NBA plans private equity investments in teams

NBA Commissioner Adam Silver addresses the media ahead of the Miami Heat’s game against the Los Angeles Lakers in Game One of the 2020 NBA Finals at the 2020 NBA Restart on September 30, 2020 at AdventHealth Arena at ESPN Wide World of Sports Complex in Orlando, Florida.

Garrett Ellwood | National Basketball Association | Getty Images

Property accoutrements.

That’s the phrase National Basketball Association commissioner Adam Silver used in 2019 to help define the attractiveness of owning a sport. And Silver has suggested the NBA could inspire those looking to join his club, even at a minority level.

The NBA’s plan to attract private equity money is underway, and he’s betting that the allure of owning limited partnerships in his clubs will pay off.

With club valuations reaching astronomical levels, the NBA joined the hunt for private equity when owners approved a plan for investment firms to hold stakes in teams. NBA executive JB Lockhart is one of the people overseeing this strategy and the league has chosen Dyal Capital as its partner.

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

Some in the private equity space are praising the NBA’s decision and even attempting to connect it to a more global game down the line.

The advantages and disadvantages of PE

By turning to private equity, the NBA is soliciting more capital for its league, can make faster deals to help liquidity and fund its future efforts.

Also, NBA ratings are skyrocketing. A club’s average price is now over $ 2 billion, and its last two franchises (Brooklyn and Utah) have averaged $ 2.45 billion when you consider that Nets owner Joseph Tsai, paid $ 1 billion for Barclays Center in Brooklyn as part of a separate deal.

Therefore, the league needed to expand its investor base as even minority stakes get expensive.

“It gives the NBA, its member teams, all of its infrastructure a financial option,” said Chris Lencheski, president of private equity consultancy Phenicia and an assistant professor at Columbia University.

Allowing private equity investments will also help minority owners looking to sell and leave property groups. On the majority side, owners who wish to recover from Covid-19 losses can sell and benefit from shares.

Lencheski, who is also CEO of Granite Bridge Partners’ Winning Streak Sports, sees the NBA’s global ‘economic divide’ as a draw for investors as there is unlikely to be viable competition for professional basketball. high level. Additionally, the league is backed by global licenses, merchandise, sponsorships, and approximately $ 2.5 billion in annual media rights revenue, which runs through the 2024-25 season.

But the move is not without risk.

Addressing the slippage in NBA odds at the 2019 Sports Business Journal Dealmakers conference, Silver described the cable TV model as “broken” and added that young league viewers are “abandoning traditional cable.”

So if its media rights drop as cable subscribers continue to cut the cord, valuations could fall and investors could lose money on LPs. A sports banker pointed to 2009, when valuations fell due to a poor economy, as proof that the NBA is not immune to a drop due to the economic crisis, either.

And few of them foresaw the sudden end of its turnover estimated at 40% due to the pandemic.

But it might have some help from the public appeal.

Anthony Davis # 3 of the Los Angeles Lakers shoots the ball against the Miami Heat in Game 4 of the NBA Finals on October 6, 2020 at AdventHealth Arena in Orlando, Florida.

Nathaniel S. Butler | National Basketball Association | Getty Images

The SPAC game

Dyal and investment firm Owl Rock have merged with Altimar Acquisition Corporation, a $ 275 million Special Purpose Acquisition Company (SPAC) currently traded on the New York Stock Exchange, allowing merged companies to enter in stock exchange. The new company is called Blue Owl, and public investors will soon be able to invest in it under the symbol “OWL” on the NYSE later this year.

And one of its attractions will be its NBA fund.

Dyal did not respond to a request for comment from CNBC, but managing partner Michael Rees spoke about the company’s NBA strategy during a December 23 U.S. Securities and Exchange Commission call 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 buyer of a portfolio of minority holdings in all 30 NBA teams,” said Rees, according to the call transcript. “This business has just been launched, and we hope to have our first shutdown in the not too distant future.”

“We think we can develop a very attractive basketball strategy from this platform, but also eventually expand to a larger sports business which could have a huge advantage,” added Rees, who will also be the one of the co-chairs of Blue Owl. .

It’s unclear what Blue Owl’s overall athletic strategy is, or how he expects to make a comeback on the NBA LPs. A person close to their planning told CNBC they will buy stakes in some clubs, not all 30 teams.

Discussing the NBA’s private equity game, a Wall Street CEO said companies don’t make money on fiat capital until they sell something. The person has requested to remain anonymous due to the sensitivity of publicly discussing the matter.

The CEO, who has a long history in private equity, also wondered how private companies could make $ 2 billion profitable. A longtime sports executive, who also requested anonymity, noted that NBA teams can redistribute annual profits to new investors.

So, if a private company bets on sports teams as a long-term game, it could earn on club income while keeping LPs through dividends. Then he could sell the LPs at a higher price.

And with the NBA as a global product, billionaires around the world looking for an entry point into American sports could be potential consumers of NBA accessories.

Qatari president of Paris Saint-Germain, Nasser Al-Khelaifi, arrives for a training session at Luz stadium in Lisbon on August 22, 2020 on the eve of the UEFA Champions League final soccer match between Paris Saint- Germain and Bayern Munich.

Miguel A. Lopes | AFP | Getty Images

Foreign investment, an option?

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

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

There is gossip that points to Middle Eastern investors as future buyers of minority stocks. The NBA bans sovereign state investment in its teams, but investors from Abu Dhabi, Dubai and Qatar have already been linked with the league. In 2010, it was said that investors were interested in buying the Detroit Pistons.

Lencheski added that the NBA could also use the private equity investment vehicle to examine people who may be looking to buy controlling positions in teams at a later date. The athletic director 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 cited David Tepper’s entry into the National Football League as another example.

“One of the many factors that certainly helped Charlotte become an NFL owner was the initial minority interest in the Pittsburgh Steelers,” he said. “If David Tepper doesn’t see how the Steelers organization works, understands what a top-notch organization looks like when he speaks to his NFL colleagues and says, ‘I want to buy a team,’ he has. funds, but especially for the NFL, it includes the culture of a winning, community-driven sports organization. “

The NBA seems optimistic about its product. Live sports always prevent the cable model from breaking. The league continues to produce international superstars to protect its economic moat – $ 8.3 billion in revenue. And the NBA’s credit is in order.

The NBA’s new goal is to expand the list of those seeking property accoutrements through private equity.

“You get some of the benefits of being a team owner,” Silver told SBJ, according to SportsPro. “So it’s not just a pure” What’s my financial return on investment? “Not that it’s not important, but try to get closer to some of the same reasons traditional franchise owners buy teams.

“Part of it is financial,” said Silver, “but part of it is the amenities, and the cachet, and the desire to be directly involved in these leagues.”

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