The theory that you can invest in almost anything these days is about to be put to the test.
A San Francisco trading platform, Fantex Inc., has pioneered a new form of public investment strategy, buying a portion of a professional athlete’s future earnings and offering an IPO whose future value depends solely on that athlete’s upcoming contracts.
If that seems insane, what makes it so different from other investments? You figure out the current value, the potential value and the probability of outside influences. Then you plunk down some money and pray.
The problem is that young, professional athletes don’t want to give away their future earnings anymore than you do. Probably less so. So if they’re perfectly willing to ink a deal allowing investors to take on that risk of their future earnings for an upfront buyout, what is that telling you about how those athletes feel about their own future?
Fantex isn’t beating around the bush either. “This offering is highly speculative and the securities involve a high degree of risk,” it says on its website. In that case, fetch me my checkbook, pronto!
In star Houston Texans’ running back Arian Foster, they couldn’t have found a more interesting initial test case. Fantex recently announced it had closed a deal with Foster, paying him $10 million upfront for 20 percent of his future earnings, according to Forbes.com. Fantex will then sell stock in those future earnings it bought.
The Arian Foster IPO is now priced at $10 per share, according to the Fantex website.
Foster would have been a tremendous buy-low candidate when he came out of college as an undrafted free agent who barely made the Texans’ roster in 2009. Even though he was the second-highest all-time rusher out of the University of Tennessee — the school that produced such star NFL running backs as Jamal Lewis, Travis Henry and James Stewart — he battled injuries, off-the-field issues and fumbling problems in college and disappeared from draft boards.
In 2010, he broke out with 231 yards rushing in the opening game and went on to lead the league in rushing with more than 1,600 yards.
He missed three games in 2011 — perhaps a sign that an injury-plagued college career was rearing its head — but still was named to the Pro Bowl and totaled almost 1,850 yards. He had the sixth-most NFL rushing yards last season.
Since he just turned 27, in most sports he would have been entering the prime of his career and would be a solid buy for the next five to six years. But he’s an NFL running back, where high-performance careers past age 30 are the exception and personnel turnover is common. Of the top 10 rushers in the NFL in 2010, just two are in the top 10 so far this year.
Foster is one of them. He’s the seventh-leading rusher this year, which bodes well for his possible staying power. But he’s hurt (again) and might not play this week.
What makes the whole prospect more maddening is that you’re not investing in an athlete’s performance, you’re investing in earnings.
Mike Trout, the 22-year-old star outfielder for the Los Angeles Angels, just logged two of the best back-to-back full seasons to open a career in baseball history. Has he been financially rewarded for this? Of course not!
Thanks to Major League Baseball’s contract system, he made $510,000 in 2013, according to baseballplayersalaries.com, near the league minimum of $480,000. He’ll likely be close to that figure again in 2014 before he hits arbitration in 2015 and free agency after the 2017 season. The Angels could buy out his arbitration years and bump his salary up to about $10 million or so per year, but they don’t have to, and he’d still be wildly underpaid even if they did.
Investors in Trout would be giving away four more years of his peak production before they can hope to realize some major value in 2018 — as long as he doesn’t get hurt or suffer a major dip in production.
If you’re a regular investor, that’s probably something you’d never be able to wrap your head around -- the idea of earnings versus performance. But it’s the nature of the sports world, and if investors are going to make their way in to that arena, they better know exactly what they’re getting in to.
I’m pretty sure I’d rather throw $50 on the long-shot in the seventh at Penn National tonight than invest in a professional athlete — especially an NFL running back — if I’m investing in future earnings. It’s fun to know I could do it if I wanted to, but it makes about zero sense to do it in financial reality.