Investing in Duffey

[Platoon]

If I was Duffey, I take the money in a second. Hell, he could by 30 yr bonds, and have a nice retirement nest egg, no matter what happens. And as someone else said, if he hits it big he can't spend it all anyway, it's just a number on an account. As far as the investment itself, I think it's a great idea. Everyone remembers derivatives, right. . Whatever happened to the time when stocks were sold for capital to invest, and commodities were sold to hedge against price spikes? Arrgh. Ok, off my soap box and back into moms basement! Oh, btw, mom said, "if it looks too good to be true, it likely is"!

[Boom Boom]

I'm wondering what happens to the player if there aren't enough interested investors.

[Otto von Ballpark]

 

I'm wondering what happens to the player if there aren't enough interested investors.

Nothing.  I believe their contracts with Fantex are dependent on Fantex selling all of the "shares" first.

[Otto von Ballpark]

 

The point was that a career does not have to be that long to earn a large sum of money.  Crain's career was shortened by injury as he was done by 32, a shortened career for a reliever. Semantics arguments. Romero spent a few years as set up, not the majority of his career. Again, if you feel that as a starter or reliever, if you think you are going to have a decent career,  20 million is obtainable, be it as a mid to back rotation starter like Pelfrey, a long career with a few good years, or  a shortened excellent career. Taking the money, to me, is a sign the maybe Duffy is not very certain of his future

And my point was, you may need to re-calibrate your perception of MLB careers if you think 11 years (Crain) is a "short career" in the full universe of MLB players.  What percentage of 25 year olds with ~70 days of MLB service time do you think wind up with 11 year careers?

[Richie the Rally Goat]

So Fantex is like a Pay Day loan. I wonder what happens to the players if Fantex goes bankrupt? Does their debt become immediately due to the lien/shareholders?

[diehardtwinsfan]

 

So Fantex is like a Pay Day loan. I wonder what happens to the players if Fantex goes bankrupt? Does their debt become immediately due to the lien/shareholders?

 

I'd be more worried about the other side here.  The players get that money up front as soon as their shares are sold.  It's the guys on the other end holding those contracts for 10 years who assume all the risk if Fantex were to go under.

 

 

[Richie the Rally Goat]

I'd be more worried about the other side here. The players get that money up front as soon as their shares are sold. It's the guys on the other end holding those contracts for 10 years who assume all the risk if Fantex were to go under.

not sure if contract holders are the only stakeholders with assumed risk. Agreed, contract holders are at a high risk for loss, but if the players owe x% of future earnings, they become assets to be liquidated to pay the contract holders and lien holders. Of course the lien holders get paid before the contract holders, but it's the players that do the paying as debtors. Could you imagine some bankruptcy judge saying "well, you have made 6 mil so far in your career, we think you'll play another decade, at rate of wage growth that should be an additional 50 mil. You owe 5.6 mil due today"

[ashbury]

Read the link I posted above.  Fans aren't buying a share of Duffey's future earnings.  They are buying a share of a "brand tracking stock" on Duffey, that is measured at the sole discretion of Fantex.  I guess it's not illegal (it's spelled out in the terms of the purchase), but I'd say it's more than a bit deceptive.

It sounds like Fantex buys two separate things when they give the player X-million dollars up-front. 1) Ten percent of future earnings, 2) the right to market the player's "brand" in this specific stock-trading way. The general public has their role in #2 but apparently nothing to do with #1.

 

The shares that the general public buys may or may not be liquid. Fantex acts as the market maker. There is room for unseen arbitrageurs to work in conjunction with the market makers, matching bids with offers without providing transparency. If the market ever becomes highly liquid due to participation on a scale of the NYSE then maybe with external regulation the market can be fair to investors, but if it remains illiquid or unregulated then you're at the mercy of strangers accountable to persons unknown. I had a little experience with stock options in a thinly traded market like I described, and even in a regulated environment the scope for mischief was considerable.

[big dog]

These are an example of derivative securities; the payout of the "shares" is derived directly from the earnings of the player, which is a very risk stream of future cash flows.  Bonds pay a coupon rate that is specified, but risky; these have a payment that is both risky and unspecified, but tied to a particular variable (player earnings).  Derivatives are demonized in the press, but there are lots of things that are well-accepted derivatives, like stock options.  As mentioned above, we don't know the formula for how much of the earnings are actually paid out to investors, so we can't do much modeling on the possible valuation.

 

Perhaps the best analogy for this are the so-called "Bowie bonds".  David Bowie sold bonds which paid out over time based on the sales of his previous albums rather than at a specific coupon rate.  Another somewhat similar instrument would be bonds that have an interest rate that fluctuates with oil prices.  Investors have been very interested in these assets, and baseball player contracts would also be at least potentially interesting to certain investor profiles.

 

I'm not sure I buy the idea that it makes a player less likely to sign an early extension, but it's possible.  Dozier's contract that bought out his late arb years was 4 years, $20 million.  Would a $3-4 million up-front payment in exchange for 10% of all future earnings have persuaded him to skip the deal and hit free agency earlier? As others have also mentioned above, there's still a ton of risk in playing MLB.  If you sign the deal early, 10% of what you lose with potential arb raises is money you don't get anyway.

 

It will also be interesting to see which players want to do this.  Players who are marginal probably have the most interest in doing it, but they would also see the least investor interest.  At least they would see the lowest prices from investors.  Maybe the best marketing strategy would be to try and sell these shares to people who pay hundreds of dollars a year to be in fantasy baseball leagues.

 

In my opinion, this isn't gambling any more than any type of equity-based investing.  It's just a different kind of asset, with much less complex possible cash flows but much higher specific, uninsurable risk.  You could diversify by getting shares in more players, but that only diversifies some of the risk.  Declining interest in baseball or anything else that slows growth in the salary pools would hit at least most players.

[big dog]

...and I agree with Ashbury- these things are long way from becoming publicly-traded securities.  It is probably going to be a very thin market, where you may be told you are buying "shares", but markets are going to be thin and easily exploited by insider market-makers.  

[70charger]

 

not sure if contract holders are the only stakeholders with assumed risk. Agreed, contract holders are at a high risk for loss, but if the players owe x% of future earnings, they become assets to be liquidated to pay the contract holders and lien holders. Of course the lien holders get paid before the contract holders, but it's the players that do the paying as debtors. Could you imagine some bankruptcy judge saying "well, you have made 6 mil so far in your career, we think you'll play another decade, at rate of wage growth that should be an additional 50 mil. You owe 5.6 mil due today"

 

If you wanted to liquidate it, why couldn't you sell it like any other receivable? You're assuming that the player would be responsible for it, but that wouldn't be the case, unless the player wanted to "buy himself back" at a discount.