The Billionaire's Dilemma

Have we learned nothing?

Welcome to Warning Track Power, a newsletter of baseball stories and analysis grounded in front office and scouting experiences and the personalities encountered along the way.

These are five of the free-agent contracts from this century that influenced a generation of baseball’s decision makers. It was Scared Straight! for the front office:

Mike Hampton, 2001 (28 years old) — $121 million, 8 years

Chan Ho Park, 2002 (29) — $65 million, 5 years

Gary Matthews Jr., 2007 (32) — $50 million, 5 years

Jason Bay, 2010 (31) — $66 million, 4 years

Josh Hamilton, 2013 (32) — $125 million, 5 years

None of the players listed above played out his contract with the signing team. Collectively, in fact, they didn’t even last for half of the guaranteed years agreed upon.

The misfortunes of these players and, more so, their teams underscored the dangers of paying for past performance, ignoring the aging curve, and negotiating longer-term deals.

Perhaps the industry overcorrected.

It was three years ago that Tony Clark, executive director of the MLB Players Association, chastised owners for their austerity. Tanking had become fashionable. Teams battled for draft priority almost as much as they did for playoff spots. Owners certainly were not complaining over spending too little.

That doesn’t seem to be an issue any more.

With Aaron Judge pacing the free agent activity, teams are committing more total dollars over more years than ever before. As many of you know already, that’s the new wrinkle in this moment’s spending spree.

With players and agents focusing on total dollars guaranteed and teams prioritizing lower annual average values (AAV), we’ve seen three deals of 11 years or more signed this month. Flattening the AAV relieves some of the pressure on luxury tax thresholds.

It’s a copycat league. Information is shared, studied, pilfered. Openers, shifts, starting pitchers who will never face more than 18 batters. Well, MLB banned the shift, but organizations took it upon themselves to welcome the return of long-term contracts that almost always end poorly for clubs.

The difference now is that everyone knows it. Judge, Carlos Correa, Trea Turner, Xander Bogaerts, Carlos Rodon: Teams invested in these players to help them win in 2023, not for what might happen in 2029.

Owners historically have doled out big dollars in the first offseason of a new Collective Bargaining Agreement. Beyond that, though, it feels safe to say that the game has recovered from the pandemic.

Where’s the money coming from?

I’ve been asked it over and over. And I want to give a better answer than: Steve Cohen.

Cohen’s Mets redefined the bullpen market early in free agency when they re-signed closer Edwin Diaz to a $102 million, five-year deal. Aside from being the most money ever committed to a reliever, the agreement also signaled a win-now urgency.

But it’s not just Cohen, whose net worth of $17.5 billion puts him in the top 100 richest people in the world. Other ownership groups are choosing to spend money this offseason, making me wonder not where it’s coming from, but where the money has been hiding all these years?

A report came out in July 2021 about Ares Capital Management, an investment firm that was raising $1.5 billion for a sports, media, and entertainment fund. Ares was founded by Tony Ressler, who owns the Atlanta Hawks, and Bennett Rosenthal who is an owner of LAFC of Major League Soccer. 

When the Padres sought to raise $350 million in capital earlier in 2021, Ares bought about $100 million in debt from the franchise.

Curious as to what this meant for the Padres and baseball in general, I did some research. Frankly, I was relieved to learn that this practice is above ground.

Most baseball teams, when looking to finance or borrow money, pursue mainstream avenues such as traditional bank debt or bonds. In the Padres case, the organization is pursuing a nontraditional means of financing. Regardless, all such transactions are cleared through MLB.

It’s important also to note that MLB has a debt service rule in place. Under the current Collective Bargaining Agreement, as explained by Evan Drellich of The Athletic: “most teams are required to keep their debt to less than eight times their earnings.”

Teams are capped on what they can borrow; these measures are designed to keep everyone out of trouble. Is it as simple as some teams feeling more comfortable with taking on debt to improve the lineup?

If that’s the case, the ultimate challenge seems to be one of sustainability. The Padres, for instance, drew almost three million fans in 2022. If the team struggles at some point in the near future and attendance drops, how will the organization account for lost revenues from fan spending?

The same goes for any team that has taken on more money as of late, like the Blue Jays, Phillies, and Rangers. I suppose it’s not something we need to worry about this season. Let’s just enjoy the baseball.

Meanwhile, this past September, Ares announced that it had raised $3.7 billion of capital for its sports-related fund. The firm’s other investments include a minority ownership in Atlético de Madrid (a top Spanish soccer team) and McLaren Racing.

Notably, Ares also supplied a $100 million credit line to support Rawlings’ acquisition of Easton Diamond Sports in 2021. Rawlings, in case you forgot, was acquired in 2018 by MLB and Seidler Equity Partners.

Co-founder and managing partner of Seidler Equity Partners is Peter Seidler, chairman of and lead investor in the Padres.

Perhaps Seidler, along with Cohen in New York, John Middleton in Philly, and Ray Davis in Texas, is part of a growing group of owners more willing to spend his money and reinvest the team’s revenues in the on-field product.

I hope so.