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- [00:01]
A
Welcome to the Insightful Investor Podcast, a weekly series that seeks to share industry, investment and market insights. Learn more about our show@insightfulinvestor.org Today's guest is Brian Darcy, partner at 6th Street, a leading global investment firm founded in 2009 that manages over $130 billion in assets as of year end 2025. Today we're going to discuss 6th Street's investing philosophy and then spend most of our time on how the firm thinks about sports media and live entertainment as an institutional investment opportunity. Welcome Ryan. I've been looking forward to this conversation.
- [00:41]
B
Me too, Alex. I appreciate you having me on.
- [00:43]
A
Of course. Let's just start. If you can briefly remind us of the 6th street history and how the firm got started.
- [00:51]
B
I know you had my partner Alan on a handful of months ago, so you know we got some of that last time. Hopefully I do it justice. We founded 6th street on the heels of the great financial crisis in March of 2009. Prior to that, our founding partner group had been managing one of the largest on balance sheet investment businesses that had ever existed in the world, the Goldman Sachs Special Situations Group. The combination of Volcker, Dodd Frank Financial regulation effectively was limiting Post GFC Bank's ability to continue engaging in investment risk taking activity. And so the founding partner group here effectively left to recreate the investment style, the framework, everything that we had been doing prior to that at Goldman, but outside of a regulated bank. And that was the beginning of 6th street in 2009. You fast forward the clock, what is that, 16, 17 years later today the firm, as you said, we manage over 130 billion of capital. Someone told me recently. I guess that makes us the 10th or 11th largest of the alternative investment firms. But I believe we are the largest or one of the largest who is not public and also not a subsidiary of a larger asset manager. We have about 850 people around the world. Historically we have tilted a little more developed markets focus. So big presidents, big investments historically in the U.S. europe, that we also opportunistically go into a handful of other markets and I would tell you Alex, there's two kind of hallmarks to just who 6th street is. Constitutionally that if you'd ask any of our counterparties, any of our capital partners like who is 6th Street, I think they would generally agree with this. 6th street to our bones are a hardcore investment firm. Every asset we invest in is specifically within a theme. And then secondly, you know, we don't pound our chest about a lot of things, but in the 25 years collectively, our partner group's been investing together. We have had a very consistent track record of both on the return side, generating consistent returns, but on the loss side of the equation, having some of the lowest loss rates of any manager in the world. And so no different than what I said about just loving investing and constitutionally being just people who love to think about investing. We're also folks who wake up in the morning, go to sleep every night saying, protect capital, compound capital. So that's who we are.
- [03:05]
A
Would you talk about the original insight behind the thematic flexible capital investor approach and what has reinforced your conviction over time?
- [03:15]
B
I think it stems from our founding partner group growing up as a part of a bank balance sheet investing business at Goldman Sachs. Back in the day, Goldman and a few others were kind of the first to figure out if you would have your most talented investors segmented into a silo, into a specific sector, a particular area, and then you had your least talented investor in a different area. And it just so happens that your least talented investor was in a particular silo which in a given year did the best, and your best investor was in a silo that didn't do the best. On paper, it would look like your least talented investor was your best investor and your best investor was your worst investor.
- [03:55]
A
That's like a line between luck and skill gets blurred.
- [03:58]
B
Absolutely. And so, you know, in the late 90s, early 2000s, Goldman formed this special situations business as a way to break down those silos and walls and say, rather than have defined silos and segments breaking apart your people, let's have a singular balance sheet that can migrate to wherever the best risk return is at any moment in time. Long duration, short duration, public, private, liquid and illiquid. And as we formed 6th street, we wanted to keep that exact same ethos and how we built our firm. And so when you look at our firm Today, we have 16 investing business units. But rather than those investing business units being hardwired and tied into a specific product or a specific instrument, those investing business units wake up every single day just thinking about themes. And if the best way to express and play that theme is to go do a first lien loan, great, they'll go do that. If the best way to play that theme is an asset company, great, they should go do that. If the best way to play that theme is to do a cash flow lending deal or buy a royalty interest, great, let's have the flexibility to do that. But we wanted to orient our firm again back to investor first model as saying let's have the flexibility, the capabilities, and then the capital base that our teams can just go attack wherever we think the most mispriced assets, the most attractive opportunities are at a moment in time. And so it's both the business units and how we organize them, as well as how we organized our fund complex, our liability structures, all with that mission to just be an opportunistic investor.
- [05:34]
A
So let me dig into the mindset a little bit more. Do you think about thematic investing as the pursuit of asymmetric outcomes where upside meaningfully outweighs downside? And if so, why do you believe those opportunities can exist and persist in even when many investors assume risk and return should be more balanced?
- [05:53]
B
We never talk about return units without talking about risk units. In the productization of what I see in alternatives a lot today, and not just in alternatives, but a lot of asset classes, I see a lot of people talking about just the return units, but importantly, what risk units are you taking in order to generate the return units on this side of the equation? And people look at us, they say, listen, we have a very large platform today. We do a lot of different things. How do you compound capital with such low loss rates? I think we have a lot of really smart people. We have a lot of experience, we have unique structures, we have unique deals and things like that. But to create a business that has the freedom to constantly migrate in and out of different themes, in and out of different sectors, is as important as anything else that we do. And so I don't think it's a singular answer saying, well, opportunistic means we're just necessarily going to generate nominally higher returns. I think what it means is over a long time, 10 years, 20 years, 30 years, 50 years, if you're operating with an opportunistic model with deep expertise across all available investment sectors, you're marrying that with great liability structures that allow you to invest well on the risk side of the equation. You should be able to compound with lower loss rates while on the return side of the equation generating much more consistent, predictable return rates. And so hopefully that's what we're delivering to our capital partners is not just nominal return target of acts, but here's the risk units we're taking to deliver that return unit.
- [07:28]
A
I think it's really important insight because most investors focus on return alpha, but you can also think about risk alpha and getting even the same return with a lot less risk makes that return stream more dependable and sustainable through time.
- [07:45]
B
Absolutely. And to your point, I think people get Caught up. Particularly when markets are reaching all time highs, things are going really well on just nominal returns. It usually takes moments with a capital M before people figure that out. It could take a moment that might not be as big, but a moment like 2015, 16, where suddenly risk got repriced and you start to see what risk units were you taking to those relative return units? Obviously moments like the GFC or the dot com bubble expose those sorts of things. The combination of events in the world today between the war in Iran, the private credit struggles and the retail market, things like that, we'll see if this is one of those moments or not. But stepping back to your question ethos of 6th street, what risk units are you taking relative to return units?
- [08:30]
A
So in a world that increasingly rewards specialization, what do you see as the structural advantages of a broader mandate like yours and and where do you feel it may genuinely create challenges?
- [08:43]
B
Yeah, I'm going to make a compare contrast analogy. This is in particular, no particular firm, but just to compare contrast how we've set up our investing business units of 6th street relative to perhaps a more traditional alternative asset business model. Let's take our energy investing team. At many places of our size and bigger. You'll have an energy direct lending team, you'll have an energy private equity team, you'll have an energy infrastructure team, and then each of them are attached to a product. And if you happen to be an energy direct lending team, every single meeting you walk into, you look at the counterparty and say, how about we do a first lien loan? Do you want to do a first lien loan? How about we do a first lien loan? No matter what the situation is, they're going to try to put out in the world a first lien loan. Whether or not that's the right risk unit, return unit for that situation and whether or not it solves the issue for the counterparty. When you look at 6th street and our energy team goes into a situation, they're not asked to just do a first lien or an equity or a pref or a convert. They'll sit down with a counterparty and say, don't worry about debt, don't worry about equity. Explain to us what's going on here. Explain to us the variables of why you're looking to raise capital, why you're looking to do a transaction and then come back with one option, two options, maybe three different options about different structures that from a counterparty perspective solves their issue. But from a risk return perspective also is pricing the appropriate Risk return for that situation. And so look, if the counterparty the right situation, the right answer is the counterparty is repricing an RBL with a bank and they need a first lien, great, they should go do that. If that situation entails a distressed reorg of a company in the Permian, great, they should go do that. Or it could be a traded loan at 85 that we think should price at 96. But we want our deep expertise and energy not to be locked into one instrument or one product, but have the freedom just simply to make the best investments, the best structures, the best instruments to price risk in that situation.
- [10:47]
A
So you're basically drawing the line in terms of your specialization is in the market segment and you have flexibility around structure as opposed to drawing the line in terms of the structure and trying to work your way that way.
- [11:01]
B
I think to some extent you need both a, you need sector expertise. If you go to healthcare, we have PhDs and MDs who are wildly deep on the healthcare side, or if you go into technology and what's going on in artificial intelligence. My partner, Marty Chavez, sits on the board of Alphabet. We have a whole team who's as deep into that ecosystem as anybody. You need expertise in your ecosystems and your sectors. But number two, we need to marry that with the 25 years of experience we have with all sorts of different instruments, solutions, structures, working with counterparties and having pattern recognition to say, hey, we were the folks at the structure that bridged Spotify to an IPO in 2016 worked because of these variables. We were the folks in 2020 that Airbnb turned to to do the $2 billion structured financing in the middle of COVID And hey, we were the folks who worked with the NBA and with multiple different MBA teams to figure out a way to structure a purchase or working capital for an MBA team who couldn't borrow traditional debt. Like those are the examples of saying you need deep expertise in those areas in those sectors, but you want the freedom to use experience of different instruments, solutions and structures to price that risk efficiently.
- [12:19]
A
Okay, so let's jump into sports and live entertainment, which I know have become a major focus for the firm. What was the moment you realized this was more than just trophy ownership and could be a durable investment domain?
- [12:33]
B
You know, this is a major part of our business. We've invested a lot of capital. We're probably one of the world leaders in terms of partnering with brands, but also just number of investments in the things we've done. It is funny, Alex, you and I were Catching up before we started this podcast, that even though this is a major part of what we've done, is probably 5 or 10% of our AUM, but it absorbs 50, 60, 70% of the press we get. So it's a hot topic. Institutional capital coming into sports is not something that's existed for the last 20 or 30 years. In fact, what you've seen is it's really since COVID that you've seen a significant uptick in even the possibility of institutional capital coming into sports and institutional investments being made in the asset class. Prior to Covid, most major revenue sports leagues existed as a closed ecosystem. You really couldn't borrow against these things. Major League Baseball going into Covid had something like a 50 $75 million debt cap on teams. The NBA had a $325 million debt cap, regardless of the value of teams. And for most of these major revenue leaks, historically, any and all transactions were done by wealthy individuals for common equity. And two things happened, one of which was building and one of which was acute in 2020. The building was the value of meteorites. As we moved away from a traditional print and TV model into the streaming era, as well as the value of the infrastructure around these teams had gotten bigger and bigger and bigger that it was starting to attract take notice by institutional counterparties and potentially outgrow the pockets of individual wealthy owners. Covid itself created a somewhat existential event that year to start reassessing if closed ecosystems was the right business model. I mean, you think about it at a moment in time, you had these hundred of million of dollars, up to multi billion dollar assets that suddenly hit Covid. They have very little financial flexibility because again, a lot of these leaks do not allow any substantial amount of borrowing against them. And there really was no institutional capital against them. And owners suddenly saying, whoa, the growth of the value of the franchises, the meteorites, the infrastructure, and suddenly realizing the need that institutional capital should be coming into these ecosystems, began a wave of institutional capital being entered into, approved, and I would argue we're only in the second or third inning of that. The NBA, for instance, right on the heels of COVID we did a nearly $500 million deal, one of the first ever structured investments, first ever institutional investment that we did with the San Antonio Spurs. Also that year we did a deal with the Yankees and the Cowboys to taking control of Legends Global, one of the biggest live entertainments, the stadium management businesses that exist in the world. And since then, you've seen every major league start to open themselves up in different phases to institutional capital. With the NBA, the NFL, we're one of the four approved counterparties to transact with the NFL, the mlb, Major League Soccer, women's sports. But again, if you ask me where we're at today versus 10 years from now, we're probably only in the second or third inning. As more of these leagues take on additional institutional capital, additional structures, you know, create more businesses out of ancillary assets. I think that's why we're all talking about it. So that, that's the first part of the answer, Alex. The second part, and I'll be brief about this, is what you're hearing from me, is a massive tam. When you add up just the leagues, the teams, the value of the media rights, the, the infrastructure around this, and then all the ancillary business properties, you start to step back and say, wow, that is a massive tam that's going through a generational change. And one of our ethos since day one at 6th street is we want to be involved in large TAMS that are undergoing changes where we can facilitate that for buyers and sellers, where we can invest behind it, but utilize our flexible capital to be relevant and capture some of the tailwinds of a change like this, but do it in an incredibly thoughtful, nuanced investor first model. And so, unlike some others out there, I'm not here today to tell folks, wow, just buying sports teams left and right is the right answer. I'm not here to tell you buying stadiums or stadium finance is the right answer. I'm also not here to say meteorites is the only way you should play it, but rather we want to have a lens across that entire ecosystem and, and find ways in which in each one of those, we can create differential risk return using our flexible capital, our kind of solutions based approach. That's what we find interesting about.
- [17:31]
A
Seems like a good universe for you to operate in, given your flexible approach and kind of the big change that's occurring there.
- [17:39]
B
Yeah, it's kind of funny. I threw an example out, which as I was talking, I was thinking back to one of the landmark deals we've done in our careers was the Airbnb deal in 2020. And the setup of that deal was obviously Covid hits. Airbnb needed to raise capital for working capital and a whole bunch of other issues. On the one hand, Airbnb did not want to just issue equity because right away in Covid, you didn't want to issue equity and at risk of it being at a down round, the pricing wouldn't be attractive. But on the other hand, they couldn't just go to a bank in the middle of COVID and borrow traditional debt. They needed something different. And so the outreach to 6th street in that transaction was, we know you are the folks who are thoughtful, scalable and can create unique solutions to facilitate capital through situations like that. Well, now think about that for sports and think about the whole variety of counterparties in that ecosystem. So you have private equity funds, you have billionaire family offices, you have sovereign wealth funds who are starting to mobilize capital to go buy sports assets, media assets. And for instance, if you're going to go buy a team in a major revenue league, you don't have the ability to just go borrow to make that acquisition possible. And as you all know, from the NBA to the NFL, these are not purchases that cost $500 million or $1 billion. These are purchases that are going to be 5 billion, 10 billion, 15 or 20 billion in the future. And so when it comes to a number of our deals, which Alex, I'm sure we'll talk to, but a number of our deals, no different than what we did in Airbnb in many different parts of our business, is saying how can we create something which may or may not be a traditional equity, may or may not be a traditional debt instrument, but actually fix, solve a problem or create a solution for counterparties who find themselves in a situation where they don't need something that's just the highest priced equity or traditional debt instrument.
- [19:43]
A
So sports investing often seems relationship driven and ecosystem based. How do you think about sourcing opportunities and building the access required to see the best deals?
- [19:54]
B
There are three vectors I think about for sourcing. Number one is we have a very substantial direct team here with experience across sports teams, media assets, espn, different leagues, things like that, where the human beings who constitute our sports media and entertainment team have relationships and tentacles into basically all of those ecosystem. And it's a group of world class investors. So that's number one. Number two, we own and control now a business called Legends Global, who is the largest manager and outsourced provider of things like food and beverage, ticket sales, premium experiences for venues around the world, everything from Notre Dame Stadium to Sofi Stadium to Real Madrid to various events at different tours and leagues and things like that. And when you think about the impact of that inside of professional sports organizations and inside the venues, having a call in where they can introduce people to us, and then on the flip side, counterparties who work with us, having access to legends as a mechanism for an additional value driver to them on their stadium live entertainment that has been a hugely helpful ecosystem. So that's number two. And then number three is, you know, Alex, I'm sure you've heard this before, but deals beget deals. And sports is still a fairly clubby, intensely reputationally concerned asset class. When you look at our portfolio, we've done transactions with the Yankees, the Cowboys, Real Madrid, FC Barcelona, the Boston Celtics were the first institutional owner of a women's professional sports team. We have probably arguably the most premier brands in sports who count us as their partners. And so when you add up those three vectors, you have a deeply experienced sports team in that ecosystem. You have legends, which is inside a lot of the major revenue teams, major revenue league stadiums themselves, and as an option to create value for counterparties who don't already use their services. And then number three, a portfolio of brand names. Who folks say, well, who are the really blue chip credible people I would want to be associated with? Clearly 6th street is one of those folks.
- [22:23]
A
How do you think about the distinction between owning a team versus owning the economics around fandom? And which do you believe is more mispriced today?
- [22:34]
B
I don't think it's binary. I really don't. I don't think you can make a binary bet. When you think about a sports team. You know, there's two or three value drivers which effectively you're pulling at. And this is regardless of leagues or things like that, you have the intrinsic value of the asset itself, which I'll call the Picasso effect. Like does somebody want to own that asset regardless of what it is? And that's some amount of value in that asset. You have the media rights associated with it, which is a huge part of the value driver of these sports assets. That today sports content, for the avoidance of doubt, is the most valuable media content on planet Earth. You have the infrastructure around that asset, meaning if a team owns the stadium or they don't own the stadium, you have ancillary businesses from parking lots and everything else around it. And then you have cash flow revenue coming off the various collection of those assets and other assets out of the sports team team. And so when, when you ask like, what is the most valuable component, what I would put back to you and where I would want to invest is partially dictated by the value of each of those assets in an individual situation. And so when you look at our portfolio, you know, we have the New England Patriots, as I said, we're one of the four approved investors by the NFL to invest in NFL teams. The New England Patriots is a world class organization. They're in the most valuable pro sports league on planet earth. The Kraft family is one of the best owners of assets that you can come across. And NFL teams have cash flow. And so in that instance, for a whole variety of reasons, we were comfortable saying we want to invest equity in that team behind all of those tailwinds for both the team itself, the NFL, things like that. In the case of the Boston Celtics or San Antonio spurs, we invested really unique structured equity investments that for our counterparties. In the case of the spurs, it was the whole family. For the Boston Celtics it was Bill Chisholm. They had specific reasons and targets for why they were looking to raise capital. And so we created some really unique investments there. But to contrast that in the case of Real Madrid, the capital need there was for the team to actually finish off a very large stadium renovation project they were doing where investment is actually part of a stadium financing that doesn't have a direct correlation to the value of Real Madrid as a team. And so I kind of go back to what I said earlier, which is this ecosystem of sports media entertainment is wildly changing. You're introducing new forms of institutional capital into the ecosystem. But I don't want to paint a broad brush and just say the right way to play that is just buy sports teams or the right way to play that is just to do stadium fans. So the right way to play that is just doing meteorites. It's the ability to use our kind of creative capital and find what we think are the most attractive opportunities through that ecosystem. Which look, might be an equity investment in the Patriots, or it might be an instrument in a pro baseball team, or it could be a structured investment in a stadium co financing. But it's the unique collection of those assets which we find pretty interesting.
- [25:58]
A
Do you have a general framework you use to try to identify asymmetric outcomes in in sports and entertainment assets?
- [26:07]
B
Great question. Let's talk about individual deals. Then we'll go to portfolio as a whole. Because I think there's two separate things you need to think about. Going back to risk units and return units. For nearly every investment we make, you know, we wind up having some 60 page memo that talks about every single facet of that investment, the diligence the deal team's worked on. At some point in that memo we will have stratifications on returns and typically we will have five to seven different variables that will identify how those strats will play out over time. That is as a general Framework, how we think about creating unique assets and things like that, but then also contextualizing, look, based on the structure, based on the instrument, based on everything we've set up here. Here's how we can show again back to basic principles. Protect capital, compound capital. Even if things go wrong, how do we feel about our downside case? But then if things go right, how do we see some upside convexity? So that's generally true for all the deals we do, whether it was Real Madrid or the Patriots or the BFC investment. Then number two, the question is on the portfolio as a whole and on the portfolio as a whole. I think about it somewhat as a bell curve. And the fat part of the bell curve are kind of what we do here at 6th street when we have upside convexity, downside protection, all that stuff on the right side of the bell curve. You know, we might do something like bfc, which is again, we're the first institutional owner of a women's professional sports team. We're the folks who helped create Bay FC here in the Bay Area. That's an equity investment. It's got operations, it's got things like that. We will do some of that stuff over here. On the flip side, we'll probably also add to our portfolio some kind of very downside protected, more kind of fixed income like assets on the left side of that bell curve just to create a whole portfolio of risk. And again, you wrap up both of those individual deals portfolio. The whole key to me is investor first. Like don't look at things as if we have an arbitrary bucket to fill or we have to do this many deals and exactly this kind of deal or this many deals in that it's really about putting together a great portfolio of assets that fits that ethos of risk unit to return unit.
- [28:30]
A
So there's one other phenomenon that we've seen. How has the shift from television to streaming changed the base case for sports economics? And the way you perhaps underwrite long
- [28:42]
B
term risk, it has a massive impact. Massive impact. I mean, if you think about it, Alex, in the old days you effectively had radio and tv and in tv, what was there, three channels back in the old days, very predictable about how it would go. And all of this. And today, everything from televisions to iPads to phones, I mean you can consume content in so many different ways, so many different applications. And also this evolution in the streaming era that the kind of last bastion that people will actually turn in live to and watch a live event has been kind of narrowed down solely into sports and you have seen a massive response through the value of media rights in this ecosystem. Alex, I'm sure for you and your listeners, you're at least anecdotally familiar about this, but you saw a massive step up in the value of NBA media rights going up 2 to 3x where they were previously negotiated. The NFL has renegotiations coming up. I think it's in 29 and 30 and I would anticipate a similar type of step up there reflecting the value of this, but also the value of the content being provided to all of these streaming platforms. So you can't underestimate how valuable that is and when people are underwriting on individual teams in this ecosystem. I said this before, I'll say it again. Obviously there's a ton of value in the infrastructure live experience. There's a ton of value in just the cash profile and the revenue coming off these teams. There's some amount of Picasso value that comes off of owning a sports team and things like that. The meteorites are becoming a major factor in the revenue multiple, the forward earnings growth of a lot of these. As you continue to take a view that this is going to continue to be one of the most exclusive, valuable media properties that exists on planet Earth,
- [30:36]
A
is it an oversimplification to say that one of the reasons sports has stood out is there's value in watching it live? Because in a world, you know, dominated by on demand content, live sports, you can't have it on demand and if you want to watch it later, you probably would have already heard what the outcome is or kind of ruins the
- [30:57]
B
ending, you know, Alex, I think the answer is yes, but a big and one and it's the dissemination of that content, right? In the old days you, you tuned into, what was it, abc, CBS and NBC. And if you didn't catch it like you got clips on the local news or you read it about it in the newspaper the next day. When you think about the consumption, just, just take the NFL and how many different ways in which the NFL is consumed today. Everything from the Red Zone channel to the NFL app which will replay games after they played, to Amazon doing a Thursday night game which didn't exist before, all the way to even what is ancillary touching that to media companies who might be using artificial intelligence to create clips of media from all of that to then advertise the consumption of that media and how it's divvied up and split has also added to all that value. So I think it's definitely, yes, it's become more valuable because it's kind of the last thing in which people will watch live, which drives advertising dollars and eyeballs and things like that. But then the big and one is think of all the different ways it's being sliced and diced and then the value to all of those different players through the ecosystem. Whereas 60, 70 years ago, 30 years ago, it just wasn't consumed in the same way.
- [32:19]
A
In light of valuation increases that we've all seen, what is a good way of potentially being able to participate in the growing enterprise value without buying straight equity?
- [32:31]
B
I'll stay close to home here. I'm broadcasting from San Francisco and we did a really unique investment with the San Francisco Giants, the major League baseball team here in the city that gives a good example of this. The Giants, world class organization, great ownership. And in this case, the ownership effectively has three things. Number one, they have the team itself. Number two, they own the stadium. And then number three, they have a real estate development adjacent to the stadium as well. The Giants were looking to raise capital to facilitate a renovation of the stadium, which is reaching its 25th anniversary, which as a side note, I remember when that stadium opens, so I guess I'm getting old. And then number two, to have some amount of capital to finish off the real estate development adjacent to the stadium. So. So back to my point, it's not just media rights or tangential value of the assets, but actually it's the infrastructure around these assets which also become valuable. And the Giants had a decision to make. They could go issue equity to pay for all that, because remember, no different than many other sports assets, Major League baseball teams have very limited capacity to borrow. So you can't just borrow to go do that. And so they could have gone and sold equity or they could have just funded that all in cash. But they said to themselves, well, I think completing the stadium renovation, completing the real estate project will probably make my team even more valuable after that. So I'm not sure I want to just entirely sell equity to fund that. And number two, coming up with a couple hundred million dollars of just straight cash is also not a great answer. And so we created a really unique instrument with the Giants. And so to frame this again, going back to risk units to return units. Our partner in the deal, the ownership group of the Giants, didn't necessarily need a traditional equity. You couldn't do traditional debt. So you have to figure out that issue with a unique structure. And on our side, rather than just getting common equity in a team, we were able to solve our Counterparty's problem. And so, again, going back to what we were talking about earlier, Alex, there's a lot of things to be excited about in this ecosystem. There's a lot of growth nodes, a lot of growth vectors. But it's not just saying linearly. I just want to buy equity and all these things.
- [34:49]
A
In your experience, what are the most common sources of hidden downside in sports deals that may look safe on the surface?
- [34:57]
B
I'll break it apart into two or three categories. First and foremost, not all sports is created equal. I used the example earlier in the podcast, comparing contrasting a deal like we did in Airbnb with some of the things we're doing in sports. You know, it's no different anywhere in investing. Like, there's ways you can play a certain ecosystem with venture risk. And if you're approaching sports only in that lens, like, sure, you might hit a home run, you might do some amazing investment that you put 15 or 20 million bucks into that winds up working out, but you're going to hit a lot of dry holes as well. So I think there's this stage and predictability of the leagues, the teams that you're investing in, and I particularly am aware of there's a lot of excitement around all this. And I think a lot of businesses are just indiscriminately being funded, regardless of the predictability, the recurring revenue, the brand recognition, and some of that has to do with what I see happening in certain upstarts and others. So that's, that's one thing to think about. The other thing to think about is how levered you want to be to consistent from here valuation growth across all of these leagues, teams and other sorts of things. And what I mean by that is I don't want to just in every single league we invest in and every single team we invest in, just have the same bet that all of this is going to keep growing at the exact same growth rate. I fundamentally believe that we're only in the third inning of institutional capital coming into sports. Theoretically, with any fixed group of assets, if you keep introducing more liabilities, more capital that should be inflationary for the value to the asset. But I also don't know that. I just want to bet the growth rate from here is exactly this and have a levered naked equity bet on that future growth. And so that's something that when we make investments, particularly when we're making a straight equity investment, we want to make sure we're being very thoughtful, very conscious of why what we're doing is Very different than what others are doing. And then implicit in some of our other deals, also having investments in, in our portfolio that don't necessarily just take kind of a one way levered bet on the equity, but that have structures, have interest income, have other cash flows, collateral, where we feel really good that look, if that happens, great. But we're not only predicated on that piece of the puzzle coming true.
- [37:21]
A
So I just asked you about potential hidden downside, but on the flip side, where does surprise upside most often come from in sports and wrestling?
- [37:31]
B
So I think everybody's heard the story of the meteorites. I think people generally understand the value of merchandise and things like that. I don't know that the world fully appreciates the value of the live experience yet. And so we're long this bet. We obviously own Legends Global, one of, if not the largest kind of stadium management outsourcing businesses. Basically playing this whole trend. But as you have seen human beings getting more absorbed in social media into our devices, the AI revolution coming to change things. There is also a correlation that the value people are paying and the premium they're willing to pay for the live event experience. And so I think people very close to this ecosystem understand this, which is why you're seeing most owners who own their stadiums or assets like that going through renovation projects, putting a lot of time and effort into making sure that premium experience all the way down the line makes sense for their fans. That infrastructure around it in the Live experience is something that I don't think outside of certain pockets of this people are fully appreciating and understanding. And I think it's a huge valuable unlock and growth engine for the whole sports live entertainment ecosystem as you keep seeing them investing behind this. And before I wrap up this point, I also think there's multiple ways to play that. Like sure, you can invest in a team that owns their stadium or you could invest in companies that are servicing those assets, building those assets, working with those assets because they're going to be subject to those same tailwinds. So again, I know people have heard the meteorite story, I know they've heard the Picasso story. I know they know why buying a warrior shirt is valuable or not, but that kind of infrastructure around it and the live experience piece is something we're pretty interested in here at 6th Street.
- [39:27]
A
So we've talked about valuation a little bit. But how do you think about valuation when comparable transactions are noisy, assets are scarce, and the marginal buyer may not be purely economic?
- [39:41]
B
I think it's about quality of assets and Alex, your question is, is the exact reason why this whole podcast today got set up about how we're thinking about the ecosystem, which is if, if I approach this tam, which we've already established, is a very big tam, and the only tool in my toolkit is basically to just buy equity or buy minority equity. Your exact question is what I would really worry about because I don't really have a lot of other options to play this, and I'm kind of just betting the whole thing keeps going up into the right at the same time. Change agent. It's been going on for the past five or six or 10 years. And look, I'm not saying it won't, but I'm saying if I want to make that bet, I want the freedom to say on this specific asset, on this specific team, this specific area, I'm willing to make that bet because of these five, ten reasons. And you know what? In certain other areas, I still like those tailwinds. I'm happy to own some of that risk, but. But I have to have other things in my structure, in my deal, and. Or maybe I just have a totally different way to gain access to very valuable assets where I don't have any of that risk that I'd be willing to do a deal. So I don't think that's a magic answer to your question, but I think it's a different mindset than saying, hey, everything we have to do is just buying minority common equity. And then how do you exit this? What if growth rates slow 10% from where they are? What does that do to my return? Like, that's why we don't set ourselves up to play the sports live entertainment ecosystem that way.
- [41:13]
A
And it also helps reduce the risk of getting the valuation completely wrong.
- [41:18]
B
Correct. And again, I think for major revenue sports teams, for a whole variety of reasons, I'm less worried that quote, unquote, you absolutely get it wrong. And you'll lose money for the major revenue sports leagues for a whole variety of reasons. But just simply, what if growth slows or what evaluations just don't go up as much as they had? Like, I don't want to necessarily just be levered to that. And number two, I'm sure you have folks on this podcast who invest in vehicles and funds and products that invest this ecosystem. What does that do if you don't see growth play out that way to the incentives of how people would or would not choose to exit certain of these assets? These are all questions that, like, I would think about if you're Playing a very singular one way to play this kind of narrow lane, as opposed to a broader way.
- [42:08]
A
And it is interesting when you think about the impact of COVID So at the time league stopped and the game stopped, and you could look at that and say, oh my God, this is a disaster. And now you look back, you know, six years later, and you see the benefits that accrue from that experience.
- [42:23]
B
No question. That's why I walk a fine line. I think we would have gotten here anyways. Institutional capital was coming. The value of these assets had started to get so big, it was going to inevitably get beyond a closed ecosystem of wealthy folks being able to do it all themselves with common. But Covid effectively pulled all that forward because at a moment in time you started saying to yourself, oh my God, what if this goes on longer? What other options do I have if I can't borrow? All I've been able to do is common equity with individuals and started to facilitate those conversations and accelerate them into leagues. And unrelated to Covid again, that deal we did in late 2020 or early 2021, the first ever structured investment, and I think it was the first ever institutional investment in the NBA with the spurs, kind of started this whole train going of saying there's different ways we can operate this businesses and unlock real value by introducing institutional capital.
- [43:24]
A
You highlighted the NFL earlier. Is there something specific to an NFL that might put it in a different league as opposed to the other major sports?
- [43:32]
B
The NFL is very unique, Very unique. If you simplistically buy an NFL team, you only really have, again overly simplistically, two forms of revenue. You have national revenue, which is simply your 1/30 or however many teams there are in the NFL share of everything that the NFL sells and licenses. Regardless if you're the Kansas City Chiefs, the Chicago Bears, the New York Giants, you just all own your share of basically everything that's generated. And then number two, you have local revenue, which is basically anything that is not directly captured in that and derived off things like sponsorships or if you own your stadium or things like that. That is very unique relative to Major League Baseball, relative to the NHL, relative to many of these other organizations. It ensures the equal kind of splitting of all of that revenue, ensures a very competitive league. It assures everybody's aligned together. It's a very tight league where the owners are very close, collaborative, making decisions together. And so it's very unique relative to what you see in some of the other leagues. And so if I would make a bet to Say, hey, I'm buying the Kansas City Chiefs or I'm buying the Kansas City. Fill in the blank from another league and team. What's unique about buying the Kansas City Chiefs? Equity is not only do you own the Chiefs, the intrinsic value, the local revenue that's being generated from the Chiefs, but you own a huge share of everything that is licensed from, you know, the most profitable professional sports league that exists on planet Earth. Whereas if it's a baseball team, if it's a hockey team or if it's something else, you're taking a much more major bet on that local market, the local team. And that's not even factoring in the growth rates from here, the popularity of the game, things like that. And so it's no mistake when you looked at, you know, one of the straight equity investments we've made here at 6th street, again, not the only one, but one of them. It was in the New England Patriots. We love the Patriots. We think the Kraft family are world class in running their organization and it has alignment with running the NFL. That's why we liked it as a part of our portfolio.
- [46:01]
A
Earlier you mentioned we're probably in the second or third inning of this expansion into sports assets. What do you see as a potential tipping point or what do you think happens if too much capital comes in?
- [46:13]
B
I don't think we're there yet and I'll explain my answer. But that is a very key question. And I don't think it's unique to sports in any asset class, whether it be US direct lending to software, private equity to health care, royalties. It's always about supply, demand. Do you have an excess or dearth of supply of capital relative to the assets, the projects, the capex needs, the CapEx needs of a given? Tam, I think, I think that is a key question. I, I was with the deputy commissioner of one of the major, you know, revenue sports leagues that I was literally having this conversation at this point. In the NFL, there's only four approved groups who can be a counterparty with the NFL. And you can only invest thus far in minority equity transactions less than 10% of a team. You look at the NBA, you have the ability now of a couple of us who have actually done transactions, but you know, it's still not widely open for new structures, debt, things like this happening in the NBA. And then you go down the line, whether it's the mlb, whether it's Major League Soccer, Premier League, there's still a beginnings of introducing institutional capital structures and other sorts of things into these Teams. Teams and leagues. And you fast forward the clock ten years from now, I don't think this is a major prediction. You're going to see more openness, more participants, more capital, more structures coming into all of these assets as it simply matures and grows. At some point or nowhere near it, at some point, the marginal dollar will not be allocated efficiently. Now, that's going to be different by league, it's going to be different by team, it's going to be different by situation. But sports will be no different. At some point there will be excess marginal dollars which will be used on not profitable or not higher ROI CapEx projects it will be used to overvalue an asset. Something like that. I just fundamentally don't think we're even near that equilibrium yet because we're still so early into this. Again, it's only been about five years that you've seen any institutional capital even coming in here. And again, it's still somewhat limited. But that is a great question. It's something we debate deal by deal as we keep going through this ecosystem. But I still think it's a long
- [48:32]
A
way away as entertainment options fragment and compete for attention. We talked about that a little bit. Does live sports face some of the same headwinds we've seen in movies or do you feel like it's fundamentally different?
- [48:47]
B
It's probably benefiting from the trend we're seeing in movies, quite frankly. I mean, the fortunate or unfortunate reality of movies, and I'm a big movie person myself, so this is unfortunate to see, is that the ability to stream movies in the whole streaming proliferation and content being available in your homes and the hardware side of things, with bigger and better TVs and sound systems and things like that, people just aren't feeling the need to go to a movie anymore. I think you're actually having a totally different thing happening in sports, which is sports and the live entertainment side. Look, we are living in increasingly politicized country. It's kind of one of the few if last bastions that everybody can come together and feel really good about their team. Whether that's professional, whether that's college. You can all come together, cheer your team on, you go with your friends, you feel part of a community doing all that. People are demonstrating, paying a premium for that experience to go do it. And number two, the cycle that happens is the access to the content that your team and their league is producing is tying you even further into their ecosystem. Because you can leave the game, you can check out all the stats on your phone you can watch highlights from it, you can be delivered the content for any game they play. It's being brought to more geographies and places than ever before. And so it's really become a virtuous cycle that's supporting one another. So I don't think it's quite the same as what you see in movies, where the exact same experience people are experiencing in the theater, where they're supposed to be quiet. Everything else is kind of the same as what you're getting at home. I actually think it's more of a virtuous cycle where one is supporting the other, creating these valuable assets.
- [50:32]
A
A newer trend is the monetization of collegiate sports. How do you see this phenomenon playing out?
- [50:37]
B
I think you're seeing that space evolve very, very quickly. You know this is publicly available. You can Google this. We were very close two years ago of being the first institutional investor to take a stake in a US college sports program. You've seen the conference alignment. The nil era just completely changed the economics for how these systems operate. And you're already seeing clear winners and losers where winners have unlimited access to funds from facilities they can build to buying players doing all this, where traditional powerhouses just might not be able to keep up, which they'll have to find capital sources to do that. So big kind of thing, number one, I do think the entire collegiate sports ecosystem, you fast forward 10 years from now, I think you will see institutional capital being involved there. Unless there's some government, regulatory or other sorts of things which kind of limits it to go back to the old days, I don't think that's going to happen. But I do think that whole ecosystem is very much set up and just slightly behind where professional sports is for institutional capital to come in. And then the second thing is, and as a father of three kids, I'm seeing this myself, the professionalization, fortunately or unfortunately, of kids sports. Like you're seeing private equity firms rolling up kids sports clubs, you're seeing the specialization and training of these kids kids across different sports, different leagues, things like this. It's funny, like, whether parents realize it or not, there's institutional capital already behind some of the teams, clubs, and other sorts of things across sports their kids play for. And I do think that those two things are two things that are kind of top of mind for me. As you think about, we kind of see some of the vectors, downside, upside of what's playing out in professional sports and stadiums and things like that. But sports also includes colleges, it includes what's happening at the youth level. There's a lot of opportunity and risk, but lots of tailwinds. Lots of things to think about across
- [52:39]
A
those well, Brian, this has been a lot of fun, enlightening, highly insightful. I appreciate you joining us and sharing all your experiences with us. Thank you.
- [52:51]
B
Alex. Thank you so much for having me. I appreciate it.
- [53:00]
A
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