviously, you need to have good unit economics and good financials and opportunities for growth and areas where we can lean in. But it really starts with that. What are areas in sports and entertainment that are making a positive impact on the world where we are really excited about leaning in and helping because we are builders of businesses. I think that's what separates us as a private equity firm is we're really entrepreneurs and operators first. And we've spent most of our careers doing that. And we happen to now have access to capital to deploy into helping these other businesses.

5:52I love the idea of, you know, you're following your passions and getting your passions. Have you invested in anything that you weren't necessarily passionate about? I've made the mistake a couple of times. I'm not going to say what those businesses were, but look, building a business is really, really hard and you got to grind it out every day, whether you're the investor or the entrepreneur. In the best case scenario, it's going to be brutal right you're gonna you're gonna fight and claw and get your ass kicked every single day and you wake up and you eat that's what i always say i do for a living and then one day something good happens hopefully right that's the best case scenario um if you don't really really really love what it is that you're pursuing or working in or the people in that space or the community that you're you're building with i don't think you have a shot i don't think you have a shot um but sometimes doesn't passion kind of hurt a little bit like you like it clouds you i'm so passionate about this that i i see something moving forward how do you guard against that uh in in the earlier days as an entrepreneur before i had an investment firm when i was building my own businesses it happened all the time and i think what allows me to be a good investor today is the fact that i've made so many mistakes as an entrepreneur when i was younger right my first two businesses we built from zero to 600 people over five years and six offices in the US and Europe.

7:21They were in sports and entertainment space doing content creation and distribution for Fortune 500 brands like Nike, Apple and Amazon, as well as long form original programming for ESPN and ESPN Plus when it first came out where we had development deals as well as Eurosport Discovery in Europe. I made a lot of mistakes as we built those businesses like every entrepreneur does and and it's just a matter of what does it take to scale how many people do you need what does hr need to look like what is your infrastructure what are your processes what are all the ways to do it wrong um and so what we do today is try to help entrepreneurs see around those corners and we're able to separate um passion and and opportunity in our minds and know when we need to be the ones to be a little more cerebral and and calm in order to work well with with the operator operating is really hard operating is is too hard for me that's why i became an investor you you got to grind all day every day you're fighting hand-to-hand combat with with clients employees competitors um it's something 24 7 and so our job now is to really support those uh support those operators as much as we can in the commerce state that's a funny years ago, 20 years ago, I was going on in the editor track and I realized I hate having people report to me.

8:47I made that a pretty similar decision. I just want to be a reporter. I want to be somebody else's problem. Yeah. And just kind of, I agree. When I had 600 employees, when we had 600 employees, I realized I don't actually do anything anymore. I just talk to people and hear about the problems that we have. Right. I wasn't being strategic. I wasn't being thoughtful, I wasn't using vision. You weren't really able to execute on the things that moved the needle, at least for me in the industry that I was in. And now we have thousands of employees across our portfolio, but in our office, we have 20 people sitting there working, looking at every single detail of every business and then working with the operators every day.

9:28And for me, that's better. But the people I really admire are like the Elon Musk of the world, right, where he's got thousands and thousands of people in these massive operations and he's able to stay super focused on actually doing the work that matters those are the world-class operators that you really want to work with and still operate like an entrepreneur so as so as you look at these people that come in they're entrepreneurs they're following their passions what are the most common mistakes that they make in the in the early part of the process they're trying to do too much that i would say the biggest thing that I do every day is say no to things, say no to great ideas.

10:06When a founder or CEO comes to us, says, we got to do this thing. Look at this company we should buy. Look at this new product we should do. It's really hard to do a lot of things really well when you're a smaller growing business and you're not fully capitalized and you don't have the CapEx capabilities of these hyperscalers today. You got to be really, really thoughtful on how you use your time as the entrepreneur. So I think that's the biggest thing that is just, we try to keep the train on the tracks and keep the main thing, the main thing as, as LeBron would say. One of the trends that I keep writing about is the growth of PE in sports.

10:44And it seems like, like, like there's so much PE right now. Is, is there, is it overcrowded right now? How would you describe the private equity market within sports? I don't think it's overcrowded. I think it's just the beginning. It's the earlier innings. Sports as an asset class is absolutely massive now. And it's just becoming commercialized and institutionalized in a really thoughtful and meaningful way. And I think it's a good thing. I think it it makes the opportunities more puts a lot more resources and sophistication around things. For example, let's look at the NCAA. Right. They're starting to do deals with private equity.

11:34We're talking about academic institutions that are not commercial animals, that do not have sponsorship salespeople and media rights people and agents and dealmakers around the table here. These institutions are largely board members and professors and coaches. And I think the ability to turn NCAA sports into professional sports, which is one of the big trends we're going to see, trickle down from pro to college to high school to, in many cases, youth sports around the world. I think it's going to be a good thing, but I don't think it's too much. Also, a lot of the money coming in has gone toward team ownership when you look at it, right?

12:20the Arctoses of the world, which did a brilliant job creating that model and the Blue Owls, buying minority stakes in teams. There hasn't been a ton of money that's gone into the operating businesses around sports and the facilities and the technologies and so forth. And I think that's where you're going to start to see a lot more of the money start to flow where there's real cash flow and growth opportunities as opposed to buying a trophy asset that may or may not be making money in a professional sports team that grows at a premium to, you know, indexes or inflation for the most part, not always, but real operating companies.

12:58That's where we try to play. Yeah, I'm always so surprised at seeing how so much PE is going into professional sports team ownership, because that does seem like kind of like what we were talking about earlier, following your passion in a way that, you know, you generally have little control and you just are watching. uh you may as well put you know in the s p 500 or something like that it seems s p 500 is a lot less fun than than owning professional sports team for sure there's not much to do with it and um look if you buy right you're gonna you're gonna beat the indexes by a lot look at look at the 76ers ownership right when when josh harris and david blitzer and and and crew bought in i think it was 250 million dollar valuation um look where we are today, right?

13:49Over 20 times that, arguably 30 times that for a return is better than you're going to see in an index, better than you're going to see at a venture firm or private equity firm for the most part. And so that's the fun, right? You're buying a trophy asset. You're going to have a lot of fun doing it. You're not going to lose money historically that that's you know what what generally hasn't happened you'd have to really screw up to have bought a sports team over the last 10 years and and it depreciated in value um and you might hit a bit and it might keep growing like like it is today and in this ai world we're living in now where everything is disruptable i think sports and and physical entertainment properties that concerts amusement parks are um are the probably the safest place you could put your money at this point.

14:46You referenced, I want to talk about youth sports because I know that's something that you're big into right now, but you referenced college and, you know, the Big 12 just did a deal and a lot of places, a lot of schools and conferences are looking at adding PE. What is that, to your mind, what is that going to look like?

15:11it's going to change a lot and we don't know what it's going to look like in its entirety yet, but I think these schools need to become businesses. In order to become businesses, especially these athletic departments, you need two things. You need access to a significant amount of capital, right? If you need to build a stadium, build a facility, build a sales team, build your own streaming opportunities like what Duke is doing with Amazon today, It takes a lot of sophistication and a lot of horsepower around the table and a lot of capital. So bringing in partners who can help on that, I think, is what you're going to start to see.

15:48Whether these are structured as credit or convertible debt or equity is to be determined. But you're sitting on massive brands and massive businesses that could be as big in valuation as a lot of these sports teams. When you think about the amount of fandom they have, the passion that they have with fandom, the longevity of these fans, I think, exceeds and the passion exceeds a lot of professional sports in a lot of cases because you go to school or you grow up in this area and you become obsessed with this team and then you went to that school. So, you know, I'm a Duke basketball fan because my dad went to Duke and now my kid's a Duke fan because I became a fan of them for that reason.

16:29And it goes on and on generationally. And you have college towns that are rabid about this stuff 24-7. So I think, could you see an athletic department or a college football team or college basketball team be worth on similar levels as some of these pro sports teams if you really commercialize it and build for five or 10 years? Yeah, I think they're sitting on multibillion dollar assets that are still functioning as part of an academic institution and slowly, slowly starting to find their way out of it. So Jason, just help me out in terms of what you mean by commercialized. Is it better media deals, more complete sponsored deals?

17:08How would you professionalize the college space right now? Where do you see growth? you you have bigger better um media rights deals again i think this what duke and amazon are starting to do and create a lot of disruption and controversy is is really interesting in the beginning of what you can start to see with schools saying i should own my media rights right right or or our conference should have a better bigger media rights deal the way um you know a league does or maybe all the conferences should come together and aggregate. I mean, it can go in either way. You're going to bundle and unbundle over and over, like in all media.

17:46But that's obviously the biggest needle mover in sports is the media rights deal. And I think there's a lot being left on the table in college sports. Then there's the ability to have direct-to-consumer streaming for your biggest fans, like what a local team might have, like what the Knicks have done here in New York or any of the pro sports team who've gone direct to consumer and had had some success charging a lot of money to the biggest fans locally to be able to access more and more of the team content. I think you'll start to see that. That's not a cheap proposition by any means. The integration of sponsors into the programs in a much deeper way is, there's a lot left on the table there.

18:28Each one of these programs should be their own media company telling documentary stories around all of their athletes 24-7 like drive to survive on on steroids for these programs is is another one um i think how you monetize the athletes nil and what you're paying them and what it drives for your school or for your brand is is in its infancy a lot because of the the red tape and rules much of which is is still silly despite making huge strides in the right direction um those those Those deals are going to increase more and more in size and amounts paid to players. If a great college basketball team has a salary cap of$15 million today, then that's only going to grow.

19:16And you need to figure out what you do with that name, image, and likeness for those players and for your school to drive value. So it's really everything across the board, but it starts with having the right team and people around the table. Well, the other area is facilities and stadiums, right? You could sell more tickets if you have a bigger arena in basketball. A lot of these college arenas are pretty small and constantly sold out, not the way they don't have the space and size that football does in basketball, just as one example. So I think there's a lot you can do in facilities and building facilities that become businesses, not just a place that you play a game for a few times in a month during the season.

20:00but a place where you could actually monetize that year-round as a community facility for gyms, athletic development, sponsorship opportunities, event hosting, and so forth.

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21:37Or how do you scale that down? Because you have a – this is going to be the fun part of the conversation because you just did a big investment in pickleball. when I've been pitched for a decade on pickleball being the next big story. The same with youth sports. People always talk about that as being sort of the next big wave, and then it's so hard to sort of scale that out, it seems. What are you seeing in youth sports? Sure, and I'm glad I wrote the fun part because, honestly, one of my biggest indicators I want to seriously consider investing in something is when media is at its peak of skepticism in that category.

22:23And if you look across history, it's a pretty good indicator of the time to buy. If you look at Apple, at the headlines about Apple in 2008, if you look at Facebook when it first IPO'd and the skepticism about mobile ads and social media ads not working, those are the best times to buy. In the cases of, let's start with Pickleball, we announced last week that Apollo has made a$225 million investment into Pickleball Inc., which is the holding company for our professional Pickleball assets, which is Major League Pickleball and the PPA Tour, our amateur Pickleball event operator, which is the biggest operator of amateur events in the country, Pickleball Central, which is a large scale retail and e-commerce platform for pickleball.

23:13Pickleball.com, which is the biggest digital media property for pickleball in the country, and all the technology that drives that. So you have a full stack sports platform and sports league for the first time I've ever seen in sports. Maybe UFC is the closest thing to it, which is you know, the whole opinion for new emerging sports leagues. And it's doing, you know, we announced over$140 million of revenue just three years into this platform. So you have a full scale, full stack pro sports platform that everyone thought was the worst idea ever. Bill Simmons has publicly tweeted about it being when we when we bought our team, we bought one of the first teams um and it was announced that lebron was buying the team with us and a few of our friends rameon green and kevin lob and then a few weeks after that kevin durant bought a team and then tom brady bought a team and then um the owners of the orlando magic bought a team and trey young bought into a team and and there was a lot of skepticism and cynicism about the sport is this a real sport or is anyone going to watch it uh it wasn't questions they were saying it's not a real sport and nobody's going to watch it.

24:30And at the time, teams were valued around a million dollars. They're well into the high teens now, just a couple of years later. And on TV as a TV property in January, the PPA tour, which is the equivalent of the tennis tour for pickleball, was on CBS and had about 800 ,000 live unique concurrent viewers, which beat an NBA game on prime at the same time it beat ncaa top 25 basketball it beat epl matches so the answer is yes it's it's being watched and um this is a real platform now and and it has a long way to go and we have huge ambitions for what's going to come next as you build it out into a real media property but when you have 25 million people in the u.s alone playing a sport you have an opportunity because participation drives viewership outside of the nfl which is an outlier if you look at cricket in india you look at soccer around the world it's participation drives viewership and there is mass participation i think it's the number one participation sport in the country so we just saw a lot of data that that pointed to a big opportunity uh apollo um tom dundon the port portland trailblazers owner is as part of not dumb people uh jumping on part of it so So that has made me take a second look.

25:59But there are, well, let's just stick with pickleball. I was going to say there are a lot of sports. Participation doesn't always equal TV viewership. And so I guess my question to you is like, where is the growth here? Is it a media play? Is it trying to set up a league type play? how are you viewing your investment in pickleball yes it's really all the above the major league pickleball which is the team-based league that is owned by pickleball inc has 20 plus teams in and a lot of high profile sports team owners that own teams in many other leagues and a lot of fandom around that and absolutely turning this into a media property is is the goal and the focus as it is for any sports league.

26:51And, you know, we just released a documentary series on Amazon called Partners, which is about the partners in pickleball because it's largely, in many ways, a double sport. And it got over a million views in its first 48 hours on TV. So I think you're seeing that drive to survive element of like, whoa, what does it mean to make a million dollars a year playing professional pickleball? Who are these people? And see a lot of character-driven storytelling, which drives more and more interest across social media and a media property the other interesting thing about pickleball that i think people don't appreciate who haven't watched it is that it's it's co-ed you have mixed doubles in the in many of the formats on tour and in the league and so you you have a case like i remember a year ago i was watching a match annalee waters who is arguably the best pickleball player in the world i think she's 18 years old now she was 17 years old at the time she just signed a nike endorsement deal was playing against the alpha male who had been around for a while tyson mcguffin he's 30 plus covered in tattoos has a mullet drinks a beer after the game and they're screaming at each other on the court going back and forth talking shit to each other and she won and she didn't back down at all and i think this is one of the only sports where you have that kind of dynamic of you know of men and women competing all ages competing and anyone could win at any given time and and it's intense and and i think that makes it really fun from a media perspective right like i'm not saying this for you know the purpose of checking a box on on gender equity i happen to enjoy watching women's sports but that's not what i'm saying i'm saying it's super interesting to watch that dynamic play out on live tv or in person at these events ticketing is a huge part of it people you know we do the amateur events around the professional events so if you're in a city for a week or two for for our tour stop and then we're also having amateur events there so now you have of those 24 million people they're coming to the same venues the same locations competing themselves to be the best of the level right below professional pickleball buying merge meeting with the players sometimes playing with them becoming fans of the sport and the league and that's why when i say thinking about emerging sports leagues as full stack platforms with amateur events, professional sports, retail and e-commerce and direct to consumer streaming, which we also have.

29:14We have Pickleball TV. It's a partnership with the Tennis Channel. We went direct to consumer before we tried to make a media rights deal so we could capture our customers and have a deeper relationship with them. And then over time, put premier events on streaming. So I'm trying to get myself in the mind of an investor and sort of as as you move forward with your pickleball investment are it is there a uh do you look at other leagues is there another league rail here is this something that you just kind of are you don't want to want to be uh distracted by the noise of those other leagues and you want to just move forward on your own like who's doing something well that you want this pickleball investment to turn into

30:04it's a great question i i look at dana white and ufc as the holy grail and i think they're incredible operators i think they have done the best job of owning exactly who they are being authentic completely controlling the narrative and storytelling of of their um their athletes and their league and creating you know drama around the narratives of who's fighting who and and so forth um and and just being in it for the long haul and grinding like you talk about how hard building things is like that wasn't an easy thing to do it took a long time there was skepticism everywhere that you looked um if you if you ever go back and watch the first ufc fight on youtube which i did it gives you a huge amount of insight into how much sports leagues evolve over time if you stick with it and continue investing in the product because it wasn't good like it it didn't look anything like what it didn't look like anything media values and production values are always what suffered the most in the early days of sports leagues because you don't have enough to invest in doing it really well and you don't necessarily know how to capture it in in the best format uh it looked nothing like what you see as ufc today in in in the cage it looked like a um sort of like a b-level wwe fight you couldn't tell if they were really fighting each other They were different sizes.

31:23There was no sort of specific type of combat that they were using. I think you had like a wrestler or a boxer both trying to fight each other in their formats at the same time. Things change a lot over time when you can start investing in the production and the product and learn what customers and fans and community care about the most at the in-person and the TV or streaming viewing. of the property so i think i think they've done a an amazing job i think that you are going to see more and more emerging sports leagues come out of the us and globally that um that emulate those types of models where you're not trying to fit into the traditional landscape of how it was done at an NBA or NFL or MLB, which are great fully scaled platforms, but trying to create new things with new monetization levers and new relationships with customers and not being corporate or politically correct or safe or following a traditional sort of collective bargaining agreement where rookies have to get paid a certain amount and older players get paid more and and and you can't own equity in the team and you can't own equity in the leagues if you're a player and and create models that are athlete first and media first and storytelling first today right like the way that adam silver talks versus dana white talks is very different right and they're both amazing in in their thing that what's authentic for their league and who they're trying to be uh and i and i think you'll start to see see those things come out more and personality-driven leagues and personality-driven commissioners and owners is a powerful tool in this sort of creator economy, influencer-driven world.

33:18So I like that. And I think when you talk about college sports and you talk about elite high school sports around the world, you're going to see more and more emerging leagues step into those opportunities that traditional leagues avoided because of NCAA regulations and NIL regulations that no longer exist. So I do want to talk about the high school sports and youth sports. Every couple of years, somebody finally convinces me, do a story. It's the next big thing. We're going to do high school sports. And ESPN does a deal and it gets very little viewership on it. You referenced your dad went to Duke, and so you didn't go to Duke, but you're still a Duke fan.