Private Equity Is Coming To The NBA

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Friends,

The average NBA franchise was worth an estimated $370 million in 2010, but after the league spent the last decade increasing media rights and expanding globally, the average NBA franchise is now worth $2.4 billion — an increase of 550%.

The only problem?

Teams are becoming too expensive, to a degree.

The solution?

Private equity.

The NBA has reportedly agreed on a framework to allow private equity and institutional investors to own minority equity stakes in multiple franchises, according to a report by Sportico.

Here are the details:

• Firms may own up to 20% equity in a single franchise

• Investment funds may own stakes in a maximum of 5 teams

• No franchise can have more than 30% of its equity held by investment funds

But what does this mean for the league, individual teams, and potential investors?

Let’s take a look.

First, some history.

Last spring, the NBA approved Dyal Homecourt Partners — a division of US investment management firm Neuberger Berman — to take a passive equity stake in multiple franchises across the NBA.

The firm is currently in the process of raising $2 billion to invest.

The interesting part?

They will share an undisclosed percentage of management fees and profits with the NBA.

Furthermore, private equity firm Arctos Sports Partners, which is co-led by Madison Square Garden chief executive Doc O’Connor, is also in talks with the NBA to become the second institutional investor with permission to invest in NBA franchises.

Now, the NBA appears to be doubling down on that strategy.

Why?

Well, there are a few reasons.

With franchise valuations increasing 550% over the last decade, with multiple teams now worth $5B+, even the wealthiest individuals in the world are now being priced out.

Put simply, this widens the pool of potential buyers.

In addition to decreasing the entry ownership premium by widening the pool of potential buyers, the addition of institutional funds will provide liquidity for existing minority owners, stabilize franchise valuations post-pandemic, and give NBA teams an attractive option for capital injection — should they need it.

On the flip slide, why do investment funds want in on the party?

Capital appreciation, obviously, but also diversification.

While headlines read that franchise valuations have increased 550% over the last decade, the average North American professional sports organization has also grown 12% annually in value since 1991 (Source).

That’s better than the stock market over the same time period.

The best part?

Compared to your traditional stocks or bonds, it’s a completely uncorrelated asset.

That’s something institutional investment funds love.

I’ve said it before, and I’ll most definitely say it again, Adam Silver is the best commissioner in sports.

Along with his decisive action to ban Donald Sterling following racist comments, increasing league-wide revenue through larger media deals, saving the NBA $1 billion by hosting the Orlando bubble in 2020, this is just one more example of his creativity paying dividends for his shareholders — the NBA owners.

Only time will tell how this shakes out, but my guess?

There’s going to be a lot of interest.

Have a great day, and we’ll talk tomorrow.

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Extra Credit

With yesterday being the one-year anniversary of Kobe & Gigi Bryant’s death, along with the even other passengers onboard, I decided to write a thread on a story you’ve never heard.

For those of you that missed it last night, you can check it out here.

I’m biased, but I think it’s worth the read.

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