Basketball fans revere Michael Jordan as the best basketball player of all time and the fierce and charismatic competitor who led his Chicago Bulls to six National Basketball Association championships in the 1990s. Private equity investors, though, likely regard the long-retired legend as a champion investor who sold his majority stake in the lowly NBA franchise Charlotte Hornets for a reported $3 billion.
That represented a whopping 990.91% uptick from the $275 million the now 61-year-old Jordan paid for the stake in 2010.
That’s a score any investor—hoop fan or not—can get excited about.
Those kinds of nosebleed valuations for sports franchise are pulling private equity into the booming game of sports investing. Since 2019, when Major League baseball became the first of the big North American leagues to open franchise ownership to outside investors, private equity has poured $59 billion into sports investing—and the spigot remains open.
Bulls are smartly betting the growth of investing in professional sports leagues both here and abroad is just in the first quarter. National TV broadcasting rights for the NBA, National Football League, MLB and National Hockey League are soaring; this year the global sports TV contracts hit a high of $62.4 billion. Media rights is the fuel powering the rocket that is franchise valuation, and market observers don’t see it falling back to earth anytime soon. Also, the number of sports-focused funds is also expected to expand to absorb all that capital gushing into the alternative asset class. Furthermore, women sports, such as the WNBA, which has recently gained more attention because of the rivalry between Caitlin Clark and Angel Reese, are spurring intense interest, along with emerging sports ranging from lacrosse to men’s volleyball to bull riding. Women’s soccer especially is drawing eyeballs and multibillion-dollar TV rights deals.
To meet the demand from RIAs, advisors and high\-net-worth investors, some firms are democratizing sports investing that is usually the sandbox of multibillionaires like Steve Ballmer, the former Microsoft CEO and longtime owner of the Los Angeles Clippers. In March, alternative platform GLASfunds of Cleveland added sports-focused fund Homecourt Partners Fund from alternative asset manager Blue Owl to its platform. The fund will allow investors to get a piece of the sports action for as “little” as $50,000, according to the firm. Homecourt is a $627 million vintage buyout offering started in 2021 and has investments and the NBA’s Atlanta Hawks and Phoenix Suns. The Suns, along with the WNBA’s Mercury, were sold in 2022 to billionaire mortgage lender Mat Ishbia for a record $4 billion.
Valuations of franchises are growing “like gangbusters,” said Steve Amato, partner with the special acquisition services group at consulting giant Deloitte. “More people are getting excited about professional sports. There’s more investment in women sports and the secondary leagues, and we’re seeing a lot of money move back and forth between the U.S. and Europe,” he said.
Diversification and the excitement of owning a slice of a sports franchise are among the reasons many private equity investors are adding sports assets to their portfolio. But these investors are aiming to beat the gains delivered by stocks. In that regard, sports investing has sprinted far ahead of equities over the long term.
Dallas-based Arctos Partners LP, a private equity firm with about $7 billion in assets and stakes in the Golden States Warriors of the NBA, MLB’s Los Angeles Dodgers and others, has provided what investors need to feel comfortable betting on a nascent sector: data.
This month Arctos launched the Ross-Arctos Sports Franchise Index that measures franchise valuation growth across the four major leagues going back to 1960. The index, compiled with the University of Michigan’s Ross School of Business, tracks more than 400 transactions.
The Franchise Index has returned 13% annually over the past 20 years, outpacing the benchmark Standard & Poor’s 500 Index by 2.5%, Arctos noted in an email to Financial Advisor magazine. (Private equity, in general, has gained 15% over that period.)
“One of the constraints for institutions seeking to invest into professional sports is that they do not have benchmarking data,” Zach Baran, a director at Arctos, said in an email. “We believe that the [index] is equipping investors with the resources they need to complete their diligence and compare the asset class to other public and private market asset classes.”
“The allure of advisors being able to offer clients a small piece of an NBA team, or elsewhere in pro sports, is an exciting differentiator, but more importantly is backed up by investment data," said GLASfunds Chief Investment Officer Brett Hillard, who added that an allocation of 5% of a portfolio to sports investing “could make some sense.”
Returns of the four big leagues even bested small capitalization stocks. Houston-based private equity firm Caz Investments noted on its website that the Russell 2000 returned 8% annually between 2002 and 2021. Over the same period, the NBA, NFL, MLB and NHL combined for 18% percent compounded returns. That outperformance was driven mainly by a 1,057% gain in the average price for an NBA team. (The price of an NBA team is now close to $4 billion, says Forbes.) The S&P 500 returned 458% over that period.
Another appealing factor for private equity investors is that a sports asset isn’t correlated to traditional asset classes, or financial or economic cycles. Sports franchises are relatively unique business models, blessed with recurring revenue streams, almost boundless opportunities to add cash streams, sticky customers or fans and low leverage. According to Arctos, the average debt level for a North American pro team is typically around 10% to 20% loan-to-value. Among other factors, the leagues restrict borrowing by franchises. Sports’ revenues proved quite resilient even during the pandemic years of 2020 to 2021.
Arctos also noted that North American sport is one of only three industries, along with healthcare and education, that has grown revenue at a compound annual rate of 7% or more over the last 30 years.
Finally, sports investing is no day-trading affair. Since the value of most investments aren’t realized until the franchises are sold—which is relatively rare—exiting the holding could take up to 10 years or more—the essence of buy and hold.
Christopher Zook, chairman and chief investment officer of Caz Investments, a private equity firm in Houston that allocates money on behalf of pensions, fund managers and institutional investor, is comfortable with a long lock-up period of even 20 years.
“I will not personally put my money into anything that's not liquid unless I have very high confidence that I can get at least a minimum of a 15% annualized return and a two-times multiple on my money,” said Zook, whose firm has $6 billion under management. “Most of these sports transactions would be in the high teens to low twenties at the minimum, and a two-times to a two-and-a-half times at a minimum.”
“But at the same time,” Zook added, “I love the benefits of owning assets for long periods of time that are going to compound and grow. But obviously we expect to make a lot more [than the minimum thresholds] over a decade or two.”
Private equity investing, simply a group of investors coming together to take a stake in a company, has been around for many years. But franchises, owned mainly by individual multibillionaires and holding entities such as Madison Square Garden Sports Company (owner of New York’s Knicks and Rangers, of the NBA and NHL respectively), stiff armed private equity investors for many years, turned off by the Gordon Gekko corporate raider reputation private capital earned in the greed-is-good 80s. Ownership across the five big leagues in North American is quite fragmented. About 130 different ownership groups own 153 franchises, according to Actros.
Seeking to broaden the buyer base for their increasingly valuable assets, teams eventually opened the gates to private capital, and now at least a dozen teams in the NBA, NHL and MLB have private equity among ownership. Besides Arctos and Blue Owl, some of the major private equity firms in the space include Bruin Capital, RedBird Capital Partners and Clearlake, and they own a piece of franchises ranging from the Los Angeles Dodgers to Formula 1 racing to women’s soccer.
As with regular mutual funds, the most efficient way for the non-billionaire wannabe sports investor to add, say, a piece of the hometown Red Sox to their portfolio is through sports funds. There are about eight firms with sports focused strategies and fund options are expected to expand swiftly. Private equity giant Sixth Street in San Francisco is reportedly launching its first sports fund. The firm manages $75 billion and has stakes in European soccer team Real Madrid among others.
While sales of big-league franchise are rare, they are happening more often as prices keep rising. A group led by private equity firm Carlyle recently closed on a deal to buy the women’s soccer team the Seattle Reign for $58 million. The team was purchased for $3 million in 2019. Carlyle also reportedly made a failed attempt to buy the NBA’s Minnesota Timberwolves alongside baseball great Alex Rodriquez. Carlyle co-founder David Rubinstein also recently led a group to acquire 70% of the Baltimore Orioles for $1.7 billion.
This autumn, most eyes in the sports investing ecosphere will be on the NBA and NFL. The NBA’s $24 billion media rights deal with ESPN and Warner Bros. Discovery, signed in 2014, is up for grabs next year and almost every network, streaming and cable entity, including YouTube and Netflix, is reportedly vying to potentially treble the multiyear deal to more than $75 billion. Meanwhile, the NFL, which Forbes estimates is the most valuable sports league in the world with guaranteed television deals that could be worth more than $126 billion by 2033, could finally open its golden ownership doors to private capital this fall or next year.
Zook sees a continued rise in the value of broadcast rights, especially for live events. “If there’s an audience, there’s an advertiser and if there’s an advertiser there’s money to be made,” he says.
But he’s especially bullish about the cash flow opportunities of streaming services, as he sees consumers’ move from broadcast and cable continuing. “Nothing goes straight up,” Zook cautions about the trajectory of sports broadcast rights. “You’ll have a stair step, but as long as the trend of cord cutting continues” the bidding will only go higher too.
Still, investing in sports is no slam dunk. Teams do lose money, especially European soccer clubs. The vetting for private capital to buy a piece of a team is restrictive. Furthermore, outside firms can own only up to 30% or so of a franchise, and funds, for one, have little say as to when or why team management might pursue the sale of the team. And even Zook is nervous about valuations getting out of hand.
“The only real risk in North American sports leagues right now is if somebody is just overpaying,” he said. “At some point, if prices get silly, then obviously we won’t keep buying; we’ll be a seller. But we don’t see that happening at this point.”
And it should be noted that not all investors are eager to jump into the sports investing market.
Jonathan Farr, director at wealth manager Homrich Berg, is comfortably ensconced on the sidelines. Farr, who admits to not being much of a sports fan, isn’t impressed with the pitches he’s been getting from managers pushing their sports funds. “I’m staying away from allocating any dollars” in sports, he told FA. “It’s just a very new space, valuations are high. When I'm thinking about somebody that I want to give money to, I want to see several transactions that have run full cycle. At this point, I don't have data to figure out who's a winner and who's a loser.”