In 2023, when billionaire Mat Ishbia acquired a majority stake in the NBA’s Phoenix Suns from Robert Sarver for $4 billion, alternative asset managers Blue Owl Capital has reason to celebrate. Just 18 months ago, Blue Owl’s private equity fund Dyal HomeCourt Partners acquired a 5% minority stake in the team, a deal that valued the Suns at approximately $1.55 billion. When Dyal HomeCourt sold its stake, the Suns’ valuation had jumped 158%.
Dyal HomeCourt represents only a small part of Blue Owl’s business, but it highlights an emerging niche in the alternative world – sports franchise investing. The North American professional sports market opened up to alternative asset managers five years ago, when Major League Baseball became the first league to allow private equity firms to buy passive minority stakes in its teams. The National Basketball Association, National Hockey League and Major League Soccer soon followed suit, and investment capital followed suit.
Currently, the alliance prohibits private equity funds from buying controlling stakes. Typically, when purchasing a team, most owners bring friends and family as partners. But those partners may want to cash out before the team is sold again. This creates a market that private equity is now participating in.
today, Private equity-backed affiliate store owns stakes in 63 major North American sports teamsInvestment totaled $243.8 billion, according to capital markets data provider PitchBook. The NBA has become a particularly attractive target—20 of the league’s 30 teams currently have private equity relationships worth $74.2 billion, according to PitchBook.
Gradually, the opportunity is opening up to qualified buyers and accredited investors, as firms like Texas-based Arctos Partners, one of the largest investors in North American sports, put their vehicles into private wealth pipelines. Arctos plans to close its $3.8 billion Arctos Sports Partners Fund II this month. The company’s Arctos Sports Partners Fund I, which closed in 2021, had a net price-to-earnings ratio of 1.15x and a net IRR of 86.7% as of September 2023, according to Buyout Insider. Since its founding in 2019, the company has purchased the NBA’s Sacramento Kings and Golden State Warriors, MLB’s Los Angeles Dodgers, Chicago Cubs and Houston Astros, NHL’s Tampa Bay Lights and Minnesota Wild, and Aston Martin Formula 1 and Paris Saint-Germain. Germain Football Club and other investments.
Most of these acquisitions (at least in North America) differ from the typical private equity strategy of buying a stake in a company, making changes to increase revenue and/or cut costs, and then selling the company to someone else or taking it public at the top of the market. According to a 2023 report, Arctos and other companies that buy minority stakes in North American teams must remain passive investors and cannot adjust the team’s operations, serve on the team’s board of directors, or even control the timing of the sale of the investment. From credit rating agency DBRS Morningstar. In the case of Major League Soccer, any sale involving a private equity firm must be approved by a majority stake in the team, and the team also has the power to force the sale of a minority stake in the private equity firm, DBRS Morningstar researchers wrote.
Ted Yarbrough, chief investment officer of Yieldstreet, a private markets investment platform, pointed out that despite these restrictions, professional sports teams are still seeing growing revenue from streaming media, sports betting, sponsorship/advertising opportunities and intellectual property rights. The platform offers its high-net-worth clients at least one opportunity to co-invest in sports businesses with private equity and institutional investors. Yarbrough said the company is evaluating more such partnerships.
“If you’re looking for something that has a different intrinsic value, I don’t think it’s relevant to many other categories,” he said. “If you look at how consumers spend their disposable income, it’s become part of their entertainment. It’s something they’re interested in because it’s easy for people to participate in it. That continues to drive the value of these properties up. “Every time we see a sports club, no matter what the sport, when it changes hands, its value tends to keep increasing.”
Another advantage of investing in sports teams and franchises is that it is a controlled market where competition is limited. In North America, major league clubs prohibit owners and shareholders from having a direct or indirect financial interest in any other major league club. That means Blackstone, for example, may face obstacles when it comes to investing in the NBA and NHL because its global head of tactical opportunities, David Scotts Blitzer, also happens to be co-managing partner of the Philadelphia 76ers and New Jersey Devils. (Blackstone has previously expressed interest in investing in sports franchises on the debt side). The NBA, NHL and MLS also limit the number of teams in which any one fund can hold shares (5 for the NBA and NHL, 4 for MLS).
Kunal Shah, managing director and principal, noted that the number of sports franchises available for investment is also limited, with only four major North American sports leagues allowing private equity investments (the NFL still refuses to invest), each There are approximately 30 teams in the league. Conduct private asset research and portfolio modeling through the alternative investment platform iCapital.
“The supply of opportunities in each sports category is quite limited. The value of franchises continues to grow – it’s one of the areas where investing is pretty good,” he said.
Padric HB Scott, president and CEO of Crossroad Capital Partners, a collaborative network of wealth planners, said some of the high-net-worth clients the firm advises have in recent years sought opportunities to invest in vehicles targeted at North American sports. He likens the appeal of sports investing to that of technology investing because of the staying power and global reach of both asset types.
“If you think about its long-term prospects, what better place to consider than an asset class that has been on an upward trajectory for the past 15 years?” said Scott, who played for the NFL’s Arizona Cardinals. “This is an area that most people haven’t been exposed to, so with that in mind, there’s the potential for higher returns to consider.”
DBRS Morningstar found that while the S&P 500 rose 317% between 2004 and 2022, the NBA’s valuation increased 1,079% and MLB’s valuation increased 702% during the same period. Major League Baseball’s only two losing periods over the past two decades included the height of the global financial crisis in 2008-09 and the COVID-19 pandemic.
Supporters of sports investing say that in addition to boosting team valuations, the industry can provide financial advisors and their clients with a way to diversify their portfolios, be less correlated with other asset classes and protected from the effects of inflation. .
Christopher Zook, chairman and chief investment officer of CAZ Investments, a Houston-based investment management firm active in the industry, said there may also be cash flow distributions and, in some cases, some tax benefits through depreciation and amortization.
However, he said the main reason to invest in professional sports is capital gains. Yieldstreet’s Yarbrough estimates that returns on equity investments in professional sports teams will be in the mid-teens, while returns on debt investments could range from the high single digits to the low double digits.
Early years
Currently, sports investing is in its infancy in the private wealth world, Shah said. Even adding in funds aimed only at institutional investors, the tools for sports investment financing can be counted on one hand, he said.
“The number of fund managers involved in this space is quite small, and given their track record is quite young, I think a lot of wealth managers are hearing about it and paying attention to their strategies, but the capital flows may not be coming yet,” he said.
Some companies are working hard to drive this evolution. For example, CAZ raises capital from qualified private fund buyers that co-invest in stakes in sports franchises, including those owned by Arctos. In fact, CAZ happens to be one of 15 shareholders, according to Arctos. sports business magazine.
Zook said CAZ has either already entered into strategic partnerships or is in talks with nearly every private equity firm capable of investing in major league sports in North America. These include Arctos, Blue Owl Capital, RedBird Capital Partners, Avenue Capital Group and Dynasty Equity Partners.
“We own and own 30 North American franchises,” he noted. “Investment advisors can allow their clients to invest with us and have a very well-known team directly on their side.”
In addition to these partnerships, CAZ has a registered closed-end tender offer fund available to accredited investors seeking exposure to eight to 15 different asset classes with no or limited correlation, including professional sports ownership. The minimum investment in the fund is $25,000.
Zucker acknowledged that given how new the sports investing model is to North American teams, some financial advisors may not even know it’s an option. “They certainly don’t know how to do it,” he said. He noted that advisors investing in the industry tend to appreciate the portfolio diversification, inflation protection and other benefits that come with it.
“What a lot of people don’t understand is that when you own a team in the North American Conference, you own a prorated share of the entire league. So, if you own an NBA team, whether you’re at the bottom or One, you still get NBA dividends from the overall NBA profitability.” “That means you’re going to get millions of dollars, depending on the year, without even the possibility of winning a game.”
However, Zook doesn’t expect retail investors to see opportunities to invest in sports franchises through private markets anytime soon. That’s because any fund investing in a North American professional team must be approved by the league, he said, and they’re unlikely to give a green light to a fund of funds.
iCapital’s Shah said another potential obstacle to financial advisers recommending clients without reservation that the professional movement toward investing is the current lack of data on investment exits. The situation is further complicated by the fact that the team sale process is governed more by league rules than the interests of private equity firms.
“You still want to get the money out, but so far, that part of getting the money out is more of a question mark,” he said. “That’s why advisors may not be ready to take on something they don’t know how to monetize.”
