House v. NCAA settlement paves way for private equity to infiltrate college football as landscape evolves

Six months ago, Gerry Cardinale stood outside a conference room at the elegant Aria Resort and Casino in Las Vegas, having already surprised a room full of attendees during the annual Sports Business Journal Collegiate Athletic Forum.

During his remarks, the founder and CEO of RedBird Capital expanded his partnership with LeBron James to bring an NBA expansion team to Las Vegas. As if that wasn’t surprising enough, he added that private equity was ready to enter the college sports scene first. He specifically pointed out that college football is tremendously undervalued.

In terms of total revenue compared to the NFL, college football earned five times less. In terms of revenue from broadcasting rights, 10 times less.

“We should fill this gap,” Cardinale insisted.

It was a bit shocking to hear this from a financial wizard. Or maybe it shouldn’t have been. Last August, RedBird Capital led the acquisition of football giant AC Milan for $1.3 billion. He already has stakes in the Pittsburgh Penguins and the Boston Red Sox.

There were reasons the college gap existed. Schools and athletes were restricted by NCAA rules. Athletic departments were capitalist enterprises overseen by a nonprofit NCAA. Oil and water get along better.

But how House v. Settlement NCAA on Thursday, the infiltration of private funding into college sports became all but official when the NCAA and Power Five conferences reached a historic agreement. The $2.8 billion deal opened the door to that influence.

The evidence was presented the day after Cardinale’s presentation. A New York Times reporter asked him: Hypothetically, how much would Michigan football be worth as an investment for your company?

“I would say it’s worth at least a billion dollars,” Cardinale said.

A lot was revealed at that moment. Not only was one of the most powerful financial companies on the planet thinking about such a proposal, but it had also calculated the numbers, which were very attractive.

“The costs of competition are rising,” Cardinale said. “You have to spend if you want to win… They won’t be able to do it with just donors. Bringing in third-party capital is not crazy. It’s a very rational thing.”

Overall, such a union would all but formalize the much-discussed FBS split between the Power Four and everyone else. This deal value of US$2.8 billion confirms this.

It is understood that a new infusion of money must be brought in to support the ever-increasing professionalization of what amateur sports used to be. What might as well be called “College Sports Inc.” is ready for its debut, with football being its number 1 offering.

Cardinale was right. College sports is basically entrenching itself at the top. The SEC and Big Ten together take 58% of the College Football Playoff media revenue under new contract. Seven of the last nine national champions have come from the top 10 in annual sports budget revenues – with the exception of Clemson in 2016 and 2018, as the Tigers ranked 17th in that category, according to USA Today.

After the deal, we’ll live with players getting paid for their services because we’ve been living through a version of that for years, actually. We’re used to it, or at least we should be by now. We’ve already seen Colorado QB Shedeur Sanders basically drive his Bentley to work.

But if Michigan is worth $1 billion, what is the going rate for Texas? Ohio State? The point is that the door is open for investment in these top brands and Big Money appears ready to pounce.

Private capital will be involved because… how could it not? Schools will need money to finance their stay at the highest level of competition. Florida State is already carrying a war chest to buy its way out of the ACC, and other schools in the league could follow suit.

No one really knows what that billion dollars would bring to an athletic department. Cardinale emphasized that such a company would not want or need help in the day-to-day operation of an athletic department. This is literally investing in an undervalued property.

As part of the agreement, Power Five schools will be on the hook for an average of $22 million over the next 10 years. Add in the funding of expanded rosters with more scholarships and that figure could reach $30 million annually. It’s $300 million by school over the next decade.

Companies like Cardinale and RedBird Capital are waiting in the wings. It was reported this week that Cardinale’s new business, College Athletic Solutions, plans to invest $50 million to $200 million in 5 to 10 major athletic departments. RedBird Capital is partnering with Weatherford Capital, an equity firm founded by former FSU quarterback Drew Weatherford. Eventually, CAS could invest in most of the Power Four.

This is the best evidence to date of a formal break between the haves and the have-nots, a move that has been speculated for years. Now we are seeing this, in practice, if not on paper. Forget leaving the NCAA, an organization that will never be what it was. In this new climate, schools can oversee enforcement themselves. As the NCAA’s power wanes, it’s becoming a big party planner — for the NCAA Tournament — every March, and there’s really nothing necessarily wrong with that.

Schools will operate within the NCAA only if they so choose, but their revenues in this new world of investment will define their true membership.

These companies will not necessarily be buying stakes in energy schools. They will be buying a brand. RedBird Capital and Weatherford will want a return on their money – 10%-12% seems likely based on the deal – but it’s more about the ground being broken with third parties now becoming investors in the picture.

Think about what it would be like to “own” a portion of the states of Texas, Michigan and Ohio in these investors’ portfolios. New on the one hand, because it has never been done. Profitable for another, otherwise companies wouldn’t get involved.

“I’m watching what’s happening here,” Cardinale said in December. “One of the questions you should ask everyone is: Is this the beginning of the end of conferences? How about a great college [conference with 68 Power Four teams]? Why not start with that?

“Why don’t you put them all together? If you went to all the media distributors and said, ‘OK, we’re bringing in all 68 and dividing up this programming. You would get, I believe, some parts that are better than the whole. You would get a better result.

Cardinale made these comments prior to the finalization of the CFP contract. ESPN purchased the value of these 68 schools and owns their rights along with Fox. It doesn’t appear that the conferences will dissolve into a large NFL-like unit anytime soon, but the Home the deal created an accelerated timeline for private capital to get involved anyway.

This new money will have to come from somewhere. State grants, loans, booster involvement and reallocation of university funds could help. But $300 million is $300 million. As part of the deal, it appears that schools that want to compete at the highest level will have to expand football scholarships, for example, to at least 100 per year.

“Roster management and really taking that [money] and investing that wisely in athletes and managing their rosters in a professional manner will be extremely important,” Weatherford told Wall Street Journal. “I think a lot will change and no one wants to be on the outside looking in when the merry-go-round stops.”

We haven’t even mentioned the cost of care. This extra income began in 2015 and was disguised as the full cost of a scholarship, but was only available to athletes. This essentially broke the seal on player compensation. In 2021, NIL took a black market in hidden recruitment payments and made it public. We were almost conditioned to this bomb in the settlements, which probably won’t be talked about much in a year or two.

College sports, especially football, have long been a multibillion-dollar enterprise. It simply had no center, no leader(s), no mission statement. Even though it operated under the NCAA brand, everyone, all the time, at the same time, was out for themselves.

“That’s going to change,” Cardinale said. “There will be an increasing evolution in their thinking. When you start getting guys like us involved, it’s going to bring that. “

What happened this week wasn’t so much a revolution as it was the creation of a new business with athletes as revenue-sharing partners. Whatever they decide in the future will impact everything from media rights revenue to coaches’ salaries. Maybe not now, but certainly in the future.

It’s only a matter of time before a central player representative emerges. Longtime player advocate and activist Ramogi Huma stressed for CBS Sports last week that he is interested in being that person once the smoke rises from the crater left in the ground by the House explosion. Again, for such a leader to emerge may take years, but he/she is out there.

First, however, introductions with Gerry Cardinale and his colleagues will be necessary.