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Institutional Investors Are Allocating Billions Of Dollars To Professional Sports
Huddle Up is a daily letter that breaks down the business and money behind sports.
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THE JOE POMP SHOW: Episode #3 with Overtime CEO Dan Porter is now live!
We talk about the thesis behind Overtime, what it was like raising over $100 million from investors like Jeff Bezos & Drake, how they can pay high-school-aged players $100k to ~$1 million, and more.
It was a great conversation — listen, subscribe & enjoy!
Hey Friends,
Private equity continues to intertwine itself within professional sports deeply.
With the average NBA team now worth over $2 billion—up more than 100% over the last five years—the second-largest North American sports league loosened its rules earlier this year to allow private equity firms access to minority equity investments.
Here’s a brief overview of how the NBA’s rules work:
PE funds can purchase up to 20% of an individual franchise
PE funds may own equity in up to 5 different teams
No team can have more than 30% of its equity owned by PE funds
As a result, we saw an immediate inflow of capital:
Arctos Sports Partners acquired a 5% stake in the Golden State Warriors at a $5.5 billion valuation.
Arctos Sports Partners acquired a 17% stake in the Sacramento Kings at a $1.8 billion valuation.
Dyal Capital Partners acquired a ~5% stake in the Sacramento Kings at a $1.5 billion valuation.
Dyal Capital Partners acquired a less than 5% stake in the Phoenix Suns at a $1.55 billion valuation.
Minority equity stakes typically trade at a 30% to 40% discount due to various factors, including a lack of liquidity. Still, based on those four deals alone, PE firms have already deployed more than ~$500 million on NBA minority equity stakes.
But institutional interest in U.S. pro sports teams appears to be just getting started.
According to Sportico, Major League Soccer has recently briefed its clubs on new private equity ownership rules. This comes just one year after owners voted to allow PE funds to acquire equity in their teams and places slightly stricter guidelines on the firms they can do business with.
Here’s a brief overview of the updated MLS rules:
PE funds must have raised at least $500 million
PE funds cannot have more than 25% owned by a single investor
No more than 10% of a PE fund can be invested in one club
MLS clubs cannot make up more than 25% of a fund overall
PE funds are limited to investing in four teams each
Additionally, institutional funds investing MLS teams will not be allowed to hold board positions or have controlling ownership and have to provide the club’s majority owner first negotiation rights should they choose to sell their stake.
The interesting part? Major League Soccer clubs currently trade at a revenue multiple nearly 2x every other major professional sports league.
Ares Management already injected $150 million of capital into MLS’ Inter Miami earlier this year, but I think we will see this space get much more active over the next 12-36 months.
We all know the story by now. On the league front, as valuations continue to rise, the number of individuals willing & able to purchase minority stakes, which typically come with little more than season tickets, has continued to decline.
That’s why bringing in institutional investors makes sense.
And on the private equity side, professional sports teams are scarce assets with a strong record of value appreciation. For example, from 2011 to 2020, the average franchise across the NFL, NBA, NHL, MLB, and Premier League increased in value by over 500%.
Combine that with inherent diversification from equities/bonds and the ability to lock in management fees for an extended period, and you can quickly see why institutional money is flowing into pro sports.
We’ll see how this goes. In my opinion, we are just in the first inning. Still, through conversations with GPs and LPs at some of these funds, they appear to be super excited about the tailwinds set to propel sports valuations even higher.
For example, only about 30% of the US population currently has access to legal moile sports betting in their state, which estimates suggest could move to 96% by 2025. That would be a game-changer, of course.
As always, I’ll make sure to keep you updated as things inevitably change. I hope everyone has a great day, and we’ll talk tomorrow.
Your feedback helps me improve Huddle Up. How did you like today’s post?
THE JOE POMP SHOW: Today’s episode is with Overtime co-founder Dan Porter.
After selling his first company for $200 million in 2012, Dan spent time as the head of digital at William Morris Endeavor (WME) but eventually left to start Overtime in 2016.
Overtime is a fascinating company. They have raised over $100 million from an impressive group of investors, including Jeff Bezos, Drake, Kevin Durant, Carmelo Anthony, and others.
WILD STAT: Roughly 5% of all active NBA players are investors in Overtime.
In this conversation, we discuss:
The thesis behind Overtime
How the company makes money
What it was like raising money from Jeff Bezos & Drake
Paying teenagers $100k to ~$1 million to play pro basketball
The future of sports betting, crypto, and the metaverse
Listen, Subscribe, and Enjoy!
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