Despite it being widely known within NBA circles that some Sacramento Kings’ investors were looking for an exit, those limited partnership stakes in the franchise sat on the proverbial market for some time. The team’s lack of on-court success, which some blame on controlling owner Vivek Ranadive, and location (few would consider California’s capital the sexiest NBA market) have been cited among the reasons why.
But both Arctos Sports Partners and Dyal Capital saw inherent value in the Kings, recently gobbling up LP interests (Arctos bought the stakes previously owned by Mark Friedman, Brad Jenkins, Mark Mastrov, Andy Miller and Kevin Nagle). Arctos has acquired 17% of the club in aggregate, in a deal that valued the club at $1.8 billion; Dyal upped its stake from less than 5% to between 5-10% with a series of acquisitions at the same valuation. Several individuals familiar with the PE firms’ thinking suggested the NBA’s bright future, Sacramento’s status as an underappreciated market, the real estate ecosystem that exists around the arena and the opportunity to align with the entrepreneurial Ranadive were among the attributes that attracted institutional money to the franchise.
JWS’ Take: Arctos’ and Dyal’s consolidation of LP interests in Sacramento is exactly what the NBA sought to accomplish when ownership voted to allow investment firms to take LP stakes in teams, a means of bringing growth capital and liquidity to franchises.
The Sacramento Kings’ ownership group, led by Ranadive, came together in 2013 to ensure the team remained in the market and that a new arena would get built (both were accomplished). But as a result, the club had more investors—more than 30 at one point—than the average NBA team has. With multiple LPs looking to exit, it became more difficult for any one of them to sell a small stake (which is among the reasons the league has tried to limit the number of LPs within a single franchise and now requires those individuals to hold at least a one percent stake).
It is also important to remember that the pool of individuals capable of making a nine-figure investment (like Arctos did) and also looking for an LP stake in an NBA team is predictably shallow. Typically, if an investor is putting up that kind of money, they want to be a controller. League rules currently prevent investment firms from realizing that possibility. Earlier this week, Sportico reported Arctos has $2.9 billion in assets in its first fund.
Ranadive said in a statement, “We are excited to welcome Arctos Sports Partners to the franchise and look forward to continuing to make Sacramento Proud.”
One can understand why growth investors would want to buy into an NBA team. “People who have held these interests for seven, 10, 15 years, and sometimes longer durations, have likely experienced significant capital appreciation,” said Drew Laurino, senior managing director at Blue Owl Capital (NYSE: OWL), the investment firm that combined Owl Rock and Dyal Capital in a SPAC merger last year. The belief is that the potential for global growth, the anticipated increase in media rights revenues (both nationally and abroad) and the chance to be at the forefront of several tech-related trends (including sports betting) will ensure that appreciation continues. For reference, Ranadive acquired majority control of the team eight years ago in a deal that valued the franchise at $535 million.
Sports teams are often viewed as trophy assets, and Sacramento is certainly not as exciting a market as, say, San Francisco (Arctos bought into the Warriors back in May) or even Phoenix (Dyal owns a stake in the Suns). But Arctos, which declined to comment for this story, and Dyal aren’t your typical LP investors (Arctos has a global mandate; Dyal is city-agnostic within the NBA), and there are a handful of key attributes to like about Sacramento that are often overlooked. The market has been among the biggest in-state beneficiaries of the egress out of the Bay Area. It sits just 90 miles from San Francisco, where more than half of the country’s billionaire production has taken place over the last decade (which helps to fortify market demographics), and small-market teams receive a disproportionate amount of league revenues (revenue sharing may increase in the next CBA).
The Kings are also the only game in town, which makes Sacramento one of the most attractive DMAs for a pro sports team. The lack of competition also means a longstanding and loyal fan base exists despite the lack of winning over the last decade. “We want good baseline economic support for a team and the value [we’re buying in at] without having to make a deep playoff run every year,” Laurino said.
The primary goal of private equity is to generate a return on investment for fund investors. So, the decision to align with a forward-thinking control owner, focused on driving local revenues and value beyond the club, makes sense for a passive minority partner. “We believe it’s a well-run team, and Vivek is a smart guy. He’s built big businesses, and he runs [the team] like a business. We want to partner with good people who run great businesses,” Laurino said.
Ranadive is also widely respected among his peers, holding an active role on several committees that will influence the long-term direction of the league, including the blockchain advisory board and social justice coalition. In theory, that should provide access to insights developed by the league at the national and global level, which can only help the franchise at the local level. And with Ranadive’s background as a tech entrepreneur, the franchise is uniquely positioned to implement those insights (see: the Kings were the first pro sports team to accept Bitcoin). Arctos Sports Partners partner and co-founder Jordan Solomon said, “We admire how Vivek and his leadership team are data driven and leverage technology and insights to build and grow the business–themes we embrace in building our own firm.”
The team does not own its building (the Golden 1 Center), but arena economics are attractive. “Their relationship with the city gives them full economic control, which we think is a pretty valuable asset,” Laurino said. The team also operates the adjacent real estate, which they have turned into a mixed-use development, and owns land at the site of the old Arco arena, so there is a local real estate opportunity that comes with investment in the team, too. It is worth noting the Golden 1 was named the “highest tech stadium in sports” in 2016.
If the NBA ever allows franchises to expand their geographical footprint into international markets the way the NFL is, Sacramento would undeniably be well-positioned to take advantage of the opportunity. Ranadive is the only control owner in the league of Indian descent. And while it isn’t China, India is still a market with 1.3 billion people that are growing to love the game. Basketball is tied with soccer as the second fastest growing sport in the country.