Several months ago, we shined a light on a fascinating trend in the world of sports — namely a growing mutual interest between institutional investors and professional sports leagues. Recently this “growing interest” has given way to actionable opportunity, as the NBA looks poised to be the first major domestic league to capitalize on these market forces by encouraging institutional investment through both single franchise and cross-league minority ownership opportunities for investors. Although the typically trailblazing NBA may be the first major domestic league to open its arms to institutional investment in this way, it certainly won’t be the last.
Institutional investor interest in professional sports ownership is nothing new, as rising franchise valuations have caught the eyes of investment funds from Milan to Manchester in recent years. What is new, however, is the enthusiasm for institutional investment among professional sports leagues themselves — particularly in the United States.
Meteoric franchise valuations have had the downside effect of limiting the global pool of potential majority-stake owners, while the joint shocks of COVID-19 and slagging television ratings have seen team owners not-so-quietly seeking cash infusions without sacrificing managerial control.
In our last piece, we identified these converging trends and made a prediction: Professional leagues would sell cross-league (i.e. multiteam) minority ownership interests that would satisfy both eager institutional investors (who might otherwise be shut out of ownership opportunities) and team owners (who would otherwise have trouble selling minority interests). We also predicted that the NBA (the most experimental U.S. professional league) would be the first to test the waters. Our prediction appears to be on the mark.
The NBA has reportedly partnered with Dyal Capital Partners (an investment unit of Neuberger Berman) to raise a private equity fund known as Dyal HomeCourt Partners for the purpose of selling bundled minority interest stakes in multiple NBA franchises. Should HomeCourt successfully raise and deploy its investor capital (it is reportedly in the process of raising between $1 billion and $2 billion) the NBA will successfully consummate the first cross-league equity instrument in the history of American sports, and in the process, inject billions of dollars of liquidity into the league through direct investment and management fees.
The NBA has also signaled that HomeCourt will not be alone in what could be a welcomed wave of institutional investment. In January, the NBA’s board of governors reportedly agreed to allow other investment funds (upon their approval by the NBA) to explore minority investment in NBA franchises. Earlier this month, private equity firm ArctosSports Partners reportedly entered a deal for approximately 5% ownership of the Golden State Warriors at a $5.5 billion valuation. When the ink dries on the acquisition, it will represent the first direct private equity investment in an NBA team — a consequence of NBA’s newly relaxed rules on institutional investor ownership.
Institutional investors like Dyal and Arctos will apparently be subject to certain restrictions (no single fund can own more than 20% of a single NBA franchise, no NBA franchise can have more than 30% of its equity held by investment funds, and no single fund can hold stakes in more than five NBA franchises), but these restrictions prove the rule — the doors to professional sports ownership are increasingly open to institutional investors, and those opportunities will come in the form of minority interest investments in both individual franchises and cross-league instruments.
As is typical, Adam Silver’s NBA is leading the way, but few would fault the other major leagues for monitoring the situation in rapt anticipation. Professional sports ownership is changing, and it seems to be a matter of when, not if, institutional investment will spark that change.