Peter Schwartz’s financial analysis notes that the spread between the control premiums and minority discounts paid on recent NBA ownership transactions has been slimmer than it is within the other big four sports leagues. “Minority investors [in NBA teams] are paying closer to the full purchase price [than those buying into NFL, NHL and MLB clubs],” the Sportico valuations authority said. But a pair of well-respected sports bankers, who asked not to be identified so that they could speak more candidly, strongly cautioned against making wholesale conclusions about recent limited partnership trades and any trends they seemingly point to. Limited partner (LP) trades, said one banker, “are a situational thing, not a league-wide thing.”
Our Take: Minority discounts certainly appear to be shrinking in the NBA. Back in September of 2019, the Hornets sold a limited stake in the franchise at a $1.5 billion valuation. Sportico values the team today at $1.51 billion. More recently, Steve Pagliuca bought Jim Pallotta’s stake in the Boston Celtics at a $2.8 billion valuation—just 9.5% less than Sportico’s $3.18 billion assessment of the franchise’s worth.
The nominal discounts on recent LP trades within the NBA are not at all indicative of a problem. To the contrary, they show “the relative strength of these assets to minority investors who just want to be a part [of the ownership club],” Schwartz said.
On paper, there are several reasons why it would make sense for LP interests in NBA teams to sell at a relative premium to those in other U.S. leagues. “There is more interest from international investors in basketball, particularly when compared to a sport like football, and there are less restrictions on ownership,” Schwartz said. Naturally, if there is competition for ownership stake in a team, the eventual buyer is going to pay more than they would if they were the only interested party. NBA teams have also appreciated at a faster rate than those across the NFL, NHL and MLB.
But as noted, there is a feeling among industry insiders that the valuations attached to recent LP trades in the NBA are less indicative of a league-wide trend and more likely the result of circumstance. “There have been a couple of LP trades in marquee franchises [like the Celtics], where there was a lot interest. So, [those stakes] traded at a smaller discount,” one source with knowledge of the recent deals said. “If the demand was [absolute], there wouldn’t be pieces all over the league that have been for sale for years,” he added. It is well-known the Kings have had an LP stake on the block for much of the last two years, while Oklahoma City has been looking to unload a 25% interest in the team for more than three years.
The problem with drawing league-wide conclusions is that no two LP opportunities are the same. While some include board seats, a path to control and/or tag-along rights, others entitle the investor to little more than season tickets. There are also a limited number of data points. Remember, it is not as if sports team ownership is a particularly liquid marketplace.
Size matters when considering the valuations LPs have traded at, too. “There are probably hundreds of people in Chicago would like to say they’re an owner in the Bulls for a $10 million piece,” one of the sports bankers said. “And that stake would probably trade at or above fair market value because there are so many people interested. But a $300 million piece in the team with no rights [is likely to come with a larger discount].”
It would have to. “No one is spending $300 million on something without a role or path to something bigger,” the banker said. “For $300 million they could be the control owner of half the NHL teams.”
Sportico’s Brendan Coffey reports the NBA is considering altering its rules to further entice institutional ownership. In theory, that development will further narrow the gap between the valuations assigned to control and LP stakes within the league. As Schwartz said, “Essentially, [a private equity presence] allows an owner to hold on to their team longer by not having to put the entire franchise on the market [when in need of liquidity and unable to find a partner].” But one of the sports bankers we spoke to isn’t so sure that is how it will play out. “The institutional investors remain skeptical that sports team ownership is a real asset class,” he said. “They see it as a vanity play. And just because the NBA changed their rules, does not change that.”
Editor’s note: SporticoLive’s exclusive event, NBA Valuations 2021, featuring NBA Commissioner Adam Silver and several league owners and executives, begins today at noon Eastern Time. You can register here.