Private Equity Chases Marathons


As the number of participants and advertisers grows, private equity firms explore investments in the country's top marathon-organizing companies

Marathons, half-marathons, and other running events are attracting hundreds of thousands of people from around the country every year, and private equity firms are beginning to take notice. Executives at Elite Racing and Devine Sports, the nation's two leading for-profit race organizations, have been talking to investment outfits interested in cashing in on the sport's gains.

But experts in the field also warn that building a serious business on what traditionally has been a volunteer-oriented and nonprofit enterprise can be treacherous. Organizers can easily lose millions as they reach out to smaller cities—or diversify into smaller races—in bids to replicate the successes of such mega events as the marathons in New York, Chicago, and Boston.

Still, private equity groups including Falconhead Capital and Seaport Capital are studying the economics of the business, industry sources say. Such firms have already taken stakes in sports or other event-oriented businesses and regard running events as in the same league, says one private equity official who asked to remain unnamed. Seaport, for instance, owns Mandalay Baseball Properties, an operator of minor-league baseball teams. And Falconhead has invested in gym and golf operations.

"The dynamics of the marathon business are pretty compelling," says one insider. "People are concerned about fitness."

Rising Numbers

It's a solid growth business. The number of people finishing marathons has nearly tripled from 143,000 in 1980 to 410,000 last year, estimates the Road Running Information Center. Organizers reap handsome revenues from runners who pay up to $100 a pop—in some cases more—to enter races.

Additionally, the managers pocket hefty sponsorship fees and marketing dollars from advertisers keen to reach the affluent demographic runners represent. "You have an average household income of $160,000, every one of them has a computer, 98% use it daily," David Moross, chief executive of Falconhead, told SportsBusiness Journal. "It is an affluent group that spends and from a marketer's perspective it is a very attractive demographic."

Advertisers such as car companies and banks have flocked to runs to reach potential consumers. It's no accident that ING (ING) and LaSalle (now Bank of America (BAC)) are heavily involved with the runs in New York and Chicago. More expected sponsors include Nike (NKE), Adidas (ADDYY), and Gatorade (PBG).

The backing of such groups has thrust hefty amounts of money into the sport. Indeed, SportsBusiness Journal reported that the ING New York City Marathon, slated for Nov. 4, will draw about $27 million in revenue, even as its economic spin-off effects for hotels, restaurants, and other outfits toss still more money into play. Although it is a run by a nonprofit group, the New York Road Runners, the journal reported the outfit is likely to reap a $6 million gain.

"Strong Business"

Such races all over the country have been overwhelmed by the number of applicants, even as many have hiked the number of slots available for runners. New York will play host to about 38,000 runners and has had more than twice that seek slots. Chicago's race, in October, drew a like number and registration for it closed months before, last April. A combined marathon and half-marathon in Houston, slated for January, sold out 17,000 spots by early October and has been battling scalpers who are selling entries for as much as $500.

Still, making sure of a payoff, particularly when getting races going, can be risky for promoters. Chicago-based Devine Sports, believed to be the second-biggest for-profit operator in the business, says it makes money on its Los Angeles marathon, which draws some 26,000 runners and thousands more for an accompanying bicycle ride. But it has lost money on new races in Las Vegas and Salt Lake City, even while drawing thousands of runners, says Chief Executive Chris Devine. "We want to make sure that they become profitable in 2008 and then we'll expand," he adds.

Industry-leading Elite Racing, which operates such entertainment-heavy races as the Rock 'n' Roll marathons in San Diego and San Antonio, and a country-music race in Nashville, lost money on its startups, as well, says Chief Executive Timothy Murphy. But he says the company, which he founded in the 1980s, now turns a nice profit on more than $35 million in annual revenues. "It's a good strong business, but you have to invest," says Murphy.

Paying Top Dollar

The economics of the industry have grown treacherous as races have become entertainment extravaganzas, not just athletic competitions. For his San Diego run, Murphy's company fields some 44 bands using 27 stages with high-quality sound systems, not to mention offering prize money.

Typically, runs have to pay top-name athletes hefty purses along with appearance fees. The ING New York City Marathon this year is offering some $700,000 in prizes, with the winner running off with $130,000. The LaSalle Bank Chicago Marathon on Oct. 7 paid out some $579,000 in prizes even though it wound up canceling the race halfway through, as temperatures soared into the upper 80s.

The New York and Boston marathons, both run by nonprofits, are unlikely to wind up in the hands of private equity investors, running veterans argue. But Chicago's race, which Devine once owned and Murphy once ran, has changed hands a few times. It's unclear whether Bank of America, which took over LaSalle only weeks before the latest race, will keep the Chicago event over time—though it has scheduled the October, 2008, run already. Murphy says one of his partners has been knocking on the bank's door to take the event off its hands.

Top Player in Talks

Murphy adds that he has been approached from time to time by investor groups interested in taking over Elite Racing and he is now talking with one he declines to name. While he says he's not intending to sell at the moment and is instead focusing on growing his business, Devine has been in and out of the field over the last 10 years. He says several private equity firms are out trolling for ways to get into the business.

If there is money to be made on marathons, half-marathons, triathlons, and even smaller events, private equity firms certainly will want to run the numbers on them.

Check out the BusinessWeek.com slide show for a review of the world's best-paying marathons.


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