When billionaire Mat Ishbia bought a majority stake in the NBA's Phoenix Suns from Robert Sarver for $4 billion in 2023, alternative asset manager Blue Owl Capital had reason to celebrate. Just 18 months ago, one of the Blue Owl's private equity funds, Dyal HomeCourt Partners, bought a 5% minority stake in the team in a deal that valued the Suns at about $1.55 billion. By the time Dyal HomeCourt sold its shares, the Suns' valuation had risen 158%.
Dyal HomeCourt represents a small part of Blue Owl's business, but it highlights an emerging niche in the universe of alternatives — investing in sports franchises. 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, the National Hockey League and Major League Soccer quickly followed suit, and venture capital followed.
Right now, the leagues bar private equity funds from buying controlling interests. Often when teams are bought, the majority owners bring along friends and family as partners. But these partners may want to cash in before a team is sold again. This is created in the market where private equity is now playing.
today, Private equity-backed and affiliated stores own shares in 63 major North American sports teams, with investments totaling $243.8 billion, according to capital markets data provider PitchBook. The NBA has become a particularly attractive target — 20 of the 30 teams in the league currently have private equity ties worth $74.2 billion, PitchBook reported.
Gradually, that 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 together vehicles that can be accessed through the private wealth channel. This month, Arctos is scheduled to close Arctos Sports Partners Fund II, with $2.5 billion, according to Australian Financial Review. The firm's Arctos Sports Partners Fund I, which closed in 2021, has delivered a net multiple of 1.15x and a net IRR of 86.7% through September 2023, according to Insider Purchase. Since its founding in 2019, the firm has bought stakes in the NBA's Sacramento Kings and Golden State Warriors, MLB's Los Angeles Dodgers, Chicago Cubs and Houston Astros, and the NHL's Tampa Bay Lighting and Minnesota Wild, as well as Aston Martin Formula One 1 and Paris-St. Germaine Football Club, among other investments.
Most of these acquisitions—at least those in North America—vary from the typical private equity strategy of buying a stake in a company, making changes to increase revenue and/or cutting costs, and then selling the firm to someone else. other or taking it public at the peak of the market. Arctos and other firms that buy minority stakes in North American teams must remain passive investors and cannot rebuild team operations, sit on team boards or even necessarily control the timing of the sale of their investment, according to a note due 2023. from credit rating agency DBRS Morningstar. For example, when it comes to MLS, any sale involving a private equity firm must be approved by the team's majority owner, who also has the right to force the sale of the private equity firm's minority stake, the researchers wrote. of DBRS Morningstar.
Despite these limitations, professional sports teams are seeing growing revenue from broadcasting, sports betting, sponsorship/advertising opportunities and intellectual property rights, noted Ted Yarbrough, chief investment officer with private markets investment platform Yieldstreet. The platform has offered its high net worth clients at least one opportunity to co-invest in a sports venture alongside private equity and institutional investors. It is evaluating more such partnerships, according to Yarbrough.
“If you're looking for something that has a different intrinsic value to it, I don't think it's as connected to a lot of other classes,” he said. “If you were to look at how consumers spend their disposable income, it's increased as part of their recreation. It's something they're interested in because it's very accessible for people to participate in. This continues to drive the increase in value in these properties. Whenever we see a sports club, regardless of sport, when it changes hands, it tends to be an ever-increasing value.”
Another advantage of investing in sports teams and franchises is that it is a controlled market with limited competition. In North America, major league clubs prohibit owners and shareholders from directly or indirectly owning a financial interest in any other major league club. This means, for example, that Blackstone could face obstacles in investing in the NBA and NHL because its Global Head of Tactical Opportunities, David Scotts Blitzer, also happens to be the co-managing partner of the Philadelphia 76ers and New Jersey Devils . (Blackstone has previously indicated it is interested in investing in sports franchises on the debt side). The NBA, NHL and MLS also limit the number of teams each fund can hold shares in (five for the NBA and NHL and four for MLS).
There are also a limited number of sports franchises to invest in, with only four major North American sports leagues allowing private equity investment (the NFL remains a hurdle) with about 30 teams in each league, noted Kunal Shah, managing director and head of Private Asset Research and Model Portfolios with alternative investment platform iCapital.
“It is a very limited offer of opportunities in each sports category. And the value of franchises continues to increase – that's one of the areas where investment has been quite good,” he said.
Padric HB Scott, president and CEO of Crossroad Capital Partners, a partner network of wealth planners, said some of the HNW clients for whom the firm has provided advisory services have pursued opportunities to invest in vehicles targeting North American sports in last years. It compares the appeal of sports investment to that of technology investment in terms of staying power of asset types and global reach.
“If you're thinking about its long-term prospects, what better place to consider than an asset class that for the last 15 years has been on an upward trajectory?” said Scott, who once played for the NFL's Arizona Cardinals. “It's an area that most people haven't had access to, so with that in mind, it comes with a higher potential return to consider.”
DBRS Morningstar found that while the S&P 500 rose 317% between 2004 and 2022, the NBA's valuation rose 1,079% over the same time period and the MLB's valuation rose 702%. The only two periods in the last two decades when any of the major leagues lost money included the height of the Global Financial Crisis in 2008-09 and the COVID-19 pandemic.
In addition to boosting team valuations, the sector can offer financial advisors and their clients a way to diversify their portfolios, low correlation with other asset classes and inflation protection, according to sports investment proponents.
There can also be cash flow distributions and, in certain cases, some tax benefits through depreciation and amortization, according to Christopher Zook, chairman and chief investment officer with CAZ Investments, a Houston-based investment management firm active in the sector. .
However, the main reason to invest in professional sports is capital gains, he said. Yieldstreet's Yarbrough estimates that returns on investing in professional sports teams on the equity side will be in the upper teens, while investing through debt could range from the upper single digits to the low double digits.
The early days
At the moment, investing in sports is in its infancy in the private equity community, according to Shah. Even when adding in funds that target only institutional investors, the number of vehicles raising money for sports investments can be counted on one hand, he said.
“There's a fairly small number of fund managers playing in the space, and given the fairly new nature of their data, I think a lot of the wealth managers are listening (to) and paying attention to the strategy, but the flow of capital may not be there yet,” he said.
Some firms are trying to push this evolution forward. CAZ, for example, raises money from qualified buyers for private funds that co-invest in stakes in sports franchises, including those owned by Arctos. In fact, CAZ happens to be among Arcto's top 15 shareholders, according to Sports Business Journal.
CAZ has either already established strategic partnerships or is in the process of negotiating them with almost all private equity firms that have the ability to invest in major league sports in North America, Zook said. These include Arctos, Blue Owl Capital, RedBird Capital Partners, Avenue Capital Group and Dynasty Equity Partners.
“We have 30 North American franchises that we have a stake in,” he noted. “Investment advisors can get their clients to invest with us and take direct ownership of teams that are very popular.”
In addition to these partnerships, CAZ has a registered closed tender offer fund available to accredited investors that seeks to invest in eight to 15 different uncorrelated or limited asset classes, including professional sports ownership. The minimum investment for the fund is set at $25,000.
Zook acknowledged that given how new the sports investment model is for North American teams, there are financial advisors who may not know it's an option. “And they sure don't know how to do that,” he said. Advisers investing in this sector tend to value portfolio diversification, inflation protection and other benefits that come with it, he noted.
“And what a lot of people don't realize is when you own a team in a North American league, you own a pro-rated part of the entire league. So if you own an NBA franchise, whether you're in last place or first place, you still get your dividend from the NBA from the benefit of the entire NBA,” he added. “That means you'll get, depending on the year, millions of dollars without ever winning a game.”
However, Zook does not expect to see opportunities to invest in sports franchises through the private market become widely available to retail investors anytime soon. That's because any fund that invests in a professional team in North America must be approved by the league, and they're unlikely to give the green light to a fund of funds, he said.
Another potential obstacle to financial advisors unreservedly recommending professional sports investing to their clients is that there is little data currently available about what the return on that investment might look like, according to iCapital's Shah. This is compounded by the fact that the process for team sales is governed by league rules rather than the interests of private equity firms.
“You also want to cash out, and so far, the cash-out part is more of a question mark,” he said. “And that's why advisors may not be willing to say yes to something they don't know how to monetize.”