Private Equity Has Definitively Entered the World of Professional Sports. Here’s What Comes Next.

Illustration by Jason Raish

Illustration by Jason Raish

Buying stakes in NBA and MLB teams is just the beginning of the private equity takeover of major league sports.

For years, as sports franchise values have exploded, industry participants have been saying that private equity ownership is coming to major sports teams. And now it is happening.

In the last 20 months, Arctos Sports Partners has taken stakes in 12 U.S. teams, including Major League Baseball’s Boston Red Sox and the National Basketball Association’s Golden State Warriors.

Blue Owl Capital’s Dyal Capital has purchased portions of the NBA’s Phoenix Suns and Sacramento Kings, while Ares Management Corp. has invested $1 billion in sports and related media this year, including Spanish soccer team Atlético de Madrid.

Until recently, top sports leagues in the U.S. refused to allow private equity ownership of teams, fearing that would create an unwieldy and unstable ownership structure.

“But now the leagues have finally come around, and that has opened the floodgates for private equity investment,” says Robert Caporale, co-chairman of sports investment bank Game Plan in Miami Beach, Florida.

Several factors have led to private equity’s admission into the owners club, with minority stakes in multiple teams. For one, private equity investors represent potential buyers of stakes from the teams’ limited partners, who have seen their interests soar in value over the years. In addition, team values have ascended so high that very few people can buy them alone.

Some teams may need money to cover losses created by the Covid-19 pandemic. And some teams could use additional money to invest in their businesses, which could mean spending on the teams themselves or ancillary opportunities, such as real estate surrounding their playing fields.

For private equity investors, sports teams constitute stable and growing assets: One private equity manager says his firm is seeking annualized returns in the mid- to high teens.

Private equity funds investing in sports teams are generally set up with an evergreen structure, rather than the typical ten-year life cycle. That way managers don’t have to worry about returning capital to their limited partners from what can be very long-term investments.

Investors find the NBA attractive for a variety of reasons. “It’s a game that appeals to a global, youthful fanbase,” says Boston Celtics owner Wyc Grousbeck, a partner in venture capital firm Causeway Media Partners.

The value of the league’s media rights deals is climbing. And sports gambling, which is being legalized quickly across the country, should provide meaningful revenue.

There’s talk the NBA will try for a $75 billion television and streaming rights package in its next negotiation, up from the current $24 billion payout, which ends after the 2024-25 season.

When you combine that windfall with the 50-50 split in basketball-related revenue between owners and players, it’s a challenge to lose money for NBA teams, industry pros say.

One investor estimates that NBA team values could rise to $5 billion to $10 billion in the next 20 years, up from Forbes’s current estimate of $1.3 billion to $5 billion.

Other major sports have huge potential as well, industry participants say. MLB, the National Hockey League, and Major League Soccer already permit private equity, with MLS officials indicating private equity deals are coming this year.

“North American sports franchises are unique assets,” says Ian Charles, co-managing partner and founder of Arctos Sports Partners. “It’s hard to find businesses with a stronger combination of innovation, brand loyalty, lifetime customer value, and long-term growth prospects.”

Major league U.S. teams and top European soccer clubs grew their revenue more than 7 percent annualized over the last 20 years, a performance matched only by the healthcare and education services sectors, according to the U.S. Bureau of Economic Analysis. (The BEA excludes the technology industry from its data.)

Private equity investment could drive the financial performance of sports teams even higher, given the constraints they now face from their leagues. Those include borrowing limits, requirements to reinvest all their cash flow in the teams, and, until recently, a ban against private equity ownership.

“They can’t take advantage of all their opportunities,” one private equity manager says. “Private equity investments could help unlock their full potential.”

The goal of a 15 percent to 20 percent return on high-quality U.S. teams is reasonable, says Wylie Fernyhough, senior analyst of private equity at PitchBook, a research service. While that’s below the 25 percent to 30 percent returns available in buyout and growth equity, it’s comparable to core private equity investments from giants like Blackstone and KKR.

The 15 percent to 20 percent range would easily top the historical return of the S&P 500 index: 7 percent annualized for 2000 to 2020. And the top sports teams are more stable than some S&P 500 companies.

From 2010 to 2020, the average Forbes team valuation for the NBA, the National Football League, and MLB jumped 275 percent, far outstripping the 199 percent climb by the S&P 500, according to data firm Knoema.

And the financial performance of sports teams isn’t correlated to stocks and bonds, thus providing diversification to investors, says Andrew Laurino, senior managing director at Blue Owl and a member of the Dyal investment team. Dyal aims to create diversification through the different NBA teams in which it invests too.

It wants large-market teams that generate more of their income from local sources than their share of league-wide revenue. And it wants small-market teams that get the majority of their revenue from the national media and sponsorship deals negotiated by the league, Laurino says.

Dyal doesn’t believe the success of its strategy depends on a portfolio team’s success on the court. While the Sacramento Kings haven’t won much lately, they have one of the most modern arenas in the league and extensive real estate holdings near their arena, including a hotel, retail, and a restaurant district. All that adds value to the team, Laurino says.

The NBA’s San Antonio Spurs, which recently received an investment from private equity firm Sixth Street Partners, are planning a $511 million real estate project, which could include a training facility for the team, a biotechnology research institute, a public park, and commercial and medical office space.

All private equity managers involved with sports team ownership say their motivation for investing is purely financial. But even so, there are some “karmic benefits” of investing in what you love to watch, Laurino says. “It’s more fun than rooting for a chemical plant.”

Private equity ownership of sports teams should continue to grow, spurred by the same factors that are pushing it now. The NFL is the only major U.S. league that still bars private equity, but PitchBook’s Fernyhough thinks it will relent after seeing the benefits for other leagues.

And you might see private equity invest in leagues rather than just teams, according to Game Plan’s Caporale. Earlier this month, La Liga, Spain’s top soccer league, said it had agreed in principle to a deal with Luxembourg-based private equity firm CVC Capital Partners.

CVC would provide €2.7 billion ($3.17 billion) to the league in exchange for 10 percent of its revenue. The league also would form a company to perform various commercial activities, and CVC would have a 10 percent stake in that.

Back in 2005, Game Plan teamed up with Bain Capital to bid $4.3 billion for all 30 NHL teams, proposing to operate them as a single entity. But the league declined.

“Our idea was that you could operate the business more efficiently as a single entity,” Caporale says. “There are economies of scale when a league is buying products, such as insurance, for everyone, rather than each team buying for itself.”

Under such a scenario, existing owners would continue to control their teams on the field and would no longer have to answer to an unincorporated league. Meanwhile, the league would be in charge of business matters.

“It could work out better for everyone,” Caporale says.