Professional Sports Opening Up To Private Equity Is A Good Thing, But Questions Remain

It’s hard to beat professional sports as an investment class.

NFL team ownership has doubled the return of the S&P 500 over the last two decades, averaging gains over 10% just about every year and increasing 5x over the last 10 years. It’s the same in the NBA, where team valuations are up 14% in the last year to $2.1 billion on average.

This isn’t a fluke. Even as COVID-19 poses unique challenges to event-based industries, team values are expected to continue rising.  

Many in the industry see professional sports as a prime beneficiary of the streaming war between traditional television and digital content providers. So, the bidding for live events should be fierce.

Investors are taking notice, making ownership positions in professional sports franchises one of the hottest asset classes available right now.

Supply And Demand

For one thing, there is an increasing number of ultra-high net worth people who are actually able to write a big enough check to get into a team investment. The U.S. has gained 44 new billionaires in 2020 according to Forbes, while there are 2,095 new billionaires worldwide.

At the same time, the number of available major sports teams has remained relatively constant, boosting team valuations over time based on simple supply and demand.

The unprecedented team valuations, however, pose a unique challenge to the market for sports team ownership. Even among billionaires, a multi-billion dollar price tag can seem too rich for a single asset, especially with a limited window to liquidity.  

Leagues are answering this challenge by cracking open the door for the first professional investment funds dedicated to sports teams. The first major funds to burst through will be Arctos Sports Partners and Dyal Capital Partners, each specially selected by a major league to pilot this seismic shift in capital dynamics.

The funds will take minority ownership positions in franchises, effectively reducing the price of entry for prospective majority buyers who bring in a fund as part of their bidding group.

Private investment funds aren’t entirely new to the space; fund managers have been investing their personal money in professional sports for more than a decade. But the investment funds themselves have been boxed out due to long-standing league rules around ownership and debt limitations.  

That’s changing, as leagues are loosening restrictions and welcoming professional funds to the party. Their timing couldn’t be better – as the world of potential investors expands, we’re seeing the need for more liquidity, more value, and a better overall market for sports investments.

New Opportunities, New Challenges

This opening is a win-win for the leagues and their investors. But there some thorny questions to navigate.

For one thing, professional sports live and die by keeping strategic information tightly locked up, but the fund model is based on holding multiple investments diversified across an asset class. That likely means any investment fund will have to hold investments in multiple teams in the same league which, until now, has been a non-starter.  Given the rivalry between teams, the information that these funds would have access to could prove problematic if it were to somehow leak between teams in the fund’s portfolio.

The same situation might arise for opportunities around sponsorship, partnerships, investments, or other confidential business matters. How many constraints can the leagues actually enforce?

Another challenge for any fund buying an interest in a team from a minority owner will be around the due diligence in vetting their investment. Professional investment funds coming into the sports space really need to see inside the machine that they’re buying. But, without the blessing of the controlling owner and their cooperation with the process, it’s going to be difficult for these outsiders to really see the details of the team to vet the investment. That could put a damper on any potential sale by minority owners who, historically, have sold their interests to wealthy individuals or families with lower standards for investigation than financial buyers.

How this will all work in practice remains to be seen. The real winners will be current team owners who will benefit from yet another new class of buyers arriving in the market – and of course funds that can figure out how to work around these challenges quickly and capitalize on the rapid growth in team values that we continue to see.

Russell Hedman is a Senior Associate in the Hogan Lovells Sports, Media & Entertainment sector group. Matt Eisler, a Partner in the group, contributed to this report.