Wall Street and Silicon Valley have spawned a love child called Fantex. The San Francisco-based marketplace for shares linked to the actual earnings of professional athletes disclosed its first tracking stock initial public offering on Thursday. The proposition sounds like a sports junkie’s dream. In reality, it is fraught with risks. Fans should lace up their sneakers and run away.
Americans shell out an estimated $15 billion a year to play at being team owners, according to a fantasy sports trade group. Meanwhile, investors value the next 12 months of estimated earnings at $5 billion Manchester United at a whopping multiple of 41 times. So there’s a market ripe for the picking.
A logical extension is to give obsessive sports followers a financial stake in the players they already track. Fantex Holdings is starting with Arian Foster, a top running back in the U.S. National Football League, with plans to use $10 million of IPO proceeds to acquire 20 percent of his future pay – including his salary, any endorsement income and what he makes after retiring from football.
It shouldn’t take long for any stat-crunching sports nerd to spot the pitfalls. Athletic careers can be cut short. Though Foster has been in the league for five years, his performance is slipping and he has confronted multiple injuries. Those playing at his position last on average less than three years. Even so, Fantex forecasts a big jump in Foster’s brand income.
Financial woes also plague pro athletes. A few years ago, Sports Illustrated estimated that four out of five NFL players had serious money problems within two years of their playing days ending. It’s not clear where Foster’s tracking stock owners would fall in the pecking order if he goes on a Ferrari-buying binge. Personal scandals are a giant risk in the sports world, the slug of upfront money may have unintended consequences on player behavior and Fantex enumerates plenty of conflicts of interest.
Buyers of the tracking stock would have no say, as Fantex retains voting power. Though music royalties have been successfully securitized, most famously some of David Bowie’s, previous efforts to make a market out of athletes have flopped. Hollywood lobbying, meanwhile, prevented trading in box office futures. The leagues, unions or other stakeholders might deal a similar blow to Fantex. The startup looks like fantasy sports re-engineered as a fantasy investment.