In the mid-2000s, I was able to work with a Private Equity (PE) firm on rolling up and consolidating sports agency firms. We ended up passing on the opportunity due to the limited commission structure. Unlike the 10 percent commissions in the talent agency business, due to player union regulations, sports representation commissions are capped at 3 percent for the NFL, 4 percent for the NBA and NHL, and 5 percent for MLB.
Contracts are not guaranteed in every sport. Additionally, most athletes have the right to move to another agency at any time. Similar to the talent agency business, the real assets (agents) walk out the door every day, making the agency business limited in terms of scalability.
Sports agents have the difficult job of positioning players for the draft; and an even more difficult time finding them in the far reaches of the world where talent is very young, such as baseball players in the Dominican Republic and Venezuela. Agents must fight to gain representation of the player and then fight to maintain their position. The upfront costs are high, underwritten and sunk by the agency. Only a few players eventually make big guaranteed money and the risk of losing the representation to another agency is not immaterial. The key to sports agency is, as the great Dicky Fox said, “personal relationships.”
Creative Artists Agency (CAA) made the jump into the sports agency business in 2006. The plan was to leverage the sports talent into higher commission commercial opportunities. They eventually grew to become the most valuable sports agency in the world, but did so at a cost. In order to enter the sports space, CAA had to work with PE firm TPG and take on debt to fund the expansion.
As vice chairman at Deutsche Bank, International Management Group (IMG) was my client; due in large part to a close relationship our president had with then-CEO Teddy Forstmann. IMG and their PE owner, Forstmann Little (FL), were great clients, giving us first shot at all banking opportunities. When FL bought IMG in 2004 for the significant price of $750 million, it was heavily into athlete representation. Teddy saw the modest margins and morphed the company away from athlete representation and into sports programming distribution, consulting, sponsorship, training facilities and commercial representation for athletes and models. Teddy passed away in 2011. New CEO Michael Dolan, along with IMG’s management and board, did a great job of continuing Teddy’s strategy by growing EBITDA to $175 million by 2013.
In 2013, Morgan Stanley (MS) was retained to sell IMG. Ultimately, MS and IMG did a spectacular job selling the company for a reported $2.4 billion to WME, the leading TV and music talent agency. WME had to give a controlling interest in the combined company to PE firm Silver Lake Partners (SLP) and take on debt to finance the deal. Their strategy is focused on a re-entry into the modest margin sports representation business with the goal of achieving significant cost savings.
TPG and SLP are both PE firms with admirable track records. However, PE’s track record in entertainment has been mixed. While the smart money is backing these agencies, that doesn’t automatically bring the good housekeeping seal of approval.
When the two best talent agencies made a move into sports, it opened the door for hard-nosed PE firms to become their partner. With the talent side of the business being soft as a result of weakness in film and music, and the debt these agencies incurred to enter the sports business with PE firms as their partner, I imagine there is tremendous pressure on agents to take on more clients and reduce “personal service,” especially in light of the low fee structure. However, young adult clients are in need of more guidance and “personal service” from agents than ever. This is especially true since careers are short and social media presents a greater opportunity to get into complicated situations.
In the next round of collective bargaining with the various players unions, the unions should not be penny-wise and pound-foolish; they should take a longer-term view. They should allow commission rates to increase so that agents can spend more time guiding young athletes to develop important life skills rather than spending time looking for new clients. It will be good in the long run for the players, leagues, teams and agencies.
Brian Mulligan is currently the CEO of Brooknol Advisors, a Media, Entertainment and Sports Advisory Company. Mr. Mulligan has held CEO, Chairman, COO or CFO position of virtually every media/entertainment vertical for majors over a 30 year career, from Co-Chairman of Universal Pictures, CEO of Universal Television, Chairman of FOX Broadcasting and Cable, EVP/CFO of a Fortune 50 Company, SVP of MCA INC, EVP of Strategic Planning and Corporate Development Universal, Senior Executive Advisor Boston Consulting, Vice Chairman of Media/Telecom of a Money Center Bank, and worked extensively in/with private equity. Instrumental in over $175 billion of media and entertainment transactions.