NBA plans for private equity investments in equipment

Property accessories.

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

The NBA’s plan to attract private equity money is underway and betting on the appeal of owning limited companies to its clubs will pay off.

With ratings at clubs rising to astronomical levels, the NBA joined the pursuit of private capital when the owners approved a plan to allow investment firms to have stakes in teams. NBA executive JB Lockhart is one of the people overseeing this strategy and the league chose Dyal Capital as its partner.

They work: The NBA completes stakes in clubs and sells them to private equity firms like Dyal, which can technically sell corporations to private investors. Last May, Dyal, from Barron, was trying to raise $ 2 billion to buy the LPs.

Some in the private equity space praise the NBA movement and even try to connect it to a more global game.

By resorting to private capital, the NBA is soliciting more capital for its league, can reach faster deals to help with liquidity, and fund its future efforts.

Also, NBA ratings are skyrocketing. The average price of a club now exceeds $ 2 billion and its last two franchises (Brooklyn and Utah) sold for an average of $ 2.455 billion considering that Nets owner Joseph Tsai paid $ 1,000. million dollars by the Brooklyn Barclays Center in a separate deal.

Therefore, the league needed to spend its investor base, as even minority stakes are becoming expensive.

“This provides the NBA, its member teams, with all the infrastructure with financial optionality,” said Chris Lencheski, president of the Phenicia private equity consulting firm and adjunct professor at Columbia University.

Allowing private equity investments will also help minority homeowners who want to sell in and out of homeowner groups. For the most part, owners who want to recover from Covid-19 losses can also sell shares and profit.

Lencheski, who also serves as CEO of Winning Streak Sports for Granite Bridge Partners, sees the NBA’s global “economic gap” as attractive to investors, as viable competition for professional basketball is unlikely. high level. In addition, the league is backed by global licenses, merchandise, sponsorships and approximately $ 2.5 billion in annual revenue from media rights, which extends over the 2024-25 season.

But the move does not involve any risk.

Addressing the slides of the NBA scores at the 2019 Sports Deal Journal Dealmakers conference, Silver described the cable TV model as “broken” and added that young league viewers “are tuning in to traditional cable “.

Thus, if their media rights went down in price as cable subscribers continued to cut the cable, ratings could fall and investors could lose money on LP. A sports banker pointed to 2009 when ratings fell due to a bad economy, as proof that the NBA is also not immune to a downturn due to economic turmoil.

And few predicted the abrupt halt of their estimated 40% of revenue due to the pandemic.

But it could have the help of the public.

Dyal and investment firm Owl Rock merged with Altimar Acquisition Corporation, a $ 275 million special-purpose acquisition (SPAC) company currently listed on the New York Stock Exchange, allowing the companies to merge. pass the bag. The new firm is called Blue Owl and public investors will soon be able to invest in it under the “OWL” symbol on the NYSE later this year.

And one of his attractions will be his NBA background.

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

“We believe we can certainly grow a very attractive basketball strategy outside of this platform, but also possibly expand into a wider sports business that can have a big advantage,” added Rees, who will also serve as one of the Blue Owl co-chairs.

It’s not clear what Blue Owl’s overall sports strategy is or how he hopes to get a return from the NBA LPs. A person close to his planning told CNBC he would buy stakes in some clubs, not in all 30 teams.

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

The CEO, who has a long history in private equity, also questioned how private companies would get a $ 2 billion return. A longtime sports executive, who also asked for anonymity, noted that NBA teams can redistribute annual profits to new investors.

Therefore, if a private company bets on sports teams as a long-term game, it could win with the income of the clubs while maintaining the LPs through dividends. Then, I could sell the LPs at a higher price.

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

Private companies can acquire LPs and then sell them on the secondary market. If the NBA follows the path of private equity, 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 with LPs.

There are talks pointing to Middle Eastern investors as future buyers of minority shares. The NBA bans sovereign state investment in its teams, but investors in Abu Dhabi, Dubai and Qatar had already been tied to the league. In 2010 it was rumored 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 could buy majority positions in equipment later. The sports executive used Tsai’s entry as an example. He paid Russian billionaire Mikhail Prokhorov $ 1 billion for a 49% stake in Brooklyn networks in 2018 before taking full control.

Lencheski pointed to David Tepper’s entry into the National Football League as one more 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 how the Steelers organization works, he understands what a top-class organization is like when he goes to his NFL colleagues and says, ‘I want to buy a team,’ he has the funds, but what it’s more important to the NFL, it understands the culture of a winning community-focused sports organization. ”

The NBA appears bullish on its product. Live sports still prevent the cable model from breaking. The league continues to produce international superstars to protect its economic moat, with revenue of $ 8.3 billion. And NBA credit is in good shape.

The NBA’s new approach is expanding the list of people looking for property accessories through private equity.

“You get some of the benefits of owning a team,” Silver told SBJ, according to SportsPro. “So it’s not just a pure” What is my financial return on investment? Not that this isn’t important, but try to approach some of the same reasons traditional franchise owners buy into computers.

“Part of it is financial,” Silver said, “but part of it is the amenities and the cache and the desire to participate directly in those leagues.”