The Secondaries Market

In the financial world, secondaries markets are where the scraps and pieces that firms no longer want are given away in a package deal. These scraps are deemed unworthy to be held  and are often sold at a very cheap price. A lot of the time it’s because the former owner of the asset realizes there are other options that seem more viable to pursue; it’s just time to let go. In private equity, there are specialized firms that invest primarily in these secondary positions. Most sellers these days are looking to liquidize their assets, meaning they need to find some source of cash because they’re running out and thus clients are getting anxious. These secondary funds are willing to take this assessed risk and run with it once/if there are returns to be had in the near future.

This market reminds me of players like Adrian Gonzalez, Carlos Pena and Jack Cust. All former first rounders (Gonzo was even a former #1 pick) went through numerous ball clubs before finding a suitable team that accepted them and were somehow able to, in return, develop into a power bat. For the past three years, they have hit a combined 275 home runs. Just like in financial markets, baseball players are like assets where players are projected for the future and opinions of players can change drastically over time. If a team has finally given up on a once highly praised player, selling cheap on the trade market is inevitable. Many suitors will come along, especially those frugal clubs willing to take a small risk that could end up paying big dividends.

Adrian Gonzalez


Drafted number one in 2000 by the Florida Marlins, Gonzalez signed a $3 million bonus but fell victim to an early wrist injury. This eventually made Marlins management believe he would no longer possess the smooth swing and quick hands that made him desirable. He was in essence, deemed as broken bits that would never be able to climb through the minors. He would be traded two times, the first stint with the Texas Rangers, before he would land with the San Diego Padres, his home town. While with the Rangers, it was evident he did not show enough talent to management to make him be a full time starter. The Padres took a small risk in trading for him, Chris Young (a 6 foot 11 pitcher) and two others for two pitchers who would later have health issues. By taking this risk, the Padres saw a chance to pick up a once highly touted prospect who needed time to develop as well as recover fully from his wrist injury. Gonzalez was also blessed in coming back to his sunny hometown near the Mexican border. What the Padres gave up in Eaton (a 7 game winner who started only half the season due to injuries) and Otsuka (a top notch closer but at the end of his career) was made up for entirely by the presence of Chris Young who flourished in Petco Park (a pitcher’s haven), pitching over 500 innings in less than 4 years. How about Adrian? He has been compared to Albert Pujols, the best in the league, for his patience during at bats. Earlier this year, Gonzalez rode an 8 game streak where he walked at least twice per game. For the past three years of his services, Adrian has made a total $1.7 million (he’s obviously due for a hefty raise soon). Remember his bonus when he signed out of high school? Oh yeah…about half that sum, except Adrian has hit close to 100 HR for the Padres and zero for the Marlins.

Carlos Pena


Pena was drafted #10 overall in 1998 and signed with the Texas Rangers. He quickly climbed the minor league ladder, making his debut as a September call up in 2001. By this time, he was highly regarded and was listed at #11  of Baseball America’s top 100 prospects list for the year, also receiving number one prospect honors in the Rangers organization. By 2002, he was traded in a package to the Oakland Athletics and figured to be their tenured starting first basemen. He found a quick road out of Oakland as he was deemed ‘uncoachable’ and was subsequently traded again to the Detroit Tigers. While he did have success there for two and a half years, he was unable to keep his starting job in Detroit, or Boston or New York. He finally landed in Tampa Bay and performed well above his past levels, belting out 42 HR in 2007 while also making the MVP ballot. While unlike Adrian, Pena made his name heard as a slugger in Detroit. Perhaps it’s timing, or the team environment, or just off years, or a mixture of these that built up for Pena to have great three years in Tampa. What’s more remarkable about Carlos is that through his years in Detroit and such, he was an awful defender at first base. His fielding was well below a replacement, but he made up for it with his bat. Once at Tampa, he improved his fielding drastically and won the gold glove award in 2008. Pena had to jump hurdles to get to the majors, and he did it twice. He wasn’t really deemed damaged goods, he just needed a place where he could play everyday. Pena is a streaky player, and thus needs to get into a rhythm before he catches on fire. Tampa didn’t need to give much to acquire Pena. Once Pena found the right nucleus, the right environment once again, he was able to prove why he was projected to be a star.

Jack Cust


Jack Cust is different from the two above simply because he was always regarded as good, but not good enough to hit major league pitching. He had stints with many teams, and subsequently spent little parts of the seasons in the majors. But he would never earn a starting job, and spent most months of the season playing in the organizations’ respective triple-A affiliate. He is known for his high rates of home runs, strikeouts, and walks. A weird combination, yet could be used as a double-edged sword by some teams who believe his walk rate out-weighted his K’s. Enter the Oakland Athletics. They traded for him from the Padres to start as DH for the injured Mike Piazza in 2007. He got hot in his debut for Oakland; in his first 7 games he knocked out 6 HR. His presence in the majors is a bit skeptical to many, I bet those who had him during his minor league career still wouldn’t want him. Yet for the past three years, he shows he is a cheap man’s Adam Dunn. So far it has worked for the A’s. Not known for his defense, he’s a fit at designated hitter for the time being. A cheap, reliable source of walks allows hitters behind Cust a chance to bring him home. Once again, the right timing paid dividends for those frugal Athletics.

It’s evident there will always be lopsided trades, or signings where fans of other teams become envious. Like secondary markets, once highly touted players can be bought cheap while the returns are limitless. The Padres found the face of their franchise for the next decade (if they choose to keep him, but I say trade him to the A’s please! That’s another story however…) in Adrian Gonzalez. The easy part for management is to make the call for that second market player; the hard part is creating the right environment, giving him the right resources, for that player to exceed the way he was supposed to. A manager can also make this trade numerous times; there is little risk involved as long as GM’s wisely do not give up huge building blocks to the other team. Signing players like Pena to a minor league deal is like paying a nickel for a hamburger; an organization can freely give minor league contracts (to a degree) multiple times since it does not bind them to the majors. Boston and New York took that risk with Pena, things just didn’t work out for them. On the other side, so many other cheap signings have developed into key ingredients for those Bronx and Fenway lovers. High return, low risk players are all over the place!

So who will be the next player to excel with his third or fourth team? I’ll try to answer that in my next post.


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