Sweat Equity. Jason Kelly

to capitalize on fitness and wellness. There’s Falconhead Capital, a New York-based firm that back in the 1990s decided to focus squarely on several aspects of health and wellness. Falconhead’s original thesis, and one that remains today, is that content plays a vital role in the sports and fitness economy, says founder David Moross. One of Falconhead’s first deals was for the European version of ESPN Classic Sports, a channel that shows games that have already happened, often years or decades earlier. It was a surprising success.

      Falconhead’s perhaps best known for its investment in what became Competitor Group, creator of the Rock ‘n’ Roll series of marathons and half marathons. Moross saw a content play there, as well, given that Competitor’s connection to its customers was in part fueled and fed by niche publications for the participants in its running races and triathlons. (For more on Competitor, see Chapter 10.)

      Moross, in partnership with the sports and talent management giant IMG, started what became Falconhead in 1998 under the name Sports Capital Partners. His initial pitch was met with skepticism, he says, because sports was seen as a closed, limited opportunity, in the form of teams and maybe some team equipment. What the doubters missed, Moross says, is that “sports” is just a name – “a term that describes activity and competition. It drives to a very profound thesis of passion,” he says.

      Moross says the passion for sport – broadly defined to include not only your home team, but also what you do in and around your home for your own body – has only become more important culturally. He recalls a recent conversation where a fellow investor reminded him that passion for sports these days is more deeply and broadly felt than passion for religion: “You can make money by looking at what drives the passion, what allows it to be fueled on an ongoing basis.”

      Another group that’s dedicated investments toward fitness and wellness for the better part of two decades is North Castle, the Connecticut-based private equity firm where Brian Smith worked as a young analyst. Like other investment firms that collect former CEOs and top executives for their manufacturing expertise, North Castle has a stable of fitness and wellness experts it uses for due diligence. The firm’s investors work the big industry trade shows, like the Natural Products Expo, to identify the nascent companies that may someday need a financial backer. Jon Canarick, a North Castle managing director, says the firm’s focus sets it apart, especially when courting would-be portfolio companies.

      “You’ll never find a smokeless tobacco company or an unhealthy restaurant chain in our portfolio, which matters to some entrepreneurs,” he says. That extends to the firm’s executives, who need to walk the proverbial walk of a wellness-oriented investment shop: “It would be very hard to sell yourselves as the right partner for a boutique fitness company, walking into a meeting with the owners weighing 250 pounds and eating a bag of chips,” he says. “There’s a passion and involvement.”

      The firm in 2015 bought a controlling stake in Barry’s Bootcamp at a reported valuation of more than $100 million. (For more on Barry’s, see Chapter 3.) The Barry’s deal came to North Castle in part because of its familiarity with the nuances of the gym and studio business. One of its most successful deals was what became a key player in the high-end gym business: Equinox. That chain, now owned by real estate giant Related Companies, sits amid a fiercely competitive set of gyms and studios slugging it out to be the favorite destination for the affluent and sweaty.

      Those people are everywhere – from a small town in Boston on a rainy April morning to studios in strip malls and high rises. And lots of money is chasing them.

      CHAPTER 2

      On Location

      If running is the basic unit of exercise, the gym is the fitness industry’s local headquarters. Walk a few blocks in any city, or drive a few miles in any suburb, and it’s virtually guaranteed you’ll see some sort of fitness chain nestled in a strip mall.

      The ubiquity speaks to the gyms’ importance in this fitness economy – for us as consumers, and for those looking to make money in our space. Fitness is front and center, and unashamedly so. Gyms aren’t hidden from you. On the contrary, fitness centers are in the same complexes as supermarkets, shoe stores, dry cleaners, and pizza joints. They’re a key part of our consumer habits.

      That’s what excites investors. Just as Moelis’s Kapoor found herself directing more of her discretionary income to her Flywheel habit, even average people are devoting an increasing slice of their cash to sweating. Have any doubts about the competition for that money? Check your mailbox – or email box.

      Numbers are somewhat elusive, and largely estimated, given the fragmented nature of fitness clubs; there are so many of them, and few dominant companies to give a cohesive sense of the market. Kapoor estimates that in 2015, clubs will pull in about $27 billion in revenues, a figure that grows steadily these days at around 3 percent a year.

      Then there’s the number of memberships, which she estimates at about 55 million, growing at about 2 percent a year. Putting the figures together, that would mean folks spending roughly $500 a year on memberships alone. This triangulates a bit with another oft-cited figure – the average monthly membership is about $55/month, or $660 a year – indicating we’re in the right ballpark.

      The traditional gym business did not explode in this most recent boom around fitness and wellness. Many of the current trends and fads have their foundation in the fitness clubs of the previous decades. It’s a business that’s seen its share of booms and busts and constant competition for the consumer. Where it stands today is an emblem of both the fitness economy and the way modern businesses fight for identity and profits.

      Kapoor and her fellow bankers watch the gym space closely because it’s, for lack of a better term, investable. The business is relatively simple to model in term of costs, margins, and profits, once the basic elements (geography, products and services, pricing) are established. The gym business in that sense isn’t so different from any other retail concern.

      The birth of what we know as the modern gym is generally pegged to the early 1980s, driven in part by a few pop-culture moments. In addition to Jane Fonda’s videos, there was 10, the 1979 Bo Derek movie that inspired many women, and men, to get in shape.

      By 1980, according to history compiled by Club Industry, about half the adult population claimed to exercise, up from about 24 percent in 1960.6 Tennis was popular, as was racquetball, and racquet clubs with both kinds of courts proliferated, especially in suburban areas. Over the early part of the 1980s, those clubs expanded their offerings, adding some equipment and classes to broaden their appeal and their membership. In 1981, there were about 5,000 fitness clubs across the United States; by 2012, that number swelled to more than 30,000.7

      Clubs like Bally, one of the early stalwarts, advertised heavily, relying on some of the biggest stars of the late 1970s and 1980s, including singer Cher. The ads, available for grainy viewing on YouTube, are fun to watch. A very young Cher, in various combinations of leotards and wigs, strides through a busy fitness center, delivering a message meant to underscore that gyms aren’t just for meatheads anymore. In one ad, released around the holidays in 1985, she starts out saying, “Some people worry about getting muscles. I worry about getting fat. Dieting doesn’t keep me in shape. Exercise does.”

      After Cher’s exhortations, the ad lays out the business model that Bally’s helped create and persists among its legion successors in some form today: the monthly plan. Back in 1985, Bally’s would sign you up for $18 a month, assuming you agreed to a two-year contract. That wasn’t exactly dirt cheap – it’s almost $40 in 2015 dollars. The subsequent years have seen all kinds of price wars that have pitted gyms against each other. In the New York area, where nothing is inexpensive, a chain of gyms offers a no-commitment monthly fee of $19.95. Other chains, including discount leader Planet Fitness, charge as little as $10 a month.

      Bally’s was onto something and competitors proliferated, creating a sector that stood firmly at the center of the burgeoning fitness economy, for a time.

      Fitness centers are a sector of the business where private equity has long played, owing largely to the business model advertised by Cher and her cohorts,

6

Pamela Kufahl, “Club Industry Features Clubs of the 1980s,” Club Industry, December 1, 2008, http://clubindustry.com/25th-anniversary/club-industry-features-clubs-1980s.

7

International Health, Racquet, & Sportsclub Association, www.ihrsa.org/about-the-industry/.