In 2021, nearly $2 billion in private equity deals targeted the sports industry, with the NBA being particularly sought after.

• In 2021, private equity firms invested nearly $2 billion in team stakes after being invited by sports leagues.
• NBA teams received growth capital from investors, and Wylie Fernyhough of PitchBook predicted an increase in private equity deals in 2022.
• NBA teams are experiencing higher valuations due to their projected growth over the next decade, according to Fernyhough. However, it is crucial to ensure that the trades are done at a reasonable price.

Investors experienced significant gains in U.S. stocks during the decade-long bull market that ended in 2019.

The returns from investing in sports, particularly in the National Basketball Association, are significantly greater than those from other returns.

Basketball's globalization has led to the NBA having the highest price return among leagues, with its operations in China and Africa contributing to its success.

According to PitchBook's estimates, the average price return for an NBA team was 1,057% between 2002 and 2021, compared to the 458% returns on the S&P 500.

In addition to Major League Baseball and the National Hockey League, other sports also provided substantial returns.

Private equity investors are increasingly investing in U.S. sports franchises, with over $2 billion spent on equity stakes in 2021, according to PitchBook's 2021 private equity breakdown.

Wylie Fernyhough, PitchBook's private equity lead analyst, stated that investors are drawn to "the increasing level of professionalism in sports."

In 2021, Fernyhough stated that PE sports deals had commenced and predicted an increase in such deals in the future.

NBA teams getting growth capital

Major League Baseball was the first sports league to seek private equity investment during the pandemic, while other leagues such as the NBA and Major League Soccer followed suit.

In a 2019 interview with CNBC, Rob Manfred, the MLB commissioner, stated that franchise values have increased and the capital structures in clubs have become more complex. He explained that having a fund that would act as a passive equity investor in a club or clubs could facilitate the sale of those clubs.

In 2021, Arctos Sports, Dyal Capital Partners, RedBird Capital, and Sixth Street established funds to purchase minority shares in sports teams, drawn to the economic advantages of sports leagues, such as the rising value of media rights and global expansion.

Basketball is gaining popularity worldwide, becoming increasingly attractive as a sport.

The NBA launched the Basketball Africa League in 2019, which is managed by its NBA Africa entity. Despite a 2019 dispute with team executive Daryl Morey, NBA China continues to operate, and games are being streamed on Tencent. The league aims to tap into India's massive population of over one billion people.

The WNBA secured a $75 million raise last week, valuing the league at $1 billion, which will be used to expand the women's game.

Buying minority stakes in NBA clubs presents a "gigantic" opportunity for companies with an established global footprint and a younger fan base, according to Fernyhough.

He stated that there are numerous reasons to be optimistic about the NBA.

Chris Lencheski, chairman of private equity consulting company Phoenicia, agrees.

"Unlike other major stick-and-ball leagues, the NBA has a clear, straightforward, and well-defined path to a global consumer," he stated.

In the future, within the next 20 years, supersonic travel will be available, enabling an NBA team to travel anywhere in the world in just three hours. This makes it possible to imagine a game between Madrid and the New York Knicks. Given the nature of their product, the NBA is well-suited for this scenario.

Inside the PE deals

In 2021, private equity firms purchased stakes in NBA teams such as the Golden State Warriors, Sacramento Kings, and San Antonio Spurs.

According to Forbes, Arctos has acquired a 13% stake in the $5.6 billion valued Warriors franchise, making their shares worth over $700 million.

NBA teams are experiencing higher valuations due to their projected growth over the next decade, according to Fernyhough. However, it is crucial to ensure that the trades are done at a reasonable price.

According to PitchBook, Arctos secured approximately $3 billion in funding to acquire ownership stakes in various sports teams, including NBA and NHL franchises, as well as the Fenway Sports Group, which owns the MLB Boston Red Sox and NHL Pittsburgh Penguins.

Dyal, a former division of Neuberger Berman Group, invested in the Atlanta Hawks with a minority stake. RedBird, led by former Goldman Sachs executive Gerry Cardinale, made a significant impact with its $750 million investment in Fenway Sports Group. Additionally, RedBird invested $150 million in MLS franchise Inter Miami CF.

Private firms generate revenue from the funds by charging management and incentive fees. According to Fernyhough, most of the stakes sold in NBA teams are for growth capital, which enables clubs to expand their franchises and improve their facilities.

The NBA imposes a limit of 30% ownership for private equity funds, with a maximum of 20% ownership for one fund. According to Fernyhough, there are no additional benefits or privileges associated with private equity ownership. Instead, these perks, such as courtside seats, are reserved for limited partners like Michael Dell, who purchases directly.

The NBA and MLS have different investment requirements: while the NBA has a minimum investment of $20 million, the MLB evaluates investments on a deal-by-deal basis and doesn't have a set limit.

Sports owners, including limited partners, can utilize a tax deduction called "roster depreciation allowance" to defer paying taxes on revenue generated from their clubs. This tax loophole was effectively utilized by former MLB commissioner Bud Selig during his ownership of a baseball team.

According to Fernyhough, pro sports franchises have evolved from being a symbol of wealth and exclusivity for the elite to a profitable business operation.

Watch the Broncos to see if the NFL embraces PE

The NFL is considering adding capital safety nets, but it may take time to determine its strategy. Despite private equity's presence in other sports leagues, the NFL has not yet joined the trend.

The NFL has more pressing issues to deal with, such as the Class Action lawsuit filed by former Miami Dolphins coach Brian Flores last week, which alleges that Dolphins owner Steven Ross offered Flores $100,000 to lose games, in violation of the federal "sports bribery act."

The upcoming sale of the Denver Broncos will reveal whether the NFL will permit a private equity firm to acquire minority ownership.

The estimated sale of the Broncos could fetch $4 billion, surpassing the $2.2 billion spent by David Tepper to buy the Carolina Panthers in 2018.

If private equity is permitted in the NFL deal, it is likely that the league will approve an existing fund.

"The NFL is unlikely to permit any new company or entity to acquire a stake in it," he stated.

The Basketball Africa League was announced in 2019 and this article was updated to reflect the news.