SBJ/September 27 - October 3, 2004/SBJ In Depth

Limited partnership, unlimited goals

It didn’t take long for Jorge de Cespedes to see a return on his investment in the Charlotte Bobcats. Before the team has even played its first game, he and his brother, Carlos, have launched a new company with Bobcats majority owner Robert Johnson, a man they didn’t know before they started talking to him about joining his ownership group.

The benefits of ownership won’t stop there, de Cespedes believes. There will be other deals with other new associates, and, years or decades from now, de Cespedes might realize his ultimate dream: to be the owner of the first NBA franchise in Cuba.

Brothers Jorge and Carlos de Cespedes say their decision to buy a stake in the Charlotte Bobcats has paid off with other business opportunities.
A long shot? Sure. But then you’re talking about a guy who immigrated to the United States from Cuba in 1961, when he was 8 years old, with only his 11-year-old brother for company. Their parents couldn’t join them for five years, by which time the de Cespedes brothers had long been entrepreneurs.

Jorge, for instance, earned money by ghost-writing letters for other boys at the Catholic institution where he spent his first years in America. A boy could earn an allowance of $1.40 a week just by writing home. A lot of boys were too unmotivated to do even that, so Jorge wrote letters and charged 25 cents for them.

By the time Johnson began taking on investors some 40 years later, Jorge and Carlos were the wealthy owners of Pharmed Group, a $600 million health care company based in Miami, and were ready to write a multimillion-dollar check.

There are plenty of reasons for people to buy into a sports franchise, even when they won’t be the person running it. The three reasons most often cited all apply to Jorge de Cespedes. First, he’s getting an insider’s view into what it takes to run a team, knowledge that will serve him well if he ever does become the majority owner of a team in Cuba, or anywhere else. Second, he’s already making business deals with people he met through the team, even though it hasn’t started its first season.

And finally, he’s looking forward to sitting in the owner’s box at NBA games and watching a sports franchise that he is a part of play before thousands of hopefully happy fans.

There are plenty of stories out there about partnerships gone bad. Marge Schott and her partners in the Cincinnati Reds had a public falling-out that ended with the sale of the team. Florida Marlins owner Jeffrey Loria is being sued by his former partners in the Montreal Expos, who didn’t want the team sold to Major League Baseball.

More often, though, becoming a limited partner in a sports franchise means joining an exclusive club in which membership carries a hefty price tag but brings big rewards.

Learning the ropes

Baseball fan John Henry owned a Class AAA team when he got the chance to buy a small piece of the Yankees in 1991.

He wasn’t looking for the limelight that comes with control of a top sports franchise, just a chance to rub the right shoulders.

“The motivation at that time was to be a part of a major league organization,” said Henry, now owner of the Boston Red Sox, in an e-mail exchange for this story. “I had recently moved from California to the East. I felt it was a great way to meet Easterners.”

It also turned out to be a great prep school for Henry, who would later become sole owner of the Marlins before leading the investment group that bought the Red Sox. When Henry joined the Yankees, they were far from being the influential franchise that they are today. Not only was the team struggling on the field, but owner George Steinbrenner had been suspended by Commissioner Fay Vincent.

“The Yankees were a pretty bad team when I became a partner,” Henry said. “The organization was somewhat in disarray. I was able to watch from the inside the transformation into a powerhouse.”

De Cespedes is hopeful he’ll have the same experience as Henry, eventually putting what he learns as a limited partner into practice as a controlling partner of a franchise.

“My pipe dream is that someday, if the NBA chooses to put a franchise in Havana, I would be considered for ownership of that,” de Cespedes said. “In the meantime, very few people can make the statement that they own an NBA team.”

Getting into the flow

One of the enticements that persuaded de Cespedes to join the Bobcats was the chance for early returns on his investment. The presence of C-SET, the regional cable television sports network that Johnson formed as part of the Bobcats, was one element of that.

Other sports investments that de Cespedes had considered hadn’t had the potential for such spin-off business.

“None of the things that we looked at before had some of the offshoots that appear to be very sexy,” he said. “We found that very exciting. Don’t forget that the percentage that we own of the Bobcats, we own that same percentage of C-SET, as well.”

Finding ways to make money outside their usual business circles is a big attraction for many of the people who buy into sports franchises, said Jim Nash, who heads Bank of America’s sports finance group and has helped establish many connections between teams and potential owners.

“Most investors are successful business people still active in other businesses,” he said. “Being able to sit in the owner’s suite and bring in family members and business associates allows them to transfer some of the sizzle of this business to their professional and personal relationships.”

De Cespedes found that to be true beginning with his first meetings as an owner of the team.

“The deal flow that comes at this level is unbelievable,” he said. “All of a sudden, you’re part of a very select club. You start getting to know some of the other minority owners, and some of the majority owners, and you hear about this real estate deal and that other deal that if you weren’t part of the club, you’d never hear about. That makes it financially worthwhile right from the start.”

Case in point: Johnson and the de Cespedes brothers are partners in a 2-month-old division of Pharmed that is targeting sales to government agencies in eight cities.

“That’s an opportunity that never would have presented itself had we not made the investment in the Bobcats,” de Cespedes said.

Psychic rewards

Tom McEnery was mayor of San Jose when the San Jose Sharks joined the NHL as an expansion team in 1991.

Tom McEnery (left) and Greg Jamison pose at a news conference in 2002 where they announced that a group of local investors had purchased the San Jose Sharks.
A few years later, when the team came up for sale, McEnery, by then back in the private sector, joined a group of area investors who wanted to make sure the Sharks were owned by people who cared about the region.

“We wanted to make sure it was a bunch of people who had the right goals and mission,” he said. “We thought we did, and that’s why we put it together.”

McEnery said he and the other team owners try to put a strong emphasis on having the Sharks be active philanthropically in the region, and to make sure that everyone associated with the team buys into that idea.

“So you have a group of people who kind of have the same mission, and they understand that the business has to be profitable in order to do the mission well,” he said.

Despite the highs and lows that come with competition, McEnery said he has never regretted becoming an owner of the team.

“What I’ve found is that it kind of gives you greater satisfaction and enjoyment than the sum of its parts,” he said. “It’s like life. You’re gonna find a lot of knocks in it, and a lot of things that cause you some level of anguish, but the benefits are tremendous, not only from the people you’re associated with, but from what a sports team means to a community.”

De Cespedes describes himself as a sports fan in general, and a “major” basketball fan who has coached at both the high school and college levels. Finding ways to make money as a team owner is great, he said, but there’s no sense investing in sports over other, potentially more lucrative businesses, if the association with the game isn’t going to bring you joy. The Miami resident is setting up an apartment in Charlotte and plans to spend a lot of time there cheering the team with the locals.

“I don’t believe that anybody invests in a team unless there’s a love of sports there,” de Cespedes said. “I couldn’t justify putting the many millions of dollars that we put into the Bobcats strictly as an investment. I’m sure I could do better in real estate. I’m sure I could do better in a lot of other things.”

Many happy returns

“I’ve never sat down with a potential owner who did not have a profit motive in mind,” said Elliott McCabe,

who works with Nash as a managing director of Bank of America’s sports finance group. “There are some situations where teams can be money losers, but the owners have done quite well, and in terms of investing they couldn’t have done any better.”

In other words, McCabe said, sports teams aren’t toys for rich people. They are stable investments that generally bring good returns with little volatility.

When Bank of America helped Daniel Snyder bring in minority investors for the Washington Redskins, McCabe said, equity markets were in the doldrums and there were a lot of geopolitical concerns. But the price at which the new partners bought in still pushed the valuation of the team to the $1 billion mark.

Looking at data over the last 20 years, Nash added, you can see 10 to 11 percent annual returns for sports franchises in general, “and that doesn’t include tax benefits, psychic returns and the benefits of association.”

Still, from a financial standpoint, the real benefits of a stake in a sport franchise generally aren’t realized unless the team is sold, which is what made the added bonus of a television network attractive to de Cespedes.

“C-SET is an opportunity to maybe recoup some of our investment earlier, rather than waiting for a transaction on the team itself, which may not happen in our lifetime,” he said. “Some sports teams wait many, many years to be sold, and some have never been sold.”

Will sports teams continue to be good investments? Several things are working in their favor. One is the number of people who want to be owners, and who have the wherewithal to do so. Another is the continued growth of television revenue. Even as sports’ share of the total audience shrinks as viewing choices expand, there’s still no better way to target a sizable chunk of viewers in the right demographic.

“These iconic properties become even more valuable in a fragmented world,” Nash said.

Jim Renacci, who had worked tirelessly to bring the AFL Destroyers to Columbus even before

Owners of the Arena Football League's Columbus Destroyers include (from left to right), Mike Priest, Joey Galloway, John H. McConnell, Steve Germain and Jim Renacci.
deciding to join the ownership team, was attracted to the investment because he’s a lifelong sports fan, but added that he could have justified it as a business play alone.

“I believe the AFL is, as many have said, the fifth major sport,” he said. “I truly believe that the value of the franchise will continue to increase as we continue to grow and increase sponsorships.”

Joining the club

The first step to joining this exclusive club is getting your name on a list of prospective owners. There are quite a few of those lists floating around.

Investment bankers spend a lot of time growing and pruning their list of potential investors, though they often find that owners have a pretty good idea of who they want to be in their group.

In addition, there’s a steady parade of people going through the office of most sports commissioners, Nash said, and most commissioners have their own list of people they’d like to see join the ranks of owners.

Once a person makes the short list of potential investors, both sides interview the other to determine compatibility.

The team and league want to know that there’s nothing suspect in a person’s background, financially or personally.

“It’s very awkward,” McCabe said. “We’ve got to sell the investment, but you’ve got to prove to us that you qualify. We make it clear to them that they’re going to have to open the kimono.”

Investors, on the other hand, generally want to know what they’ll get for their money besides a certain percentage of the team. They know they won’t run the show, but will they at least play a part in it?

“If you don’t have a vote, you’d better be compatible philosophically,” Nash said.

Jorge de Cespedes and his brother considered investments in all three of the other major team sports before buying into the Bobcats.

“If you’re going to be a minority owner, there’s got to be some chemistry,” he said. “In Bob Johnson, that was clearly the case, and it had never been the case before. Even though ultimately everyone knows that Bob calls the shots, he does have an open door and open ear policy.”

Henry said that feeling of being involved was important to him when he was a limited partner in the Yankees.

“You have access,” Henry said. “The feeling of ‘owning’ is palpable. There wasn’t a lot to complain about. Some of the partners traveled during the playoffs and we were there for clubhouse celebrations. We loved it.”

Beyond participation, though, a potential investor also should get a good idea of how the business is going to be run.

“The key is to do your due diligence,” Renacci said. “Understand that this is something that is a little different than the normal business venture. The basic premise is the same: You have to have enough revenues to pay expenses. The problem that I have really come to find is that in major league sports the ticket prices do not pay the bills.”

When all the interviews are done, and an owner and investor find that they can get along together, what does it take to buy into a club at the major league level?

An investment of a million dollars or so is possible, McCabe said, though with valuations continuing to rise, that’s becoming less frequent. Owners generally want to keep it to a tight-knit group, which makes each individual stake worth more money, making tens of millions of dollars a more likely sum.

Finally, when it’s time to write the check, one more thought should go through your mind.

“If you think you’re going to need that capital any time soon,” de Cespedes said, “don’t do it.”

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