How private equity ate youth sports

0:00Noel King:Everything is more expensive these days, but many American parents will know that signing a kid up to play sports has gotten wildly expensive. Youth sports, it turns out, are big business. It is now estimated to be bringing in about$40 billion a year in revenue. That's about twice as much as the NFL. The tipping point came during the pandemic when the low-key, low-stress, cheap rec leagues shut down. Parks shut down and park and recreation budgets were cut. The private sector and private leagues and club teams and travel teams, they were able to get back up and running much quicker. The private teams that filled the gap are sometimes owned by big private equity firms like Bain Capital, whose chief goal is making a profit.

0:47Noel King:So now American families are buckling under the cost of uniforms and hotels and flights and apps and coaching. Is money wrecking youth sports? That's coming up on Today Explained from Vox.

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1:57Oh, today explained.

2:01Noel King:Caitlin Moscatello is a journalist and a contributor to New York Magazine. She recently wrote for NYMAG the pay-to-play childhood. It's this big piece about why youth sports have become so expensive, costing sometimes tens of thousands of dollars. It turns out the big money started with big money and private equity firms like KKR and Bain Capital buying up youth leagues. It was a little over a decade ago that you really start to see this influx of big money coming into the youth sports sector. And what you start to see right before and then certainly after COVID is investors using what's called a roll-up strategy, where they own or have a financial stake in different touch points that families would have in the sport that their child's playing.

2:54I shouldn't have to be freaking having to take out a loan to pay for my kids to play sports. One thing we can all agree upon is that youth sports, participating in youth sports is expensive. Volleyball monthly is$400. Who is doing that? So, for instance, they might have a stake in the league itself, but also the apparel company where families are required to buy the uniforms from. And the software or the app that families need to go on to look at the team's schedule and, in some cases, look at updated stats and standings. There can be a hotel partner, so then even though there's a less expensive hotel down the street, they're required to stay at this specific hotel.

3:46And there's also money to be made, even on what's being called the media side of all this. As parents described to me, you know, not being able to record video at their child's game, but then being sold a package of photos and videos, which, again, is just another financial touch point.

4:10How much are parents spending on sports, rough average? So the average spend is a little over$1 ,000 a year, but many of the families that I spoke with, especially in this travel private club sector, I mean, they can spend anywhere from$3 ,000 a season. It can be$5 ,000 or$10 ,000 a season, depending on the sport, where you are, the level of play. So there's a lot of factors there. I spoke with numerous families who were spending$25 ,000 or more a year. So there was one mother that I spoke with. She's a single mom. She was pet-sitting on the side in addition to her full-time job to help offset the cost of her son's$25 ,000 a year hockey program.

4:54And in fact, I also came across a lot of GoFundMes for families who are trying to get their six-year-old or their seven-year-old or their eight-year-old made the travel, you know, fill-in-the-blank soccer, baseball team, and their fundraising to make that happen.

5:09Noel King:And for your$25 ,000 or more a year or your$3 ,000 or your$5 ,000, what are you getting? Well, what are you getting? It's a loaded question. I mean, part of what's drawing families to this in some areas is that they really feel like they have no other choice. And so rec programs are sparse. They also don't extend as long as they used to. So I'm sort of an elder millennial, I guess I would say. Same, same. And, you know, back in, as with many of the parents I spoke with for the piece, and, you know, back in the 90s, it was still very much that you could play a rec sport through eighth grade. And then if you chose to go on and play in high school.

5:55And what's happening is that rec programs now are ending much earlier. in some places it can be difficult to find a rec program especially after I mean again this all varies but like after maybe third fourth grade and these programs are also getting diluted because the private leagues are incentivized to attract families earlier and earlier so now you start to see travel teams and even tryouts for kindergartners first graders second graders and what I was hearing from parents over and over again was that there was this fear of missing out. Like if, well, this isn't something I would necessarily choose for my kid, but there was a feeling like if we don't get in on the ground floor, the elevator is going to go up without us and we're never going to catch up and my kid won't be able to play.

6:48And everyone around me seems to be doing this now, so we're going to do it too. What this does to the rec programs is that it dilutes them really early and in a couple of ways. So one, it just brings the level of play down when kids start leaving in the first and second grade by third grade. I mean, the level of play, it is a bit lower and it also, there just aren't as many kids. And then the other factors that kids and parents both notice that these other leads exist. And so another thing that I kept hearing was, well, the rec program sort of felt second rate. And we're looking across the field.

7:27There was this one father, he's a lacrosse coach, and he has two children who now play travel lacrosse. And he's like, it's kind of hard when you look across the field and you see the kids with their shiny helmets and their fancy uniforms and their professional coach.

7:45Noel King:As you looked into what this is doing to kids, physically, psychologically, emotionally, what did you find all this money in youth sports is doing to the youths playing the sports? So the benefits of sports have been really well established. Kids who play sports have anything from higher levels of academic achievement to higher self-esteem, better long-term health outcomes. But ultimately, in their quest to do something good for their kids, the way the sports ecosystem has changed and is continuing to change can potentially set them up for long-term harm. It can be psychological, so they're seeing stress and anxiety, burnout, but also physical.

8:31There's sort of a surge of overuse injuries now in young athletes, especially because the private programs are incentivized, again, to get kids playing as much as possible. And so what's happening now is that you have young children playing in this hyper-competitive, year-round environment. And so instead of playing, the medical advice has said, oh, well, kids should play all different sports, use different muscles, you know, learn different skills. and that that's what's appropriate for young developing bodies, not playing one sport 10 to 12 months a year, tournaments on the weekends, six games, four games, practices three, four times a week, where then you see these overuse injuries because kids are just doing that same motion over and over again.

9:24Noel King:I read your story and I thought there could be a way out of this. And that is to say, more parents just say, we are not going to do this. We're going back to the rec league and there will be enough kids if enough of us decide we ain't going to do it anymore. And I wonder, am I being naive? Is there any movement among parents to stop this, to say, this has gone too far, let's not do it anymore? So this is a collective action problem, right? If more parents stayed in the rec programs, then we would have a more robust rec system. More kids play. It's more accessible. It's more affordable. It's also local and fun.

10:05I don't want to be so naive and think, oh, things could go back to the way they were in the 90s. I think in a way you kind of can't put like the toothpaste back in the tube entirely. But the good news is that we do have a model for a pathway forward. Minnesota Ice Hockey is a non-profit youth sports program, the core of which is 250 public rinks. The cost to play is about$200 to$400. Coaches are volunteers, but they are trained through USA hockey. And these kids play more in that rec model where they play with other kids from their community. And this is showing like real results. And you look at this program and there's 60 ,000 kids who play Minnesota ice hockey.

11:00And Minnesota produces more D1 men's and women's ice hockey players than any other state in the country.

11:12And really what this comes down to then is it's accessible to everyone. And so it's more of a meritocracy, right? Everyone gets to play and everyone gets to have fun. And then the kids who really do eventually show, you know, a high level of ability, they still get to play at that really competitive level because it's not diluted. And that has shown that it can produce like really amazing hockey players, but also while giving all these kids a good experience.

11:51Noel King:New York Magazine's Caitlin Moscatello. Coming up, private equity has a stake in way more areas of American life than you might realize. We're going to talk to a journalist who left her job when a private equity firm bought her company, and then she went on to write a book about it.

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15:48Okay, let's see here. Today. Today. Explained.

15:54Noel King:Explained. I'm Noelle King. Megan Greenwell is a freelance journalist. In 2019, Megan resigned as editor-in-chief of the sports site Deadspin after it was bought by a private equity company. She says the private equity firm made some big mistakes. She wrote a book about her experience and what she sees as the broader problems with private equity. It's called Bad Company, Private Equity and the Death of the American Dream. Private equity is involved in far more people's lives than I realized. So maybe it doesn't own your employer. Maybe it doesn't own your home. But it may very well own your dentist's office, your children's preschool, your kids' hockey league.

16:38Private equity is increasingly involved in overseeing like road management, bridges, municipal water systems. It's really there once you start turning over the stones. What is private equity? How does it work? So private equity is a system of financing that combines borrowed money with outside investor money to buy companies. So often when people talk about private equity, what they're talking about is called leveraged buyouts, which means that about 70 or 80 percent of the total deal price is just straight borrowed money. None of that is the investor money.

17:21the trick with private equity is that that 70 or 80 percent the amount that is loans the debt is applied not to the private equity firm that made the decision to take out those loans but only to the portfolio company so i can buy your company noel borrow you know a million dollars to do it. And only you are going to be responsible for paying that million dollars back, not me. So what you end up with is this weird split in incentives where what's good for me as the private equity owner is not necessarily what's good for you as my portfolio company. Every few months, it feels like there's a new industry where private equity has popped up and all of a sudden become really, really big.

18:09I wrote about retail in my book, which private equity for the most part, is not even really in retail anymore. But you can see in the retail story I wrote about Toys R Us, which was a previous story that really captured the public's imagination. And what you can see through that story is private equity firms sort of setting the stage, creating the playbook, essentially, that they would later apply in all of these other industries.

18:37Noel King:Tell me what happened with Toys R Us. So Toys R Us was bought in 2005 by two private equity firms and a real estate investment trust. And they really used some classic private equity firm strategies. So, for example, Toys R Us had always owned most of its own real estate underneath its stores. the private equity firms came in and sold off all of its real estate and then started charging the company rent for the exact same plots of land they once owned. So now Toys R Us is saddled under about$5 billion worth of debt. Plus, they are also paying all of these rent payments for all of their stores.

19:21Toys R Us says 1 ,600 locations will remain open for business despite filing for bankruptcy. A company spokesperson insisting to us this is a balance sheet issue, not a business issue. So then Amazon comes along and the conventional wisdom about Toys R Us has always been that Amazon killed it, which is not entirely untrue. Many retailers had a tough time keeping up once Amazon became totally dominant. But what complicates the picture is that Toys R Us no longer had the financial wiggle room to attempt to compete. The end of an era, one of the most recognizable names in American retail is closing its doors today.

20:02The end will mean the loss of 30 ,000 jobs nationwide and gift cards that will only be good for the next 30 days. It's an ending many hoped would never come.

20:13Noel King:In the case of Toys R Us, how did the private equity firm end up making money? The basic private equity payment structure is known as two in 20. The 20 is you get 20 percent of all profits. But the 2 % means 2 % of the total value of the deal every single year just as a management fee. So even if you're in the process of driving the company into the ground, which is not an uncommon scenario, you're getting that 2%. 2 % of a$6 billion deal is pretty good. There was a good analysis when Toys R Us liquidated saying that it was clear that Bain Capital and KKR, who were the two private equity owners of Toys R Us, did make money over the life of that deal.

21:01The risk is only there for the workers and the customers who depend on whatever the business is.

21:09Noel King:Who are the investors? Is this something where I could be an investor and I don't actually know it? historically, the investors were sovereign wealth funds, public pension funds, you know, ultra wealthy individuals, credited investors. Just last year, the Trump administration modified the rules such that now 401k money can be invested in private equity. So pretty soon, it will be entirely possible that if you have a 401k, your money might be invested in private equity. And you don't even know it because who is paying close attention to exactly what the split of their 401k balance is. So there is a trend generally toward more and more openness to getting regular people's money involved in private equity, whereas historically, this was thought to be more risky, right?

22:05And so historically, there was a thought that regular people needed some protection from that. Now that is starting to change, and I think you will see more ways in which ordinary Americans' money is tied up in private equity.

22:20Noel King:You mentioned what I think of as a lot of rich people, people who have the money to invest in private equity. But you also said pension funds are invested in private equity. My mom, for example, has a pension. She certainly isn't a rich person. Why would pension funds invest in private equity? And how does it benefit people on pensions? Public pension funds have been one of the most reliable sources of capital for private equity for decades. And the research is really mixed as to whether they get better returns from private equity than they would out of just going with mutual funds, right? There is research that says, yes, private equity is absolutely a good deal for public pension funds.