It may be a non-correlated asset like no other.
San Francisco-based Fantex Inc., through its affiliate Fantex Brokerage Services, sold 421,100 shares in its IPO in April 2014. Investors in the development company gained the opportunity to share in the future brand-related income (contracts, endorsements, investments, etc.) it generates from the contracts it has with those pro athletes.
The common stock is intended to track and reflect the economic performance of all of our tracking stock brands that we may issue in the future. To date Fantex has created four tracking stocks (Vernon Davis, Alshon Jeffery, Mohamed Sanu and E.J. Manuel) with several more to come.
So, how’s Vernon Davis’ tracking stock, the first issued by Fantex, done so far? Well, if you consider its April 20 closing price of $8.10, the IPO investor who paid $10 is down 19 percent.
However, these tracking stocks are designed to pay dividends on a regular basis. In the case of Davis, Fantex has paid three dividends over the past year totaling $1.50 per share putting its overall return at breakeven in just year one of its existence.
Buying in at current prices you’re looking at a yield of almost 20 per cent. That’s very healthy for a new, and until now, unproven asset class.
So, how exactly does this work for investors?
Fantex Inc. pays an athlete an upfront lump sum payment in return for an agreed upon and contracted percentage of that athlete’s future cash flows defined as “brand income.” Whenever the athlete pays brand income to Fantex, 95 per cent of that income is attributed to the tracking stock in question. From that Fantex pays out periodic dividend distributions.
To fully understand the concept we’ll use the real case example of San Francisco 49er tight end Vernon Davis, the first athlete it took public on April 28, 2014.
Fantex has a signed contract with Davis that pays it 10 per cent of the brand income earned by Davis from October 31, 2013, onward. In return for this 10 per cent indefinite payout, Davis was paid $4 million which equals all of the future brand income Davis is expected to earn discounted to present value and accounting for Fantex’s 10 per cent ownership.
Fantex estimates Davis’ total brand income over the athlete’s lifetime discounted to present value at $40 million, hence its $4 million lump sum payment.
So, the next time you’re looking for a non-correlated asset for a client, don’t just consider real estate or private equity but you also might consider these tracking stocks.
Early returns suggest there’s money to be made.