Foster care – An IPO in the US is symptomatic of an environment of aggressive risk-taking


Jamie Lowry

Jamie Lowry

Fund Manager, Equity Value

Sports fans who feel that going to an event, betting on a game or running a team in a fantasy league just is not enough for them may be a step closer to a whole new kind of involvement. a start-up company called Fantex plans to launch a trading exchange of stocks linked to the financial performance of sports stars, with its first ‘IPO’ a 27-year-old American football professional called Arian Foster.

Documents filed with the US’s Securities and Exchange Commission show Fantex is looking to raise $10m (£6.25m) for Foster, in return for which the Houston Texans running back has promised to pay the company 20% of all his future earnings. For $10 a share, investors can access a potential upside of a small piece of Foster’s future salary, endorsements and so forth.

And the potential downside? Well, The Value Perspective hardly knows where to start although, following on from our discussion of the pros and cons of the Winklevoss Bitcoin trust IPO, which we considered in Two sides of the Bitcoin, the more than 80 “risk factors” Fantex outlines in its own prospectus seems as good a place as any.

Rather than cherry-pick the more outlandish examples and spoil your fun, we will offer a flavour with just the first two – “we have incurred significant losses since our inception and anticipate that we will continue to incur losses in the future” and “we have a very limited operating history, which may make it difficult for you to evaluate the success of our business to date and to assess our future viability”.

Most obvious among the risk factors, of course – standing out, one might say, much like the 6ft 1in, 16-stone Foster would here at The Value Perspective – is: “Arian Foster may suffer from an injury, illness or a medical condition; any injuries, illnesses or medical conditions of Arian Foster may affect the cash received by us under the brand contract.” You think?

Even so, there will inevitably be people who want to buy a share or two in Foster and it seems a fair assumption that many of them will be fans. After all, with the prices sports franchises feel able to charge for replica shirts these days, $10 a share may not seems such terribly bad value. In reality, though, sports fans are in no position accurately to assess Foster’s future prospects.

There is, however, a whole industry full of people who spend their entire careers assessing the risks of a sports player suffering every conceivable kind of career-threatening injury and it is called insurance. The economics of that sort of contract is quite different, however, with the player or their club paying an amount upfront and the insurer paying out if the player is injured.

With Fantex’s model, on the other hand, Foster pays nothing but receives a payment upfront in exchange for his future earnings. In both contracts the principal risk is the same – the chances of serious injury – but with one there is an established industry that lives or dies on handicapping the odds accurately and with the other, well, there isn’t.

Rarely has the phrase ‘buyer beware’ seemed so appropriate – and this all has echoes of the sort of aggressive risk-taking we have noted before in articles such as Fever pitch. Whatever the potential upside, the risks involved are enormous and, even if they were not, the liquidity is extraordinarily poor. after all, in this deal, only Fantex and Foster have any way of knowing all the relevant information.

Still, at least they seem to be trying to be open, with another risk factor noting: “On December 23, 2012, Arian Foster left a regular season NFL game early with an irregular heartbeat. He is also reported to have experienced a similar condition on eight prior occasions since he was 12 years old.” At the time of writing, Foster is a doubt for the next Texans game due to an inured hamstring.


Jamie Lowry

Jamie Lowry

Fund Manager, Equity Value

I joined Schroders in 2004 as an equity analyst in the European Equity Team initially specializing in the Industrial sectors before moving on to Consumer-based companies and finally Insurance. In 2007, I became a co-manager on a fund investing in undervalued European companies and took on sole responsibility for the fund in May 2010. Prior to joining Schroders, I worked at Hedley & Co Stockbrokers and Deutsche Asset Management as a trainee analyst.

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