Private equity sports investment hits nearly $2 billion in 2021, NBA hot

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Ball boys wear gloves as a precaution before an NBA game between the Charlotte Hornets and the Atlanta Hawks at State Farm Arena on March 9, 2009.

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U.S. stocks made investors big bucks in a decade-long bull market that lasted until late last year.

But those returns pale in comparison to the cash windfall from investing in sports, particularly in the National Basketball Association.

The NBA has the highest price return relative to other leagues as basketball’s globalization has spread to other markets, including its more than $5 billion China operation and the newly formed $1 billion NBA Africa venture .

Between 2002 and 2021, the average stock return for an NBA team was 1,057%, compared to a 458% return for the S&P 500, according to PitchBook estimates.

But other sports also offered solid returns. PitchBook estimates that from 2002 through 2021, major league baseball clubs offered a 669% price return, and the National Hockey League delivered a 467% return.

Now private equity investors are jumping on part of the action. PitchBook’s 2021 private equity breakdown put total transactions over the past year at over $1 trillion, and about $2 billion of that was spent buying stakes in US sports franchises.

Investors are drawn to the “general professionalization of the sport,” said Wylie Fernyhough, PitchBook’s senior private equity analyst.

“It was certainly the beginning,” Fernyhough said of PE sports deals in 2021. “We’re going to see a lot more deals in the future.”

NBA teams receive growth capital

Sports leagues, including the NBA and Major League Soccer, began allowing private equity investments early in the pandemic. But Major League Baseball was the first league to eye private equity funds.

In a 2019 interview with CNBC, MLB Commissioner Rob Manfred stated, “Franchise values ​​have increased, capital structures at clubs have become more complicated. The idea of ​​having a fund that would essentially be a passive equity investor in a club or clubs is one that is helpful in facilitating club sales transactions.”

Companies including Arctos Sports, Dyal Capital Partners, RedBird Capital and Sixth Street set up funds to buy minority stakes in teams in 2021 attracted by the economic moat surrounding sports leagues, including the rising value of media rights and global expansion.

This is where the NBA is most attractive. Tennis, motorsports and golf are considered the most global sports, but basketball is creeping in as it grows outside of the US

Benjamin Chukwukelo Uzoh 2nd R of Rivers Hoopers of Nigeria vies with Wilson Nshobozwa of Patriots Rwanda during the opening game of the first Basketball Africa League BAL in Kigali, capital of Rwanda, May 16, 2021.

Cyril Ndegeya | Xinhua News Agency | Getty Images

In 2019, the NBA announced the Basketball Africa League, operated by its NBA Africa unit. Frictions still linger after a 2019 dispute involving team boss Daryl Morey, but NBA China is still operational and games are streaming on Tencent. The league also targets India’s vast population of more than a billion.

Additionally, the league’s WNBA operation attracted a $75 million raise last week, reportedly valuing the league at $1 billion. The WNBA will use these funds to grow women’s football.

Considering the established global footprint and “younger fans on average,” Fernyhough called the purchase of minority stakes in NBA clubs a “gigantic” opportunity.

“I think there are many reasons to be optimistic about the NBA,” he added.

Chris Lencheski, chairman of private equity advisory firm Phenicia, agrees.

“The NBA has a clear, simpler, and well-defined path to a global consumer than almost any other major league that has anything to do with sticks and balls,” he said.

“And finally,” Lencheski added, “within the next 20 years you’re going to have supersonic travel, allowing an NBA team to travel anywhere in the world within three hours.” So it’s easy to see Madrid versus New York Knicks. And the NBA is inherently perfect for that.”

Gerry Cardinale, Chief Executive Officer of Redbird Capital Partners LLC, stands for a photo next to a 10 foot statue of the Incredible Hulk in New York, United States, on Wednesday, November 14, 2018.

Griselda San Martin | Bloomberg | Getty Images

Within the PE offers

NBA teams including the Golden State Warriors, Sacramento Kings and San Antonio Spurs sold stakes to private equity firms in 2021.

Arctos is reportedly taking a 13% stake in the Warriors, a $5.6 billion franchise, according to Forbes. Based on this valuation, Arctos’ stake in the Warriors is worth more than $700 million.

“NBA teams are trading at more expensive valuations because they expect them to keep growing for the next 10 years or so,” Fernyhough said. “You just have to make sure it’s done at the right price.”

PitchBook estimates Arctos has raised around $3 billion to buy stakes in sports clubs, including NBA and NHL teams, as well as Fenway Sports Group, which owns the MLB Boston Red Sox and NHL Pittsburgh Penguins.

Dyal, a division of Neuberger Berman Group, took a minority interest in the Atlanta Hawks. RedBird, led by former Goldman Sachs executive Gerry Cardinale, made a splash with its $750 million investment in Fenway Sports Group. In addition, Ares Management Corporation invested $150 million in the MLS franchise Inter Miami CF.

Private companies make money from the funds by charging management and incentive fees. Fernyhough estimates that most of the stock sold to NBA teams is for growth capital that allows clubs to expand franchises, including facilitation upgrades.

The NBA does not allow private equity to own more than 30% of teams, with a maximum of 20% in any fund. Fernyhough said there is no “ownership” with PE shares. Instead, those perks — like courtside seats — are reserved for limited partners like Michael Dell, who buys outright.

MLS has rules similar to the NBA, with a minimum investment of $20 million. MLB has no set limit but instead values ​​investments on a deal-by-deal basis.

There is a tax deduction known as the “roster depreciation amount” that allows sports owners – even limited partners – to delay paying taxes on club earnings. Former MLB commissioner Bud Selig mastered this tax loophole when he owned a baseball team.

“We’ve seen these professional sports franchises go from something that was a trophy for rich people to show off their wealth and be part of an elite club to something that’s run like a business,” Fernyhough said .

General view at the start of the encounter between the Atlanta Falcons and the New York Jets, Tottenham Hotspur Stadium, London, Britain – October 10, 2021.

Matthew Childs | Action pictures via Reuters

Watch the Broncos to see if the NFL is embracing PE

While private equity has penetrated the NBA, MLB and NHL, the National Football League remains on the sidelines. The NFL is considering adding the capital safety nets, but it could be a while before their plans are clear.

The NFL has more important concerns to address, including the class-action lawsuit filed by former Miami Dolphins coach Brian Flores last week. That lawsuit alleges that Dolphins owner Steven Ross offered Flores $100,000 to lose games – a violation of a federal law known as the “sports bribery law.”

The forthcoming sale of the Denver Broncos will shed some light. According to industry sources, the NFL may allow a private equity firm to participate in this transaction and acquire minority interests.

Sports bankers estimate the Broncos sale could net $4 billion. That would be a record amount paid for a US sports club, surpassing the $2.2 billion private equity tycoon David Tepper spent to buy the Carolina Panthers in 2018.

Fernyhough said the league would likely approve an established fund if private equity is allowed in the NFL deal.

“The NFL probably won’t let a new company or group come in and buy shares of it,” he said.

CORRECTION: This article has been updated to reflect the announcement of the Basketball Africa League in 2019.

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