Old fashioned financial instruments like stocks and bonds aren’t paying the rate of return they used to, I guess. The New York Times reports on an emerging investment trend: aspiring MLB players in Latin America. Some US “investors” with ties to sports agents (shocking!) are setting up baseball “training academies” in the Dominican Republic. These academies enroll kids as young as 13 who aspire to a professional baseball career and provide them with a place to live and baseball training. If/when the kid signs a contract with a MLB team, the investors take a cut of the signing bonus. The fraction of the signing bonus taken by the investors can be as high as 50%. The trainees don’t attend school – they spend 100% of their time in baseball training. One owner claimed that his operation will generate $1 million in profits this year on a $400,000 initial investment. Not a bad rate of return in the current financial environment.
The article suggests an unsavory element to the process, hinting that the academies exploit the trainees. The training facilities could be charitably described as “spartan.” One is surrounded by a barbed wire fence and “contains one large bedroom with bunk beds and a small bathroom with two showers” for 30 trainees. I have no idea about the state of primary and secondary education in the Dominican Republic, or what sort of job prospects these kids face there. The article does not describe the quality of training they receive. I have no idea what fraction of the trainees sign major league contracts. If these young men sign major league contracts that they would not be able to sign without attending the academies, then they are getting a significant benefit from attending the academy.
The driving force behind this investment vehicle is the fact that the MLB draft covers only players in the US and Canada. Prospective baseball players from the rest of the world are not subject to the MLB draft, and can be signed by MLB teams as free agents. Hence the significant signing bonuses and the young age of many of the players. If these prospects were subject tot he MLB draft, the signing bonuses would be reduced because of the monoposony power generated by the draft mechanism. Of course these academies would not exist if not for the potential profit to be made from these signing bonus.