Money Stuff: Sports Team Owners Like to Win

Professional sports present an unusual financial puzzle, in that they reward finding clever ways to lose money. Most owners of companies would prefer to make a profit, and probably most owners of sports teams would also prefer to make a profit, but there are other prizes in sports, and some owners of sports teams do not care that much about profit. Some owners would prefer to lose money and win a championship, because winning a championship is cool and fun and why you probably got into sports ownership in the first place. But only one team can win the championship in each competition, and athletes are expensive, and it would be bad for the owners collectively if they all spent too freely trying to win.

And so many big professional sports leagues have rules — salary caps in most US leagues, [1]  financial sustainability rules in European soccer — to prevent teams from spending too much money on their athletes. And then there are some owners who (1) have more money than the other owners, (2) really want to win and (3) have achieved their financial success in part by, you know, understanding all of the possible paths around a rule. And those owners will have thoughts like “how can I be in technical or at leat apparent compliance with these rules, while also spending a ton of money to buy all the best players to win a championship?”

The simplest form of this is something like:

1. Very good professional athletes are famous and can get paid a lot of money to endorse products and companies.
2. If you are the owner of a professional sports team, you probably also own some companies that might want some endorsing. Or if you don’t, you could just start a company that could use some endorsing. The company doesn’t need to do much, and the endorsements don’t need to be particularly effective. The point is that you are in position to write large checks to professional athletes, but (1) you are not writing the checks in your capacity as the owner of the team and (2) they are not cashing the checks in their capacity as players for the team.
3. So you write big checks to the professional athletes that you want on your team, but they are endorsement checks from your other company, not salary checks from the team.
4. Mysteriously, the best players are happy to play for your team at below-market (or, at least, not above-market) wages, while also earning above-market amounts of money from endorsements.

You see variants on this in European soccer’s financial sustainability regimes. (You buy a soccer team, you also own a company, the company pays to put its name on the team’s jersey, but it pays a lot for that space, making the team mysteriously profitable.) And a version of this is just the norm in modern American college sports, where the salary cap is technically $0 but team-related organizations funnel endorsement money to athletes.

Anyway here is a report from Pablo Torre about Kawhi Leonard, Steve Ballmer and Aspiration:

Los Angeles Clippers superstar Kawhi Leonard signed a $28 million endorsement deal with an environmental startup funded by Clippers owner Steve Ballmer, according to an investigation by “Pablo Torre Finds Out.” Former employees are now raising concerns that Ballmer’s $50 million personal investment in the company — currently under federal investigation for fraud — went on “a round trip” to power Leonard’s “no-show job” and skirt NBA rules.

Torre obtained more than 3,000 pages of documents from inside Aspiration — a so-called “green bank” that promised to supply carbon credits and plant trees to offset the emissions of its clients. Aspiration relied on public endorsements from the likes of Leonardo DiCaprio, Robert Downey Jr. and Drake en route to a $2.3 billion valuation in 2021, when Ballmer invested and announced Aspiration as the Clippers’ founding partner to help make the team’s new Intuit Dome “the most sustainable arena in the world.” ...

A former Aspiration employee, who worked in the company’s finance department and requested anonymity due to multiple federal investigations into the company, recalled to Torre: “We went through a litany of really, really top-tier name contracts. And then, ‘Oh, by the way, we also have a marketing deal with Kawhi Leonard’ — and that if I had any questions about it, essentially don’t, because it was to circumvent the salary cap.” …

Multiple former employees independently characterized Leonard’s arrangement as a “no-show job”; none of the employees — nor Torre — found any evidence of social-media posts, photographs or appearances promoting Aspiration, as stipulated in the deal.

The Clippers put out a statement:

Neither Mr. Ballmer nor the Clippers circumvented the salary-cap or engaged in any misconduct related to Aspiration.  Any contrary assertion is provably false: The team ended its relationship with Aspiration years ago, during the 2022-23 season, when Aspiration defaulted on its obligations.  Neither the Clippers nor Mr. Ballmer was aware of any improper activity by Aspiration or its co-founder until after the government instituted its investigation. The team and Mr. Ballmer stand ready to assist law enforcement in any way they can

There is something a bit odd here. Aspiration — a, you know, tree-planting brokerage — sounds like it might be a fake shell company set up by a sports team owner to funnel money to a star player in a fake endorsement deal. But Aspiration, which we have discussed a couple of times around here, was so much more than that. For one thing, it wasn’t Ballmer’s company: He was an investor, but he doesn’t seem to have had any control, and Aspiration also raised money from Allen & Co., Oaktree Capital Management and others. And its largest shareholder was not Ballmer but Joseph Sanberg, its co-founder, who was arrested earlier this year for fraud, and who agreed to plead guilty last month. (The fraud is basically that he tricked a bank into lending him $145 million against his stock of the company.)

For another thing, Aspiration apparently did lots of fake endorsement deals? One of the main allegations against Aspiration, from a Bloomberg News story last year, is that it was round-tripping its revenue, including through marketing deals: “An unusual number of customers were Colombian celebrities, including an actor and several retired soccer players,” who would simultaneously sign contracts (1) obligating them to pay Aspiration a large sum each month to plant trees and (2) obligating Aspiration to pay them a slightly larger sum each month for “marketing and branding services.” Allegedly Aspiration would count the first contract as revenue and hide the second one from its auditors, so that it looked like a big company that was planting lots of trees for paying customers. The point of the marketing deal was not to get any marketing — the celebrities didn’t have to do anything — but rather to create fictitious revenue. From last month’s announcement of Sanberg’s guilty plea:

Court documents also state that Sanberg personally recruited companies and individuals to sign letters of intent with Aspiration in which they committed to pay tens of thousands of dollars per month for tree planting services. Sanberg used legal entities under his control to conceal that these payments came from Sanberg rather than from the customers. Sanberg instructed Aspiration employees not to contact the customers that he had recruited to conceal his scheme.

Aspiration booked revenue from these customers between March 2021 and November 2022, but Sanberg did not disclose that he was the source of the payments. As a result, Aspiration’s financial statements were inaccurate and reflected much higher revenue than the company in fact received.

I guess that if your main product, as a company, is fake endorsement deals, there are a couple of different markets that you can sell into. If you are generally in the business of paying for fake endorsements to create fictitious revenue, you might also get into the business of paying for fake endorsements to get around the NBA salary cap? The funniest possibility — though to be clear it seems very unlikely — would be if Ballmer was asked to invest in this company, did some due diligence, found problems, and said “look, I realize that I will probably lose my entire investment, but I happen to have a use for a fake-endorsements company right now, so you can have my money on one condition.”

I suppose I should start with an apology. In February, MicroStrategy Inc., the Bitcoin treasury company, changed its name to “Strategy.” Sort of. It was still officially “MicroStrategy Incorporated d/b/a Strategy,” and I interchangeably referred to it as “MicroStrategy” and “Strategy” for several months. Including last week, when we discussed the fact that its basic trade — issuing stock at a premium to net asset value to buy more Bitcoin — doesn’t work as well as it used to. (The premium, which was once well over 100%, is now something like 54%. [2] ) I called it “MicroStrategy,” as I had in the past. But I missed the fact that, when I was on vacation last month, the company completed its legal name change; it is now in all contexts just Strategy. So I am sorry for misnaming it.

That basic trade remains as puzzling as ever. Why can Strategy keep selling stock at a premium to net asset value? My main explanation is that it can sell stock at a premium to net asset value because it can sell stock at a premium to net asset value: Selling stock at a premium is accretive for existing shareholders and allows Strategy to increase its Bitcoin holdings per share, so people rationally buy Strategy because they expect it to continue issuing stock at a premium and increasing those holdings. Buying Strategy stock is a better deal than just buying Bitcoin, because a Bitcoin is just a Bitcoin while a Strategy share represents an increasing quantity of Bitcoin.

I believe that this explanation is correct, circular, sufficient and alarming. There are other explanations, though. Here is a new paper titled “Valuing MicroStrategy,” by Sandro Andrade, Brian Coomes and Diogo Duarte, arguing that Strategy can sell stock at a premium because it can sell debt at a premium:

Bitcoin treasury stocks present a novel situation in which a firm's assets and equity are traded independently. Surprisingly, the market value of equity can at times be significantly larger than the market value of assets. We build a continuous-time structural credit model to replicate this pattern, assuming the firm is able to issue new debt at a premium to fair value during a "hype state", thereby violating Modigliani-Miller conditions.  This violation creates a "financing franchise"' owned by shareholders that can be valuable enough to push the market value of equity above the market value of the assets. Our model is consistent with data showing that limits to arbitrage bind for MicroStrategy's debt but not for its equity.

I think there is some truth to this, but that my explanation is more relevant. (It doesn’t actually sell that much debt!) Still I like the term “financing franchise.” The reason Strategy’s equity trades at a premium to its underlying assets surely is that it is “able to issue new [securities] at a premium to fair value during a ‘hype state.’” I think those securities are mostly equity but, sure, debt too. [3]  The point is that if you are investing in Strategy, you are investing in some combination of (1) Bitcoin (that is, its net asset value) and (2) the financing franchise (the premium). 

There are not-quite-financing-franchise explanations, though. One is of the form “once you accumulate a giant pile of crypto, maybe you can do something useful with it?” In my decade of writing about crypto I have never been quite clear what people have in mind when they say stuff like this, but you never know. If you have a giant stash of Bitcoin and people increasingly want Bitcoin, maybe you could become a leading Bitcoin lender or investor or whatever. The main way to monetize a crypto treasury in 2025 is to keep selling more stock, but perhaps the main way to monetize a crypto treasury in 2030 will be, you know, smart contracts or something. Here’s Zac Townsend, “the CEO of Meanwhile, a BTC-denominated life insurer and asset manager,” at Institutional Investor:

The conventional wisdom on Bitcoin treasury companies that make holding BTC their primary business is that they’re just clever public-market arbitrages. They’re levered bets on digital gold wrapped in corporate paper. But to believe that take is to miss the forest for the trees. These firms aren’t short-term trades. They’re the seed stage of the world’s next generation of endowments.

Consider how institutions like life insurers, pension funds, sovereign wealth funds, and university endowments power the machinery of capitalism. They fund bridges, ports, power plants, and roads. They make the long-term loans behind real estate, infrastructure, and private equity deals. They hold the risk on which venture capital is built.

What makes these institutions special isn’t just the size of their balance sheets; it’s the shape of them. They are built on permanent capital, and they don’t panic or sell at the bottom. They don’t mark to market every day. They have liabilities and obligations that span decades, enabling them to invest across the entire time horizon of human ambition.

Bitcoin is beginning to demand a similar institutional architecture.

It seems to me that companies mostly get into the crypto treasury business for the shortest-term possible reasons (“the stock market will pay more for crypto today than the crypto market will”), but perhaps I am the one who is short-sighted.

Elsewhere in the entire time horizon of human ambition, here’s a Dogecoin treasury company run by Alex Spiro:

More than four years after Elon Musk topped DOGE on Saturday Night Live, the billionaire’s lawyer, Alex Spiro, is taking over a sanitation company to create the first Dogecoin digital asset treasury (DAT).

CleanCore Solutions announced [yesterday] that Spiro will immediately become Chairman of its Board of Directors, and unveiled a $175 million private placement sponsored by the Dogecoin Foundation and its official commercial arm, the House of Doge. Staying true to its nature as a meme, the company aims to raise $175,000,420 prior to fees and expenses.

Sure! The stock fell 53% yesterday, though it still seems to trade at a premium to the private placement price.

I wrote the other day about two strategies that private equity sponsors can use to deal with their main problem these days, which is that they have bought a lot of companies, can’t sell them, and have investors who are antsy to get their money back. The two strategies are:

1. Raise new equity: Go to investors and raise new money to buy the companies (and pay back the old investors). This is usually called a “continuation fund.”
2. Raise new debt: Go to private credit investors borrow new money, and use the money to give cash back to the old investors. This is called a “dividend recap” (if the portfolio company borrows the money) or a “net asset value loan” (if the fund does).

I wrote that “you can mix and match” these approaches. We were discussing a Bloomberg News story about subscription line financing for continuation funds: Basically, the sponsor raises new equity to buy the old companies, but first it borrows money (against the new equity) to pay out the old investors. Fine. But there are other possible hybrid approaches. Here’s another Bloomberg News story:

Goldman Sachs Group Inc. is looking to capitalize on helping private equity clients saddled with bets they can’t exit.

The bank’s asset-management arm is raising some of its biggest funds to help cash-strapped private equity firms and portfolio companies. Many of those firms have struggled to return cash to investors in a muted environment for mergers and initial public offerings, and are trying to ease that liquidity logjam.

Goldman is now approaching investors to pitch a $10 billion fund offering combinations of debt and equity, known as hybrid capital, according to people with knowledge of the matter. Such funds essentially expand financing to companies owned by private equity firms that can then turn around and funnel the cash back to their parents in the form of dividends. ...

“There’s a lot written about continuation vehicles but not about the hybrid-capital side,” Marc Nachmann, head of asset and wealth management at Goldman Sachs, said in an interview. “Hybrid solutions allow portfolio companies the creation of dividends upstream. That’s why we see hybrid capital as pretty interesting right now.” ...

Like a $15 billion hybrid-capital fund the company raised in 2021, the new vehicle will offer financing instruments that provide the flexibility of equity with the structure of a loan, and which can often be converted to equity.

Goldman (disclosure: where I used to work) is interesting in that it is both an investment bank and, somewhat aspirationally, an alternative asset manager. As an investment bank, it has clients, and private equity sponsors are some of the most important investment banking clients these days. Their main problem is getting money to cash out their old funds, and Goldman’s bankers are motivated to find solutions for that problem. But as an alternative asset manager, Goldman also raises funds to invest in private equity/debt/hybrids. If those funds can solve investment banking problems, that’s just good business.

In 2020, it was obviously good marketing for big asset managers to talk about environmental, social and governance investing. A lot of customers — particularly but not exclusively in Europe — really wanted ESG investing; many institutional customers had green or ESG mandates, and many individual customers wanted to make the world better with their investments. We talked in 2020 about a pair of letters from Larry Fink, the head of BlackRock Inc., saying that “more and more of our clients have focused on the impact of sustainability on their portfolios” and that “climate change is almost invariably the top issue that clients around the world raise with BlackRock.” 

Other customers didn’t care about that stuff — they just wanted good returns and low fees — but that was fine. You could talk about ESG to the customers who wanted ESG, and the customers who didn’t want ESG could ignore that and buy your regular cheap index funds.

In 2025, that doesn’t work. Now some customers and regulators — particularly US Republicans — are intensely anti-ESG. It’s not that they don’t care about ESG and just want good returns and low fees; it’s that they are actively opposed to ESG and will bring lawsuits and political pressure if you do or talk about ESG stuff. (We have discussed a court ruling suggesting that BlackRock’s vanilla, non-ESG index funds are illegal because BlackRock sometimes talks and thinks about ESG.) And so various big asset managers are walking away from a lot of their ESG commitments in order to appease their anti-ESG constituents.

But it’s not like the pro-ESG ones went away. The Financial Times reports:

One of Europe’s largest pension funds has pulled about €14bn from BlackRock as it increases its focus on sustainability after an overhaul of its investment strategy. 

PFZW, which oversees €248bn of pension assets for more than 3mn Dutch healthcare workers, said on Wednesday it was ending a major contract with the world’s biggest asset manager and dumping its stakes in thousands of companies. ...

The ending of the mandate with BlackRock underlines the growing divergence between Europe and the US over responsible investing, a practice of including traditional non-financial factors in investment decisions. ...

The move comes after US asset managers pulled back on so-called environment, social and governance (ESG) investing in recent years as Republican-controlled pension funds and treasuries sued and redeemed billions of dollars from asset managers, including BlackRock, over what they called a “woke” and “left-wing agenda”. 

I suppose eventually the customer segmentation will be complete, and some asset managers will compete for pro-ESG customers while an entirely different set of asset managers competes for anti-ESG customers.

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