As the value of sports franchises continues to soar, the National Basketball Association has widened its potential pool of investors by allowing pension funds, university endowments and sovereign wealth funds to purchase passive stakes in NBA teams.
The move follows the league's earlier decision to permit private equity firms to buy passive investments in teams.
Earlier this year, Dyal Capital Partners, a division of Blue Owl Capital Inc., acquired a roughly 6% stake in the Atlanta Hawks, while Arctos Sports Partners LP bought a slice of the Utah Jazz in August. Dyal also owns stakes in the Sacramento Kings and Phoenix Suns.
Gordon Saint-Denis, Chicago-based managing director and head of sports finance at Monroe Capital LLC, a firm specializing in private credit markets with $14.1 billion in AUM, said by email that sports teams in North America have increased in value at a compound annual growth rate of about 20% annually over the last two decades.
Along with their rising value, sports investments are non-correlated to the S&P and other major exchanges, Mr. Saint-Denis noted. "As such, pension funds, sovereign wealth funds and others have been seeking approval to join in these investments," he said. "It's not a matter of prestige, it's a matter of exposure to a new asset class to a lot of these investors."
Michael J. Forestner, Atlanta-based global co-CIO of private markets at consultant Mercer Investments LLC, echoed those sentiments.
Sports franchises would be of interest to pension funds and other institutional investors as they are "legitimate businesses that can generate attractive returns and certain assets can provide significant income generation," while providing diversification in an investment portfolio, he said.
Asked where these investments would fall in institutional portfolios, Mr. Forestner said sports teams are hard to classify since those franchises encompass a wide variety of businesses, including media, entertainment, real estate, etc. "For example, when you buy a sports team, you are probably also going to get the arena they play in, some also encompass additional ancillary real estate in proximity to the arena, and related sponsorship deals," he said. "But most investors would likely classify these teams as private equity although a case can be made for 'real assets.'"
Mr. Forestner also noted that a team does not necessarily have to win championships to be extremely valuable. For instance, neither the Dallas Cowboys (valued at $8 billion) nor the New York Knicks ($6.1 billion) have won titles in their respective leagues in decades. But their strong "brands," along with the value of their home arenas, broadcasting deals, passionate fan bases, lucrative sponsorships, merchandising capabilities, among other things, help grant them their lofty valuations, he said.
Rodney Fort, professor emeritus of sport management at the University of Michigan in Ann Arbor, said in an email that he believes the NBA is widening its investor pool to "force competitive bidding to elicit the highest price for franchises. And these (pension and sovereign wealth) funds are now competitive with rich individuals and showing interest in teams."
Patrick Rishe, director of the sports business program at Washington University in St. Louis, said by email that given how expensive professional sports franchises in the NBA, NFL and MLB have become, he's "not surprised" by the latest development.
"Given that the NBA was the first league to allow private equity funds to take stakes in its teams, I'm not surprised the NBA is now the first North American league to allow even more institutional investors to assume passive investments," he said. "With rising franchise values and a limited number of individuals with the means to execute such transactions riding solo, I expect other leagues will follow suit in due time."
Mr. Rishe added that because pro sports owners have an "intrinsic responsibility of stewarding a sacred public trust — the locally beloved team — this is why you will likely never see either private equity funds or sovereign trusts take majority stakes (in these clubs)."
