The NBA’s Board of Governors has agreed that private equity and other types of institutional investors may own up to 20% equity in a single franchise, and funds may own stakes in a maximum of five teams. No franchise can have more than 30% of its equity held by investment funds, no matter how many funds own a stake in the team, according to the people familiar with the owners’ decision. They asked not to be identified because they aren’t authorized to speak on behalf of the league. The NBA declined to comment through a spokesman. Sportico first reported owners were having discussions last week.
To date, the NBA has approved just one fund, Dyal Homecourt Partners, as eligible to own a portion of teams. Dyal was approved last spring. Based on disclosures made by the fund, it’s looking to raise $2 billion to invest in NBA minority stakes and will share an undisclosed percentage of management fees and profits with the NBA. More recently, Sportico reported that sports investment fund Arctos Partners is seeking permission to also invest in teams. Arctos isn’t yet approved by the NBA, and today’s decision does not mean any other funds besides Dyal are pre-approved to invest.
The decision to allow in institutional investors addresses a number of needs. For one, NBA team values are skyrocketing. Less than seven years after Steve Ballmer stunned the sports world by paying $2 billion for the Los Angeles Clippers, almost half of the league’s teams are now worth that, and three teams are worth more than $5 billion, according to Sportico’s recent NBA valuations. Those numbers mean it is increasingly difficult for limited partners to find buyers wealthy enough and willing enough to own part of a team controlled by someone else. Adding institutional funds should support franchise values by providing a larger pool of long-term buyers with little ego for controlling a big-league franchise.
The pandemic has also heightened the financial pressure some owners may be feeling. Revenue has declined on the order of tens of millions per team, and owners are looking for capital, a process that could involve selling portions of their teams, or making capital calls on existing limited partners.
The move also feeds a burning desire by institutional investors to access sports team ownership. Since 1991, the value of teams in North America’s major sports leagues has grown 12% annually, besting the stock market over that time. Adding to the appeal, sports offers a high degree of non-correlation with other assets, a feature often widely valued by professional money managers. That is, the value of sports investments don’t move in tandem with the prices of mainstream investments, like stocks and bonds, and are less affected by the factors that shift those asset prices too.