NBA: Private Equity Firms Keeps Calling

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Hey Friends,

The recent flood of institutional capital pouring into professional sports teams and leagues doesn’t appear to be slowing down anytime soon.

Arctos Sports Partners, a private equity firm with about $1 billion in assets under management (AUM), agreed last week to acquire a 17% stake in the Sacramento Kings of the National Basketball Association (NBA) at a $1.8 billion valuation.

That’s a nice 235% jump from the $535 million tech entrepreneur Vivek Ranadive paid for the team back in 2013, compared to a 170% gain for the S&P 500 over the same time period.

Sacramento Kings Valuation

• 2010: $305 million

• 2015: $800 million

• 2021: $1.8 billion

In total, the Sacramento Kings have seen their valuation increase nearly 500% over the last decade, which puts them at the center of the league average in terms of overall valuation appreciation.

The transaction is still subject to league approval, but for those keeping score at home, this is the second NBA franchise that Arctos Sports Partners has invested in.

With valuations continuing to climb higher — the average NBA team is now worth more than $2 billion — and the number of individuals that can afford (& want) to shell out serious cash on an NBA team hitting its upper bound, the league has loosened its rules to allow institutional investors access to minority equity investments.

Here’s a brief overview of how the new rules work:

• Private equity funds can purchase up to 20% of an individual franchise

• Private equity funds may own equity in up to 5 different teams

• No team can have more than 30% of its equity owned by PE funds

Just 9 months after the new rules were put in place, the demand appears to be strong, with multiple private equity firms already executing transactions.

A few months before acquiring this 17% stake in the Sacramento Kings at a $1.8 billion valuation, Arctos Sports Partners also agreed to acquire a 5% stake in the Golden State Warriors at a $5.5 billion valuation.

Depending on the valuation discount typically awarded to minority shareholders — this historically ranges from 30% to 40% due to various factors, including a lack of liquidity — that means that Arctos Sports Partners has probably deployed more than ~$400 million on NBA minority equity stakes.

In addition, Dyal Capital Partners, a unit of Blue Owl Capital, has also purchased a nearly 5% minority stake in the Sacramento Kings at a $1.8 billion valuation and a less than 5% stake in the Phoenix Suns at a $1.55 billion valuation.

Both private equity firms, Arctos Sports Partners and Dyal Capital Partners, reportedly plan to invest in several more teams.

The allowance of institutional capital within cap tables around the NBA was an inevitable shift that many saw coming. However, as valuations have continued to rise around the league, the number of individuals willing & able to purchase minority stakes, which typically come with little more than season tickets, has continued to decline.

NBA franchises are also a great investment from an institutional perspective. Sure, with the average NBA franchise increasing about 500% over the last decade, they have historically been great when looking at pure capital appreciation. But these minority stakes are also illiquid, enabling PE firms to lock in lucrative management fees for an extended period of time.

Combine that with the fact that NBA owners lost more than $1.5 billion during the COVID-19 pandemic, and you have the perfect storm between desire, necessity, and timing.

As more existing minority shareholders look to cash out after experiencing strong capital appreciation over the last decade, I expect more PE firms to get involved.

The NBA is in line to see their media rights multiply over the next few years, and they essentially operate as a monopoly with little to no competition. When it comes to continued valuation appreciation, that’s a winning strategy.

I hope you all had a great weekend. I’ll talk to everyone tomorrow.

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Extra Credit: I highly recommend reading Chamath Palihapitiya’s Twitter thread on the decision-making process behind his investment in the Golden State Warriors in 2011.

According to the latest valuation, his $25 million investment for a 10% stake in the franchise is now worth about $520 million, a 2000% return.

You can read the thread here.

Huddle Up is a daily newsletter that breaks down the business and money behind sports.

If you would like to join more than 47,000 other professional athletes, business executives, and casual sports fans that receive it directly in their inbox each morning, subscribe now.

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