NBA plans for private equity investment in teams

Property accessories.

It is the phrase, the commissioner of the National Basketball Association, Adam Silver, used in 2019 to frame the attraction of becoming a sports owner. And Silver suggested that the NBA could stimulate those who want to join his club, even at a minority level.

The NBA’s plan to attract private equity money is on the move and betting on the attraction of owning limited companies in its clubs will pay off.

With ratings in clubs rising to astronomical levels, the NBA joined the pursuit of private equity when owners approved a plan to allow investment firms to hold stakes in teams. NBA executive JB Lockhart is one of the people overseeing the strategy, and the league has chosen Dyal Capital as its partner.

How it works: The NBA completes club stakes and sells them to private equity firms such as Dyal, which can then technically sell limited partnerships (LPs) to private investors. In May last year, Dyal, reported by Barron, tried to raise $ 2 billion to buy LPs.

Some in the private equity space praise the NBA movement and even try to connect it to a more global game.

Moving to private equity, the NBA is asking for more capital for its league, can complete faster transactions to support liquidity and fund future efforts.

NBA ratings are also rising. The average price of a club is now over $ 2 billion, and its last two franchises (Brooklyn and Utah) have sold an average of $ 2.45 billion, with Nets owner Joseph Tsai paying $ 1 billion. dollars for Barclays Center in Brooklyn in a separate agreement.

Therefore, the league had to spend its investor base, because even minority stakes become expensive.

“This gives the NBA, its member teams, the entire infrastructure with financial optionality,” said Chris Lencheski, president of the Phenicia private equity consulting firm and associate professor at Columbia University.

Allowing private equity investments will also help minority homeowners who want to sell and leave property groups. For the most part, owners who want to recover from Covid-19 losses can sell shares and profit.

Lencheski, who also serves as CEO of Granite Bridge Partners’ Winning Streak Sports, sees the NBA’s global “economic groove” as an attraction for investors, as there is unlikely to be any viable competition for high-level professional basketball. In addition, the league is backed by global licensing, merchandise, sponsorship and annual media rights revenue of approximately $ 2.5 billion, which runs into the 2024-25 season.

But the movement is not without risks.

Addressing the NBA slides at the 2019 Sports Business Journal Dealmakers conference, Silver described the cable TV model as “broken” and added that the league’s young viewers “tune the traditional cable.”

So if its media rights fall in price, as cable subscribers continue to cut the cable, ratings could fall and investors may lose money on the LP. A sports banker pointed to 2009, when ratings fell due to a bad economy, as proof that the NBA is not immune to a decline due to economic turmoil.

And few have predicted a sudden halt in revenues estimated at 40% due to the pandemic.

But he could get help from the public attraction.

Dyal and investment firm Owl Rock have merged with Altimar Acquisition Corporation, a $ 275 million special-purpose acquisition (SPAC) company currently trading on the New York Stock Exchange, allowing the combined companies to go public. The new company is called Blue Owl, and public investors will soon be able to invest in it under the “OWL” symbol on the NYSE later this year.

And one of his attractions will be his NBA fund.

Dyal did not respond to a request for comment from CNBC, but managing partner Michael Rees spoke about the company’s NBA strategy in a December 23 call from the Securities and Exchange Commission, announcing Blue Owl’s launch plan.

“We are proud to be a partner, an exclusive partner, with the NBA, the National Basketball Association, where we are the only approved purchaser of a portfolio of minority shares of the 30 NBA teams,” Rees said, according to the transcript of the appeal. “The business is just starting and we hope to have the first closure in the not too distant future.”

“We believe we can certainly develop a very attractive basketball strategy outside of this platform, but it is also possible to expand into a wider sports business that could have a tremendous advantage,” added Rees, who will serve and as one of the co-chairs of Blue Owl.

It’s not clear what Blue Owl’s overall sports strategy is or how he expects to make a profit on NBA LPs. A person close to their planning told CNBC that they will buy stakes in some clubs, not in all 30 teams.

When discussing the NBA’s private equity game, a Wall Street CEO said that companies do not make money from trust capital until they sell something. The person requested to remain anonymous because of the sensitivity to discuss the issue in public.

The executive director, who has an extensive history in the field of private capital, also questioned how private companies could achieve a return of $ 2 billion. A longtime sports executive, who also sought anonymity, noted that NBA teams can redistribute annual profits to new investors.

So, if a private company bets on sports teams as a long-term game, it could earn from club revenues while staying on LPs through dividends. Then he could sell LPs at a higher price.

And with the NBA such a global product, billionaires around the world looking for an entry point into American sports could be potential consumers of NBA accessories.

Private companies can buy LPs and then sell them on the secondary market. If the NBA follows the private equity path, there will be instructions in place, but it will lose control over who the LPs are sold to.

Foreign investors could be a way for companies to make money on LPs.

There are discussions that indicate investors in the Middle East as future buyers of minority shares. The NBA bans the sovereign state’s investments in its teams, but investors in Abu Dhabi, Dubai and Qatar have also been linked to the league. In 2010, it was rumored that investors would be interested in buying the Detroit Pistons.

Lencheski added that the NBA could also use the private equity vehicle to examine people who might be looking to buy majority positions in teams at a later date. The sports executive used Tsai’s entry as an example. He paid Russian billionaire Mikhail Prokhorov $ 1 billion for a 49% stake in the Brooklyn Nets in 2018 before taking full control.

Lencheski highlighted David Tepper’s entry into the National Football League as another example.

“One of the many factors that certainly helped Charlotte’s ownership in the NFL was the initial minority interest in the Pittsburgh Steelers,” he said. “If David Tepper doesn’t see how the Steelers work, he understands what a top-class organization looks like when he goes to his NFL colleagues and says, ‘I want to buy a team,'” he has the funds, but more importantly , for the NFL, he understands the culture of a winning community-focused sports organization. “

The NBA looks up on its product. Live sports prevent the cable model from being destroyed. The league continues to produce international superstars to protect its economic trench – $ 8.3 billion in revenue. And the NBA credit is in good shape.

The NBA’s new focus is expanding the list of private equity seekers.

“Get some of the benefits of owning a team,” Silver told SBJ, according to SportsPro. “So it’s not just a simple question: ‘What is my financial return on investment? “It’s not that it’s not important, but try to get closer to some of the same reasons that traditional franchise owners buy in teams.

“Part of it is financial,” Silver said, “but part of it is the facilities and the character and the desire to be directly involved in these leagues.”