Portfolio manager explains how e-sports drive a large portion of the Purpose Global Innovators Fund amid demographic shift
Call it a shift in demographic … or maybe it’s the revenge of the nerds. Either way, the e-sports industry is big business and attracting the biggest companies and an increasing number of investors.
For Nick Mersch, associate portfolio manager at Purpose Investments, his thesis revolves around figuring out where the eyeballs are going and that the penny dropped during a stroll through Toronto.
He said: “I was at the then Air Canada Centre and I saw these huge line-ups outside and I thought, what’s going on here? Only afterwards did I figure it was a video game competition and seats were going for $250-300 on StubHub re-sale. It wasn’t a Leafs game! It was a League of Legends championship game!”
From there, he went down a rabbit hole of checking out the different teams and content creators, and discovered the franchise leagues. When Activision came out and charged teams $35 million for an Overwatch league team, it was an “eye-popping figure".
Mersch co-manages the Purpose Global Innovators Fund, which allocates about 20% of its holding towards e-sports. A self-confessed nerd, he said that while there are risks in such a nascent space, it’s impossible to ignore the numbers and potential.
He said: “It’s growing at a much higher rate than other traditional sports. The saying in the industry is that for every MLB fan that dies, two e-sports fans are born. If you look at the emerging demographic from that perspective, you can make an overall bet on the space.”
Mersch highlighted the formalisation and structure of the league, and how the teams are building solid brands and adding other assets to their arsenal. They are businesses arguably more professional and efficient than many established sporting institutions.
The e-sports and video game markets combined are expected to generate $149-billion in global revenue this year, which is more than the traditional sports market (about $140 billion). There are a number of other quick-fire facts that Purpose puts forward to illustrate the market’s standing:
- more people watched the finals of the League of Legends World Championship than the Super Bowl in 2018 (approximately 200-million viewers versus 98-million);
- many owners of traditional sports franchises also own e-sports teams, including Robert Kraft (New England Patriots), the Aquilini group (Vancouver Canucks) and Jeff Wilpon (New York Mets);
- franchised leagues in e-sports are formally aggregating media rights, sponsorships, advertising and player contracts in the same way traditional sports have;
- Twitch, the main online channel to watch gaming, has twice the number of subscribers as ESPN;
- huge revenue upside is that the average e-sports fan spends $5 per year while an NFL fan spends $60.
Mersch added: “[Being a video nerd] used to be taboo, with video games only for the diehard nerds but after the Fortnite phenomenon, it’s exploded. It was family friendly and massively popular. You had a cultural revolution!”
As a more direct play, Mersch likes the streaming service Huya, which can provide a gateway into China for investors. It has backing from Tencents, the largest holding in the fund.
There are, however, recognised risks at entering the space this early in the game. Publishing studios are experiencing a bleed-off in terms of software engineering talent, increasing the risk of a dud release, while many firms are 12-15 months old and there remains question marks around valuation and execution.
For Purpose to increase its 20% e-sports portion of the fund, it wants to see more companies on the team side go public on the junior exchanges in Canada. Mersch said: “We’ve also been through a different pricing shift within the publishers where it’s free to play. We’ll see how that evolves and what different monetization avenues are going to be explored.
“We wanted more diversification. We thought about launching an e-sports fund specifically but thought that in terms of risk, a more blended approach made more sense.”