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Good Thursday Morning. Here’s the rundown of this week’s Sports Business Playbook:

• 📰 This Week’s Topic: Grand Canyon University earned its first NCAA tournament win in school history this past weekend, upsetting 5-seed Saint Mary’s. The win puts GCU and its checkered past and present as a for-profit/non-profit institution back under the microscope, and it could be the playbook for other investors looking to get their hands on college athletics returns.

• 🍸️ Impress Your Friends at Cocktail Party: Want to show off your sports knowledge in a public setting but don’t have time to read the deep dive? Hit the “Impress Your Friends at Cocktail Party” section at the bottom for a CliffsNotes of this week’s topic

• 🤯 “Whoa of the Week”: The new MLB valuations

• 💪 Weekly Reminders that Sports are Awesome: Jack Gohlke cashes in on his March Madness heroics, and Caitlin Clark gets memorialized like one of the all-time greats.

Hey team,

It’s been a surprisingly “chalky” first week of March Madness. The favorites mostly took care of business in the first two rounds:

• All #1 and #2 seeds made it to the Sweet 16 for just the fifth time in the tournament’s history

• The average margin of victory in the first weekend was 15.8 points — second highest since 1985

That being said, we did see a few upsets in the opening slate of games. 13-seed Yale took down Auburn, 12-seed James Madison ousted Wisconsin, and 12-seed Grand Canyon University upset dark horse favorite Saint Mary’s.

People know the first two Cinderella’s, but what is Grand Canyon University?

Answer: GCU is the biggest school you’ve never heard of.

The private institution, located in Phoenix, Arizona, is the largest Christian university in the country, with a sizeable on-campus population (25,000) and a total enrollment of roughly 118,000 students due to the 92,000 online students.

This is significant and somewhat different from the usual online student presence at universities that is predominantly focused on grad programs.

But what makes GCU most unique is that they’re the only former for-profit, publicly traded entity in the March Madness field.

In this week’s SBP, you’ll learn:

• Grand Canyon University’s checkered past as a non-profit and for-profit, and their hybrid? profit model that has drawn the ire of other schools and government entities

• Why a strong athletics program helps a school like GCU

• How the GCU model could become a playbook for other investors interested in breaking into college athletics

The History of Grand Canyon University

Originally established in 1949 as a non-profit Christian college, Grand Canyon University founded itself mired in nearly $20 million in debt in the early 2000’s.

So, it switched to a for-profit status in order to bring in additional funding, and in 2008, Grand Canyon Education, the for-profit organization, became a publicly traded entity (LOPE).

As a quick primer on for-profit institutions, when you think for-profit, think schools like DeVry, University of Phoenix, or ITT Technical Institute. Basically all of the schools that used to advertise on ESPN2 during Pac-12 after dark (RIP).

These schools can work in some circumstances, but they historically have a very poor reputation, and there are myriad instances of the U.S. government finding fraud, deceptive marketing practices, and predatory behavior from these entities.

GCE operated the school as a for-profit for 14 years before receiving approval from (some) government agencies to return the school to non-profit status in 2018.

To do this, the school was sold for more than $870 million to a non-profit set up by Brian Mueller, the then-CEO of GCE and current GCU President.

The sale lives in a gray area both morally and by the letter of the law.

While now owned by a non-profit, GCU has a contractual agreement requiring GCE (the for-profit, still publicly traded entity) to continue funding many of GCU’s (the non-profit) operations in exchange for 60% of GCU’s tuition and fee revenue.

This agreement has been the key point of disagreement amongst government entities about the school’s status.

In GCU’s corner, recognizing it as a non-profit:

• The state of Arizona

• The IRS

• The Higher Learning Commission, the accrediting agency of record, officially recognize GCU’s non-profit status.

On the other side — several major government entities that do not like this setup one bit:

• The Department of Education ruled that GCU failed the “operational test” for non-profit status in 2019 and the back-and-forth has continued since then. It is currently in the appeals process

• In October 2023, the DoE fined GCU $37.7 million for deceiving more than 7,500 students about the cost of its doctoral programs. As expected, GCU appealed the fine.

• The FTC filed a lawsuit in December 2023 against GCE, GCU, and Mueller, alleging that the parties had deceived students by falsely advertising GCU as a non-profit despite GCE’s significant financial ties to the non-profit

Why Division 1 athletics?

There are probably a multitude of reasons for why GCU decided to return to non-profit status, but there’s a major one we’re going to focus on — opening up the opportunity to move to Division 1 athletics.

GCU had been focused on becoming a D1 athletics program for several years before 2018, and they saw the move to D1 as critical for two reasons: brand recognition and revenue distribution.

On the subject of brand recognition, athletics has long been seen by GCU as a way to help boost this enrollment.

In a 2013 10-K after initially accepting an invitation to join a Division I conference — the Western Athletic Conference, GCE stated “we believe this increased brand recognition has been the primary factor behind our increased enrollment, especially in Arizona and bordering states.”

This goes back to the notion of athletics driving increased visibility and potentially enrollment, also known as the “Flutie Effect,” for universities that I’ve discussed in prior editions.

I would expect it to continue as well.

GCU’s student body has steadily increased the last several years, and there are plans to double the in-person student population to nearly 50,000 by the end of the decade.

Regarding revenue, all schools competing in major athletics are technically designated as non-profits (If this statement strikes as you ironic given the multi-billion dollar endowments and nine-figure athletic department revenues that many of these schools boast, that makes two of us).

The NCAA has made clear that only non-profit institutions are eligible for its revenue distributions, grants, or scholarships.

In practice, that means payouts from, say, an NCAA tournament appearance (if you’re looking for a primer on how the “basketball fund” works, check out last week’s piece).

And in GCU’s case, much of athletics’ success can be attributed to their men’s basketball program that has a direct line to those payouts.

Coached by Bryce Drew — yes, that Bryce Drew of March Madness lore — GCU has reached March Madness in 2021, 2023 and 2024, and the Antelopes’ win over Saint Mary’s is their first tournament win in school history.

So, the plan seems to be working.

The school received nearly $650,000 from the NCAA in FY2022, per Sportico, and the stock shows the exponential growth (+436% in the last decade) that the slow path to non-profit status and D1 athletics has unlocked.

How have they become perennial contenders in their conference?

By outspending everyone, it appears.

The school reported $6.8 million in men’s basketball expenses in FY 2022, 50% more than the next closest school in the Western Athletic Conference (Seattle, $3.9 million). It’s hard not to draw a correlation between this spending and the team’s success these past few years.

And herein lies the rub.

Against the backdrop of a rapidly shifting college athletics landscape, a school playing in the gray area of for-profit/non-profit is using publicly traded company funds to juice its athletics program to compete against traditional non-profit institutions operating under the old model.

The school has done a number of things well that it should be commended for — hiring an outstanding coach, creating a top notch home court atmosphere, and marketing the athletic teams’ successes.

On the other hand, it’s also got a highly questionable organizational structure and has engaged in predatory behavior in the past.

Stranger than fiction, but also appropriate for the uncertain times college athletics finds itself in.

But, could it also be a roadmap for others looking to get into the lucrative college athletics business?

The Grand Canyon University Plan

Let’s put on our tin foil hats together, friends.

It’s no secret that college athletics has become big business.

As the decisions have become more and more money-focused, we are now hearing rumblings that private equity firms and major banks are beginning to kick the tires on potential investment vehicles within college athletics.

The challenge has been navigating the existing structures, norms, and bureaucracy of these historic institutions and finding a solution that satisfies the non-profit status while also generating a significant return for the for-profit entity.

Enter: the Grand Canyon University plan.

There are 2,270 private for-profit institutions in the U.S., according to the National Center for Education Statistics.

Assuming the pending litigation against GCU doesn’t result in any material changes to the way they’re operating, what’s to prevent a well-funded group of investors from finding another diamond in the rough like GCU and running the same playbook:

1. Purchase a struggling for-profit university

2. Take the controlling company public

3. Build up athletics almost like an expansion franchise, unbridled by tradition, donors, and bureaucracy

4. Convert it to a non-profit with a hook back to the public, for-profit company

5. Reap the financial benefits — both direct (revenue distribution) and indirect (increased enrollment) — that come with a strong, well-known athletics department

It’s unlikely this would work with football. The startup expense is too high — estimated to be $75 million for just setting up an FBS school in 2016, it throws the school’s male/female scholarship equilibrium required by Title IX out of whack, and given the distance between the have’s/have not’s, it’s unlikely there would be a reasonable return to justify the significant expenses.

But basketball — both men’s and women’s — could be an interesting proposition. They require smaller rosters, lower expenses, and there is more opportunity for mid majors to generate decent revenues and exposure from March Madness.

With NIL money enabling a team to change its fortunes in one whirl around the transfer portal, who’s to say it couldn’t work.

Is it slimy and do I feel like I need a shower? Of course.

But, is this type of money-first thinking and moral ambiguity really that different than what we’re seeing from the revered non-profit institutions that lead college athletics today?

🤷 

🍸️ Impress Your Friends at a Cocktail Party

Want to show off your sports knowledge in a public setting but don’t have time to read the deep dive? This section is the CliffsNotes of this week’s topic

• Opener: Grand Canyon University earned its first NCAA tournament win in school history this past weekend, upsetting 5-seed Saint Mary’s. The win puts GCU and its checkered past and present as a for-profit/non-profit institution — including the large, publicly traded company still heavily invested in them — back under the microscope

• Shot: GCU is the biggest Christian university in the U.S., with 25,000 students on campus and another 92,000 online. It was rescued out of debt in the early 2000’s and converted into a for-profit university. There is a negative connotation with these institutions, and many have been convicted of deceptive marketing practices, predatory behavior, and outright fraud.

• Shot: GCU reverted back to a non-profit in 2018, with one of the main goals being able to compete in Division 1 athletics. Moving to D1 would provide additional revenue opportunities for the school plus major brand exposure, which fits with GCU’s goal to double its on-campus enrollment to 50,000 by the end of the decade. This non-profit move has drawn scrutiny from government regulators because while it is technically non-profit, the publicly traded company that used to own GCU still covers a number of expenses and receives 60% of all revenues. In short, there are a lot of conflicts of interest here.

• Shot: The basketball team has been emblematic of that success, reaching the tournament in 2021, 2023, and 2024. They’ve done this by spending two times as much as other teams in their conference, which further illustrates the gray, morally ambiguous area they currently occupy.

• Chaser: All of that being said, the GCU model could be perfect for a group looking to cash in on the lucrative world of higher education. Given the increased focus on the industry by large institutional investors, it could work.

🤯 “Whoa” of the Week

Insane, mind-blowing things constantly happen in the sports business world. Here was my favorite of the past week.

1. New MLB valuations dropped. A notable takeaway: outside of the Dodgers, the top 5 features teams that have not competed for a World Series in several years, and last year’s champion — the Texas Rangers — didn’t crack the top 10.

💪 Weekly Reminder that Sports are Awesome

This newsletter is, of course, mostly centered on the business side of sports and the things that happen off the field. That being said, it’s important to remember why we fell in love with sports in the first place, though.

This section is meant to highlight the amazing things that happened in sports this week that serve as that reminder.

1. Jack Gohlke turned his March Madness heroics against Kentucky into NIL money in less than 24 hours

2. Caitlin Clark is getting a tribute issue from ESPN the Magazine. Look at the group of all-timers she’s joining.

Thanks for reading! Let me know what feedback you have.

Also, if you enjoyed this breakdown, please consider sharing it with your friends and network by clicking the social media icons at the top of the newsletter.

Until next time, sports fans!

-Alex