As private equity firms rush toward sports franchises as a new asset class, there’s been one burning question across the industry: What’s the exit strategy?
An early answer came this week. As part of Mat Ishbia’s record purchase of the NBA’s Phoenix Suns, which closed Tuesday, a majority of the team’s limited partners were bought out at a $4 billion valuation. According to multiple sources familiar with the deal, that includes at least some of the franchise equity held by private equity fund Dyal HomeCourt, which bought into the team in July 2021 at a $1.55 billion valuation. That’s a 158% appreciation in roughly 18 months.
It’s likely the first major exit of the NBA’s Private Equity Era, and important proof of concept for the growing number of firms seeking to build portfolios around sports franchises. The NBA, MLB, NHL and MLS have all changed their ownership rules in the past two years to allow funds to buy passive, minority stakes, and HomeCourt, which is part of asset manager Blue Owl (NYSE: OWL), is one of many groups raising and deploying capital to take advantage.
A representative for Ishbia declined to comment. A representative for Blue Owl didn’t respond to multiple requests for comment.
Ishbia is buying a majority stake in the Suns at that $4 billion valuation, a record transaction for an NBA team. That includes all of the roughly 37% control stake owned by Robert Sarver, who sold the franchise after news reports and a subsequent independent investigation found that he used racist and sexist language, and demeaned female employees.
Dyal originally planned to maintain its full position in the team when Ishbia’s agreement was reached back in December. Instead, it is selling at least part of its position. The few LPs staying on include Jahm Najafi, founder and CEO of The Najafi Companies, who announced his support for Ishbia in statement on Tuesday.
Dyal was the first private equity firm with permission to invest in the NBA—part of a wider 2020 partnership—and as of last November, its assets included $283 million and positions in the Sacramento Kings and Atlanta Hawks. Arctos Sports Partners, another sports-focused PE firm, has raised more than $5 billion and made more than a dozen deals. (Though Sportico is unaware of any fund that has sold an NBA stake, Arctos did unload a piece of its Fenway Sports Group position, according to someone familiar with the specifics, though financial details weren’t given.)
These funds obviously collect management fees on their capital, but their basic investment thesis is that sports teams will continue to appreciate in value, due in part to their scarcity, their global popularity and their unique position at the nexus of live events, media, real estate and technology.
The private equity era is, in some weird paradox, a self-fulfilling prophecy of sorts. Institutional investors believe that sports teams will continue to appreciate rapidly, and owners believe that allowing institutional investors into their league will help sports teams appreciate rapidly. The average NBA team is worth 16% more than in 2021, according to Sportico’s numbers. NHL teams are up 9%, while MLS clubs have gained 6%. The NFL is the last major U.S. league that still prohibits PE firms from buying into teams, but pressure is mounting for even the world’s richest sports league.
A control acquisition is not the only way private equity firms can exit their franchise positions. While some have seven- to 10-year time horizons, as they might on more traditional investments, fund managers believe they will also have available buyers for just their stakes down the line, be they high net worth individuals or other firms.
Ishbia is chairman and CEO of United Wholesale Mortgage. His transaction includes the WNBA’s Phoenix Mercury and the entity that operates the 17,000-seat arena where the two teams play. Ishbia’s brother Justin, founder and CEO of Shore Capital Partners, will serve as the team’s alternate governor.
With assistance from Scott Soshnick.