NBA plans non-public fairness investments in groups
NBA Commissioner Adam Silver speaks ahead of the Miami Heat game against the Los Angeles Lakers in the first game of the 2020 NBA Finals as part of the 2020 NBA restart on September 30, 2020 at the AdventHealth Arena of the ESPN Wide World of Sports Complex Media in Orlando, Florida.
Garrett Ellwood | National Basketball Association | Getty Images
It is the term that National Basketball Association commissioner Adam Silver used in 2019 to determine the attractiveness of a sports owner. And Silver suggested that the NBA could create incentives for those who want to join their club, even at the minority level.
The NBA’s plan to attract private equity money is on the move, and it will pay off to bet on the appeal of owning limited partnerships in their clubs.
With club ratings soaring at astronomical levels, the NBA joined the private equity pursuit when owners approved a plan that would allow investment firms to own stakes in teams. NBA manager JB Lockhart is one of the people overseeing this strategy and the league has selected Dyal Capital as a partner.
This is how it works: The NBA pools the shares in clubs and sells them to private equity firms like Dyal, which the Limited Partnerships (LPs) can then technically sell to private investors. In May of last year, Barron Dyal wanted to raise $ 2 billion to buy the LPs.
Some in the private equity space are praising the NBA’s move, and even trying to tie it to a more global game across the board.
The pros and cons of PE
By turning to private equity, the NBA is soliciting more capital for their league, closing deals faster to support liquidity and fund their future efforts.
NBA ratings are also skyrocketing. The average price for a club is now over $ 2 billion, and the last two franchises (Brooklyn and Utah) sold for an average of $ 2.45 billion, considering network owner Joseph Tsai is $ 1 billion – Paid dollars for the Barclays Center in Brooklyn in a separate deal.
Therefore, the league had to use its investor base, as even minority stakes become expensive.
“This provides financial opportunity for the NBA, its membership teams and all of its infrastructure,” said Chris Lencheski, chairman of private equity advisory firm Phenicia and associate professor at Columbia University.
Allowing private equity investment will also help minority owners sell and leave groups of owners. On the majority side, owners who want to recover from Covid-19 losses can sell stocks and benefit from them too.
Lencheski, who also serves as CEO of Winning Streak Sports at Granite Bridge Partners, sees the NBA’s global “economic divide” as a draw for investors as it is unlikely that there will be viable competition for high-level professional basketball. In addition, the league is supported by worldwide licenses, merchandise, sponsorship, and approximately $ 2.5 billion annual media rights revenue running in the 2024-25 season.
However, moving is not risk-free.
Silver spoke about the NBA’s rating slide at the Sports Business Journal’s 2019 Dealmakers Conference, describing the cable television model as “broken”.
Should media rights fall in price as cable customers continue to cut cables, 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 evidence that the NBA is also not immune to a decline due to economic turmoil.
And few foresaw the sudden halt of the estimated 40% of sales due to the pandemic.
But it could have some help from public attraction.
Anthony Davis # 3 of the Los Angeles Lakers shoots the ball against the Miami Heat during game four 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 merged with Altimar Acquisition Corporation, a $ 275 million special purpose vehicle (SPAC) currently listed on the New York Stock Exchange, enabling the combined companies to go public. The new company is called Blue Owl and public investors will be able to invest in the company later this year under the ticker symbol “OWL” on the NYSE.
One of its attractions will be the NBA fund.
Dyal didn’t respond to a CNBC request for comment, but managing partner Michael Rees spoke about the company’s NBA strategy during a December 23 call by the US Securities and Exchange Commission, announcing the plan to launch Blue Owl.
“We are proud to be a partner, an exclusive partner of the NBA, the National Basketball Association, where we are the only eligible purchaser of a portfolio of minority interests in the NBA’s 30 teams,” said Rees. according to the log of the call. “This business is just getting started and we hope to have our first deal in the not too distant future.”
“We believe that with this platform we can certainly develop a very attractive basketball strategy, but also potentially expand it to a broader sports business that could have tremendous benefits,” added Rees, who is also one of the co-presidents of Blue Owl becomes .
It’s not clear what Blue Owl’s overall sports strategy is and how it expects a return on NBA LPs. One person close to their planning told CNBC that they would buy stakes in some clubs, not all 30 teams.
While discussing the NBA’s private equity game, a Wall Street CEO said that trust companies don’t make money until it sells something. The person asked to remain anonymous as the matter should be discussed sensitively in public.
The CEO, who has a long history in private equity, also asked how private companies would generate $ 2 billion in returns. A longtime sports manager, who also asked for anonymity, noted that NBA teams can redistribute annual profits to new investors.
So if a private company relies on sports teams for the long term, it can generate income from the clubs while holding onto the LPs through dividends. Then it could sell the LPs at a higher price.
And with the NBA as such a global product, billionaires around the world looking for a point of entry into US sports could be potential consumers of NBA gear.
The Qatari President of Paris Saint-Germain, Nasser Al-Khelaifi, arrives for a training session at the Luz Stadium in Lisbon on August 22, 2020 on the eve of the last UEFA Champions League football match between Paris Saint-Germain and Bayern Munich.
Miguel A. Lopes | AFP | Getty Images
Foreign investment an option?
Private companies can buy the LPs and then sell them on the secondary market. If the NBA takes the private equity route, there are guidelines in place, but they lose control of who the LPs are sold to.
Foreign investors could be a way for companies to make money from the LPs.
There is gossip pointing to Middle Eastern investors as prospective buyers of the minority interests. The NBA bans government investment in their teams, but investors from Abu Dhabi, Dubai and Qatar have been linked to the league before. In 2010 there were rumors that investors were interested in buying the Detroit Pistons.
Lencheski added that the NBA could also use the private equity investment vehicle to study individuals who might try to buy majority positions on teams at a later date. The sports manager used Tsai’s entry as an example. He paid Russian billionaire Mikhail Prokhorov $ 1 billion in 2018 for a 49 percent stake in the Brooklyn Nets 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’s possession in the NFL was her minority stake in the Pittsburgh Steelers,” he said. “When David Tepper doesn’t see how the Steelers organization works, he understands what a top notch organization looks like when he goes to his NFL peers and says, ‘I want to buy a team,’ he has the resources, more importantly for the NFL, however, is that he understands the culture of a successful, community-based sports organization. “
The NBA appears to be optimistic about their product. Live sports still prevent the cable model from breaking. The league continues to produce international superstars to protect its economic ditch – $ 8.3 billion in sales. And the NBA’s credit is in good shape.
The NBA’s new focus is on expanding the list of those looking for home furnishings through private equity.
“There are some advantages to being a team owner,” Silver told SBJ, according to SportsPro. “So it’s not just a mere ‘What’s my financial return?’ Not that that doesn’t matter, but try to get closer to some of the same reasons traditional franchisees shop in teams.
“Part of that is financial,” said Silver, “but part of it is the convenience and the stamp of approval and the desire to be directly involved in these leagues.”