NBA plans for private equity investments in teams

Proprietary equipment.

It’s the phrase National Basketball Association commissioner Adam Silver used in 2019 to help frame the appeal of becoming a game owner. And Silver suggested the NBA could encourage those to join the club, even at a minority level.

The NBA’s plan to lure private equity money is underway, and betting on the allure of limited partnership ownership in its clubs will pay off.

As valuations in clubs soared to astronomical levels, the NBA joined the hunt for private equity when owners approved a plan to allow investment firms to own shares in teams. NBA Director JB Lockhart is one of the individuals overseeing this strategy, and the league chose Dyal Capital as a partner.

The way it works: The NBA rounds out stakes in clubs and sells them to private equity firms like Dyal, who can technically sell the limited partnerships (LPs) to private investors. Last May, Barron’s reported Dyal set out to raise $ 2 billion to buy the LPs.

Some in the private equity space are praising the NBA’s move and even trying to relate it to a more global game down the line.

By turning to private equity, the NBA is asking for more capital for its competition, can close deals more quickly to help with liquidity and fund its future endeavors.

NBA ratings are also skyrocketing. The average price of a club is now over $ 2 billion, and the last two franchises (Brooklyn and Utah) sold for an average of $ 2.45 billion when you consider that Nets owner Joseph Tsai paid $ 1 billion for the Barclays Center in Brooklyn in a separate deal.

Therefore, the league had to expand its investor base as even minority stakes become expensive.

“This gives the NBA and its member teams its full infrastructure financial capabilities,” said Chris Lencheski, the chairman of the private equity advisory firm Phenicia and an adjunct professor at Columbia University.

Allowing private equity investments will also help minority owners looking to sell and leave ownership groups. On the majority side, owners who want to recover from the losses of Covid-19 by selling stock can and also profit from it.

Lencheski, who also serves as CEO of Granite Bridge Partners’ Winning Streak Sports, sees the NBA’s global “economic moat” as an attraction for investors, as there is unlikely to be a viable competition for high-level professional basketball. Additionally, the competition is supported by global licensing, merchandise, sponsorships and approximately $ 2.5 billion in annual media rights revenue, which will run through the 2024-25 season.

But the move is not without risk.

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

So if the price of the media rights were to fall as cable subscribers continue to cut the cord, valuations could drop and investors could lose money on LPs. A sports banker pointed to 2009, when valuations fell due to a bad economy, as proof that the NBA is also not immune to a decline due to economic turmoil.

And few anticipated the abrupt halt to the estimated 40% of revenues resulting from the pandemic.

But it could be helped by the allure of the public.

Dyal and investment firm Owl Rock merged with Altimar Acquisition Corporation, a $ 275 million special purpose acquisition company (SPAC) currently traded 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 ticker symbol “OWL” on the NYSE later this year.

And one of the attractions will be the NBA fund.

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

“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 interests in the 30 teams in the NBA,” said Rees. according to the transcript of the call. “That company is just launching, and we hope our first shutdown will take place in the not too distant future.”

“We think that with this platform we can certainly develop a very attractive basketball strategy, but also potentially expand into a broader sports company that could have a huge advantage,” added Rees, who will also serve as one of the co-presidents. from Blue Owl. .

It is not clear what Blue Owl’s overall sports strategy is, nor how it expects to return on NBA LPs. One person close to their schedule told CNBC it would buy stock in some clubs, not all 30 teams.

In discussing the NBA’s private equity game, a Wall Street CEO said the companies don’t make money from fiduciary capital until it sells something. The person requested to remain anonymous due to the sensitivity to publicly discuss the matter.

The CEO, who has an extensive history in private equity, also wondered how private firms would make any returns on $ 2 billion. An experienced sports manager, who also asked for anonymity, noted that NBA teams can redistribute annual profits to new investors.

So if a private company is betting on sports teams as a long-term game, it could earn revenue from clubs while holding the LPs through dividends. Then it could sell the LPs at a higher price.

And with the NBA such a global product, billionaires around the world looking for a gateway to American sport could be potential users of NBA gear.

Private companies can buy the LPs and then sell them on the secondary market. If the NBA goes the private equity route, there will be guidelines, but it will lose some control over who the LPs are sold to.

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

There is gossip that suggests Middle Eastern investors as future purchasers of the minority stocks. The NBA is banning state investment in its teams, but investors from Abu Dhabi, Dubai and Qatar have previously been linked to the competition. In 2010, there were rumors that investors were interested in purchasing the Detroit Pistons.

Lencheski added that the NBA could also use the private equity investment vehicle to investigate individuals who could buy majority positions in teams at a later date. The sportsman 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 pointed to 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 minority interest initially in the Pittsburgh Steelers,” he said. “If David Tepper doesn’t see the way the Steelers organization works, he understands what a best-in-class organization looks like when he goes to his NFL peers and says, ‘I want to buy a team,’ then he has the money. , but more importantly for the NFL, he understands the culture of a winning community-based sports organization. ”

The NBA seems optimistic about its product. Live sports still ensures that the cable model does not break. The competition continues to produce international superstars to protect its economic moat – $ 8.3 billion in revenue. And the NBA’s credit standing is in good standing.

The NBA’s new focus is to expand the list of people seeking retention of title through private equity.

“You get some benefits from being a team owner,” Silver told SBJ SportsPro. “So it’s not just a pure, ‘What’s my financial return?’ Not that that’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,” said Silver, “but part of it is the facilities and the cachet and the desire to be directly involved in these competitions.”