Sports franchises have long been a billionaires’ playground, where each round of seemingly outsized vanity purchases by an industry titan simply sets the base for the next sale. Since 1991, the value of teams in the NBA, NFL, NHL and MLB, has grown 12% annually, handily besting the stock market’s 8% annual growth in that time. Amazingly, that’s become a problem for owners.
“There aren’t enough billionaires walking around that want to write a billion- or two-billion-dollar check for a team,” says one banker involved in sports. “And there aren’t a lot of potential owners who want to write a $100 million check to get minority equity—basically nothing. You get to call yourself an owner, get to choose your seat and get to fight over your parking pass. That’s it.”
Sometimes even billionaires aren’t enough. So leagues are turning to even deeper pockets to improve the pool of prospective buyers and increase team values. Institutional investors entrusted with cash from pension funds, endowments, sovereign wealth and large family offices are partnering with leagues to buy equity in sports franchises. In recent months at least four funds have formed, looking to raise initial capital of nearly $4 billion.
Most aim to buy limited partnership stakes in major sports league franchises, although some are open to majority ownership and less established leagues too. While investment funds have occasionally bought into sports in opportunistic fashion, like hedge fund Elliott Management’s acquisition of AC Milan two years ago through holding a defaulted loan, these new funds mark the first time institutional money seeks to systematically take part in owning sports franchises.
“Team ownership has, on average, generated strong returns even in down cycles. Valuations over the last few decades, across the marquee sports leagues, have outpaced the major stock indexes,” said Michael Kuh, an attorney at Hogan Lovells who has represented team sellers as well as leagues in high-stakes negotiations. “But teams are scarce, and they don’t trade often. Investing in these funds provides an avenue for investors to participate in this attractive class of assets.”
These new funds—Arctos Sports Partners, Beautiful Game Group, Dyal Homecourt Partners and Galatioto Sports Partners—are helmed by sports finance, management and media veterans, who see their expertise as a way to bring value to investors and the leagues they seek to join.
Executives from each declined to discuss any specifics of their funds, including assets, investments, strategies and investors. Regulatory filings and other public disclosures show they have a common investment strategy: buy stakes in pro franchises and sit on the investment for 10 years or more. If teams and leagues want to call upon the fund’s expertise to add value during that time, great. If not, the funds will mainly be passive investors waiting for team values to grow over the long-term until a liquidity event, like a majority owner selling. Minority stakes normally get sold at a liquidity discount of 20–50%, but LP owners typically have the right to piggyback-sell their stakes at the valuation the general partner obtains. Ideally, some team stakes may never be sold even as original fund investors cash out, since new institutional money will take their place, according to one person familiar with private equity strategy.
Just 11 miles north of Wall Street sits the best example of long-term team appreciation. In 1973 a George Steinbrenner-led group bought the Yankees for $7.3 million. The baseball team today is worth perhaps $5 billion, a gain of 68,000%. Few teams may ever return close to that, but even slices of lesser-market franchises in North America’s major pro sports leagues have delivered market-beating wealth to investors. For instance, oil and telecom billionaire Philip Anschutz funded six Major League Soccer teams in the mid-1990s, probably for around $100 million total. Those teams (most of which Anschutz has sold) could be worth $2 billion, based on the nearly $325 million David Tepper paid for the expansion Charlotte franchise.
Getting a piece of such long-term growth is especially appealing to pension funds and endowments, who have to plan to preserve and grow assets over decades. Many have already dipped their toes into sports, usually through companies that benefit from pro sports’ business halo. Norway’s trillion-dollar sovereign wealth fund, for instance, has multiple direct sports-related equity holdings—from a $1.6 billion stake in Adidas to a $10 million slice of Juventus, the Turin, Italy, soccer club. Going into sports private equity is a logical next step.
“Institutional investors have been piling into risk assets to extract a premium from asset classes that are hard to access for other investor types,” said Elliot Hentov, Head of Policy Research at State Street Global Advisors and an expert in very large institutional investor strategy. “The problem is there are a limited supply of underlying assets that match the size of commitment they want to make.”
For owners, getting large institutional investors into franchises expands their market immensely if and when they want to sell. The world’s billionaires who typically buy franchises today have a combined $8 trillion in wealth, according to Forbes. Worldwide, pension funds, sovereign wealth funds and endowments have $55 trillion. There’s obvious value in having deeper pockets in the mix. Yet leagues also expect fund investors to speed up and simplify the process of selling minority ownership stakes, which can take six months or more with individuals. Majority owners also suspect funds will be less annoying than typical LP owners, who ask for favors like getting a niece to be a bat girl.
MLB led the way last year by opening the door for investment funds to buy multiple team stakes. Quickly Sal Galatioto, a long-time sports finance executive who has brokered hundreds of ownership deals in baseball and other sports at Lehman Brothers and his own firm, established GSP to raise $500 million to focus on baseball limited partnership investments. The NBA then followed, striking a deal this spring with Michael Rees, head of Neuberger Berman’s Dyal private equity arm, to form the first investment fund approved to be an owner in one or more teams. The NBA also gets a slice of the Dyal fund’s fee income. Dyal is believed to be raising as much as $2 billion this year. The NHL and MLS now also welcome fund ownership. The NFL hasn’t announced plans at the moment, but it’s expected they would follow when the other leagues prove the ventures work.
A third fund, Arctos Sports Partners, has raised at least $421 million, according to a spring regulatory filing. That’s likely higher today, since Arctos has executed multiple purchases already. The fund primarily aims to buy limited partner stakes across the major North American and European sports leagues. It’s led by Ian Charles, who helped lead a similar, non-sports, strategy at Landmark Partners, and David “Doc” O’Connor, former CEO of Madison Square Garden, owner of the Knicks and Rangers.
A fourth company, Beautiful Game Group, is helmed by a diverse panel of sports executives, including Dr. Oliver Finlay, a long-time sports performance director for NHL and Premier League teams; Doug Whaley, one-time Buffalo Bills GM and XFL executive; Marco Iannuzzi, a former CFL player and investment banker; and Noah Croom, whose past NBA leadership positions included assistant GM of the Grizzlies and a player representative. In addition to major league LP stakes, Beautiful Game also intends to invest in developing leagues worldwide and provide more active management based on ESG principles to cut operating costs and add value over time.
“These funds include some of the most savvy and experienced sports executives around. This means that they can quickly and efficiently do their diligence and execute on deals, even when complicated structures and issues are involved. This can be extremely attractive to leagues, teams, and sellers of minority interests,” said attorney Kuh.
While sports executives lead the funds, their investors aren’t going pro for a love of the game. A common investment theme is that sports teams are really a media rights play. In recent years, fees paid for broadcast rights have jumped anywhere from 2.5- to six-times the value of the prior contract. To date, those jumps in fees have been justified. In 2019, 93 of the top 100 watched television programs in the U.S. were live sports, according to data from Nielsen. Funds expect more of the same. In addition to the usual broadcast, cable and satellite companies bidding for sports rights, future contracts will probably draw bids from streaming services like Amazon and Netflix, social media outlets like Twitter and Facebook and yet-to-be founded digital services. “As the demand for content increases as technology provides fans with different methods for viewing games and for consuming content, those rights fees will continue to rise,” said one investor in the segment.
There are also benefits beyond capital appreciation. Long-horizon institutional investors place a strategic value on a little-noticed portfolio theory called non-correlation. Correlation is the mathematical concept that the price moves of one asset affect or correspond to all or some of the price moves of a different asset, either up or down.
The financial crisis of 2009 stunned institutional investors into realizing that even wildly different assets can be much more correlated than they want. North American sports teams, however, appear to have a vastly lower correlation with the stock market than other assets. That lack of correlation holds real value to fund managers who have to account for potential risks and get unusual investments, like a sport team, through a board review.
“Non-correlation is huge,” said analyst Hentov. “If these funds can claim to their investor base that there will be a dividend payout plus low correlation, then it can sit in a very different risk bucket within the overall portfolio. That makes it easier to market. Teams don’t disappear, they don’t get kicked out of the league, particularly in the U.S.”
Very large funds have invested in everything from New Zealand timberland to Opportunity Zone tax credits in a quest to diversify while earning mid-single-digit annual portfolio gains. It’s perhaps inevitable that they would turn their attention to taking a slice of everyone’s hometown team.
“Institutional investors are having a real hard time finding stable, predictable, low-leverage places to invest,” says another sports banker. “Sports represents one of the last asset classes that are not owned by them.”