I don't follow baseball all that closely (except maybe in October), but this headline in the WSJ certainly caught my eye: The Padres Owe Fernando Tatis Jr. $340 Million. He Owes an Investment Fund Millions From His Payday.
Sure, $340 million is an impressive number...but what's really interesting is the second part of the headline. Four years ago, when he was 18 and just a (very) promising prospect, Tatis signed a contract with Big League Advance, an investment fund that pays "minor-league players money up front in exchange for a share of their future MLB earnings." Titas now owes BLA perhaps $30 million.
BLA is essentially a venture capital fund, but instead of investing in promising startups they invest in promising baseball prospects. It is run by Michael Schwimer, a former MLB pitcher, whose years in the minor leagues inspired him to start BLA to help struggling players. Minor league players are notoriously underpaid. A typical AAA ball player (one step below the Majors) makes around $2,500/ month-- but that's only during baseball season, so on an hourly level they actually make below minimum wage; it's by no means a glamorous life. By contrast the average MLB player makes $4.4 million/ year. Schwimer aims to help these players by investing in them today.
BLA uses advance predictive analytics (think Moneyball) to spit out a price per percentage point. For example, they may advance $100,000 for 1% of a player's MLB contract or $500,000 for 5%. BLA usually takes 8-10% stakes in a players' (potential) future big-league earnings, but can do less or more. So far, they have invested $150 million in nearly 350 players.
Problem is, only 10%-20% of minor league players make it to the "Show." So, like a VC fund, BLA will lose money on most investments--remember this not a loan, but an equity transaction; players owe nothing if they don't get a MLB contract...But every once in a while a homerun like the Titas deal will subsidize the other transactions and provide a nice return for BLA's investors. The below chart explains the basics (click to enlarge):
Like any financial innovation it works by transferring risk...from players to investors...All good, as long as the players fully understand what they are getting into. When you hit it big, giving up a nice chunk of pre-tax earning can hurt.
From an investor's point of view, it is quite attractive, because returns are truly uncorrelated. What happens in the S&P 500 is not really going to impact what happens in baseball. The exit environment is also less cyclical and investment horizons shorter...most players who make it to the MLB will do so within 3-4 years.
There are similar "income-sharing" mechanisms for university students. It's a fascinating topic (with multiple dynamics like majors and university rankings) that deserves it own post. There is also "income-pooling" from groups like Pando, which itself is a modern version of communal committees. All work on the same principle of risk-sharing. For now, it'll be interesting to see if this deal spurs more investments and in other sports as investors clamor for uncorrelated returns.
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