The wide world of professional sports represents an industry with soaring valuations that are outpacing traditional asset classes. With such a limited pool of options, the barrier to entry is high, but that is not stopping certain dealmakers from going all in on the industry. Below, we examine dealmaking trends in this evolving industry.

When former National Basketball Association star Shaquille O’Neal decided to become the brand ambassador to Wynn Resorts Holdings’ newly launched online gambling effort, WynnBET, it forced his hand on another investment: his ownership stake in the Sacramento Kings franchise. The NBA prohibits owners from having an interest in gambling operations and O’Neal, who had acquired a small stake in the Kings in 2013, would have to relinquish his equity.

In years past it might have been difficult to find the capital to cash him out, however, due to recent changes in NBA ownership rules, a deal was struck with Arctos Sports Partners, a private equity firm focused on the professional sports industry, who purchased a 17 percent stake in the Kings and provided the capital needed for O’Neal’s exit. The deal represents a new wave of capital entering the asset class with private equity firms.

“What began as mom-and-pop businesses worth a couple hundred million 20 years ago and were easily funded within the local community via wealthy businesspeople in town coming together to purchase or run an asset, has now become a multi-billion dollar global organization,” says Drew Laurino, a managing director with Dyal HomeCourt Partners. “In the NBA, 20 years ago there would not have been any private equity or private capital in the business.”

It’s not just the NBA that has opened their doors to private equity. Major League Baseball, Major League Soccer and the National Hockey League have also relaxed restrictions that now allow private equity firms to acquire minority stakes in teams across the league.

It’s a recent phenomenon. In 2020 the NBA’s Board of Governors agreed that private equity and institutional investors could own up to 20 percent of a single franchise and up to five different teams across the league. NBA teams can sell up to 30 percent of its equity in total to investment funds. Similarly, MLB changed its bylaws in 2019 to allow investment funds to take a minority stake in multiple ball clubs. The NHL and even Major League Soccer each laid out new rules recently allowing private equity ownership as well.

Only the National Football League has yet to allow institutional ownership, for now.

Drew Laurino, Dyal HomeCourt Partners

Dyal HomeCourt Partners believes this is the beginning of a generational shift. “What the NBA has done here over the last couple of years, starting with its decision to partner with us to create an access point for minority investing in the league, was to liberalize the rules around private equity and institutional investors becoming minority partners in the franchises,” Laurino says. “We believe this is the first step in what is likely a longer trajectory of continuing to allow institutional capital into these leagues.”

As a result, a cadre of firms are beginning to specialize in sports franchise investments, directly investing in the industry to help with liquidity, growth capital and acquisitions financing from existing owners.

On top of Arctos’ deal for a minority stake in the Kings, the firm has built stakes in the Golden State Warriors, the NHL’s Tampa Bay Lightning and Minnesota Wild and has reportedly acquired minority stakes through private transactions in MLB’s Los Angeles Dodgers, Chicago Cubs, San Francisco Giants, Houston Astros and San Diego Padres, as well as the Boston Red Sox through a minority stake in its ownership group, Fenway Sports.

Dyal HomeCourt Partners, a subsidiary of Blue Owl Capital, has purchased ownership stakes in the Phoenix Suns and Atlanta Hawks of the NBA, whose principal owner is Anthony Ressler, founder of Ares Management, the publicly traded alternative investment behemoth.

Ares itself is getting into the game as well. Last summer, it announced it had raised $3.7 billion for its Ares Sports, Media and Entertainment Finance fund focused solely on investing in sports leagues, sports teams, sports-related franchises and media and entertainment firms. The fund has already made investments in the Padres and European soccer team Atlético de Madrid.

Establishing the Asset Class

What’s driving this trend? Salvatore Galatioto, president of New York-based investment bank Galatioto Sports Partners, lists many attractions.

“It’s a great asset class. It is extremely resilient in troubled economic times. It’s had long-term appreciation,” Galatioto says. “Its media content value is second to none and as technology continues to improve and people are able to record their favorite shows and edit out commercials, virtually everyone that watches sports watches it live. So, advertiser value continues to go up.”

Another attraction is the basic economic principal of scarcity. Across the big five U.S. based professional sports leagues, there are 152 teams across roughly 18 markets in the U.S. and Canada (see our map of these 18 markets on page 36). Until there’s a population boom in smaller or non-existent sports markets (the Montana-North Dakota market is wide open right now), there’s just not much room for expansion.

“As long as there is limited supply, media rights deals continue to expand in value and your costs are fixed, you’re really investing in a closed system that’s pretty strong economically,” says Charles Baker, partner and co-chair of law firm Sidley Austin’s Entertainment, Sports and Media industry group. “And if you look at the asset classes, team values have been appreciating across the U.S. with a 14 to 15 percent compound annual growth rate which is significantly better than most asset classes including the S&P, Nasdaq and most of the broader market indexes.”

In Forbes’ ranking of the 50 most valuable sports teams in 2022, the combined value of these organizations totals $222.7 billion, a 78 percent increase over the last five years, including a 30 percent increase from just last year.

“Number one has got to be the increasing media rights fees being paid to broadcast live sports,” Baker says. “It is still the dominant viewed television program. It accounts for probably 45 of the top 50 viewed programs each year. It almost needs to be viewed live, for appointment viewing, as they call it. So, the networks pay for it and given the number of eyeballs and sponsorship economics are strong, you’re getting your message out to a tremendous number of people. It’s a tremendous asset class and one frankly that’s not correlated generally to the stock market. We can have rising interest rates, inflation, potential recession — and the value of this asset continues to increase. It’s hard to imagine what could actually put a dent in the growth rate for these assets.”

At one point experts questioned whether media rights fees might decrease as viewers “cut the cord” and dimmed the prospects for network and cable providers, the traditional payers for media rights. However, streaming services like Amazon and Apple have aggressively jumped into licensing sports as well, and the media rights game is even more competitive now.

“You’ve got more bidders for the assets and what it’s doing now is it’s actually driving the price of these assets and the price to broadcast these assets higher,” Baker says. “The impact on the leagues and team valuations is continuing to drive asset values higher. So, for private equity, which is investing in this space, I think they view the Amazons and Apples as a tailwind behind asset growth and appreciation.”

Unsentimental Investment

While George Steinbrenner may be turning over in his grave at the idea of a sports team being run by a corporation, the attractiveness of the asset class makes it inevitable.

“I think it is a value investment,” Galatioto says. “If you are a sentimentalist, if you want to buy a stake in your favorite team you can do that directly. But I continue to believe that these assets will grow in value and be an attractive place to put money.”