When billionaire Mat Ishbia bought a majority stake in the NBA’s Phoenix Suns from Robert Sarver for $4 billion in 2023, alternative asset manager Blue Owl Capital had reason to celebrate. Just 18 months earlier, one of Blue Owl’s private equity funds, Dyal HomeCourt Partners, bought a minority 5% stake in the team in a deal that valued the Suns at approximately $1.55 billion. By the time Dyal HomeCourt sold its stake, the Suns’ valuation had jumped 158%.
Dyal HomeCourt represents a small part of Blue Owl’s business, but it highlights an emerging niche in the alternatives universe—investment in sports franchises. The professional sports market in North America opened to alternative asset managers five years ago, when Major League Baseball became the first league to allow private equity firms to buy passive minority stakes in its teams. The National Basketball Association, the National Hockey League and Major League Soccer soon followed suit, and investment capital followed.
For now, the leagues bar private equity funds from buying controlling interests. Often when teams are purchased, majority owners bring along friends and family as partners. But those partners may want to cash out before a team is sold again. That’s generated the market private equity is now playing in.
Today, private equity-backed and affiliated shops own stakes in 63 major North American sports teams, with investments totaling $243.8 billion, according to capital markets data provider PitchBook. The NBA has become a particularly attractive target—20 of the 30 teams in the league currently have private equity connections valued at $74.2 billion, PitchBook reported.
Gradually, this opportunity is opening up to qualified purchasers and accredited investors as firms like Texas-based Arctos Partners, one of the biggest investors in North American sports, put together vehicles that can be accessed by the private wealth channel. This month, Arctos is scheduled to close its Arctos Sports Partners Fund II, with $2.5 billion, according to Australian Financial Review. The firm’s Arctos Sports Partners Fund I, which closed in 2021, has delivered a net multiple of 1.15x and a net IRR of 86.7% by September 2023, according to Buyout Insider. Since its founding in 2019, the firm has purchased stakes in the NBA’s Sacramento Kings and Golden State Warriors, MLB’s Los Angeles Dodgers, Chicago Cubs and Houston Astros, and NHL’s Tampa Bay Lighting and Minnesota Wild, as well as in Aston Martin Formula One and the Paris-St. Germaine football club, among other investments.
Most of these purchases—at least those in North America—differ from the typical private equity strategy of buying a stake in a company, making changes to increase revenue and/or cut costs and then selling the firm to someone else or taking it public at the peak of the market. Arctos and other firms that buy minority stakes in North American teams must remain passive investors and can’t revamp the teams’ operations, sit on the teams’ boards or even necessarily control the timing of when their investment is sold, according to a 2023 note from credit ratings agency DBRS Morningstar. When it comes to the MLS, for example, any sale involving a private equity firm must be approved by the team’s majority owner, who also has the right to force the sale of the private equity firm’s minority stake, DBRS Morningstar researchers wrote.
Despite these constraints, professional sports teams are seeing growing revenues from streaming, sports betting, sponsorship/advertising opportunities and intellectual property rights, noted Ted Yarbrough, chief investment officer with private markets investment platform Yieldstreet. The platform has offered its high-net-worth clients at least one opportunity for co-investment in a sports venture alongside private equity and institutional investors. It is evaluating more such partnerships, according to Yarbrough.
“If you are looking for something that has a different intrinsic value to it, I don’t think it’s as correlated to a lot of other classes,” he said. “If you were to look at how consumers spend their disposable income, this has increased as part of their recreation. It’s something they are interested in because it’s just so accessible for people to take part in it. That continues to drive increasing value in these properties. Every time we see a sports club, regardless of the sport, when it changes hands, it tends to be an ever-increasing value.”
Another advantage of investment in sports teams and franchises is that it's a controlled market with constraints on competition. In North America, major league clubs prohibit owners and stockholders from directly or indirectly owning a financial interest in any other major league club. That means, for example, that Blackstone might face obstacles in investing in the NBA and the NHL because its Global Head of Tactical Opportunities, David Scotts Blitzer, also happens to be the co-managing partner of the Philadelphia 76ers and the New Jersey Devils. (Blackstone has indicated before it is interested in investing in sports franchises on the debt side). The NBA, NHL and MLS also limit the number of teams any one fund can hold stakes in (five for the NBA and NHL and four for the MLS).
There are also a finite number of sports franchises to invest in, with only four major North American sports leagues that allow private equity investment (the NFL remains a holdout) with about 30 teams in each league, noted Kunal Shah, managing director and head of private asset research and model portfolios with alternative investment platform iCapital.
“It’s a fairly limited supply of opportunities in each sport category. And the value of the franchises continues to grow—that’s one of the areas where investment has been pretty good,” he said.
Padric H.B. Scott, president and CEO of Crossroad Capital Partners, a partnered network of wealth planners, said some of the HNW clients the firm has provided consulting services for have pursued opportunities to invest in vehicles targeting North American sports in recent years. He likens the appeal of sports investing to that of investments in technology in terms of both asset types’ staying power and global reach.
“If you are thinking about the long-term prospects of it, what better place to consider than an asset class that for the last 15 years has been on an up trajectory?” said Scott, who used to play for the NFL’s Arizona Cardinals. “It’s an area that most people haven’t had access to, so given that, that comes with a potential higher return to consider.”
DBRS Morningstar found that while the S&P 500 rose by 317% between 2004 and 2022, NBA’s valuation rose 1,079% over the same time period, and MLB’s valuation rose by 702%. The only two periods in the past two decades when any of the major leagues lost money included the peak of the Global Financial Crisis in 2008-09 and the COVID-19 pandemic.
According to the proponents of sports investing, in addition to rising team valuations, the sector can offer financial advisors and their clients a way to diversify their portfolios, low correlation to other asset classes and protection from inflation.
There could also be cash flow distributions and, in certain cases, some tax benefits through depreciation and amortization, according to Christopher Zook, chairman and chief investment officer with CAZ Investments, a Houston-based investment management firm active in the sector.
However, the main reason to invest in professional sports is capital gains, he said. Yieldstreet’s Yarbrough estimates that returns on investing in professional sports teams on the equity side would be in the upper teens, while investments through debt could range from the upper single digits to low double digits.
Early days
At the moment, sports investing is in its nascent stage in the private wealth community, according to Shah. Even when funds targeting only institutional investors are added in, the number of vehicles raising money for sports investing can be counted on one hand, he said.
“There’s a pretty small number of fund managers playing in the space, and given the fairly young nature of their track records, I think a lot of the wealth managers are hearing [about] it and paying attention to the strategy, but the capital flow may not be there just yet,” he said.
Some firms are trying to push that evolution forward. CAZ, for example, raises money from qualified purchasers for private funds that co-invest in stakes in sports franchises, including those owned by Arctos. In fact, CAZ happens to be among Arctos’ top 15 shareholders, according to Sports Business Journal.
CAZ has either already formed strategic partnerships or is in the process of negotiating them with almost all of the private equity firms that have the ability to invest in major league sports in North America, Zook said. These include Arctos, Blue Owl Capital, RedBird Capital Partners, Avenue Capital Group and Dynasty Equity Partners.
“We have 30 North American franchises that we own stakes in,” he noted. “Investment advisors can have their clients invest with us and get direct ownership of teams that are very well-known.”
In addition to those partnerships, CAZ has a registered closed-end tender offer fund available to accredited investors that seeks to invest in eight to 15 different asset classes with no or limited correlation, including professional sports ownership. The minimum investment for the fund is set at $25,000.
Zook admitted that given how new the sports investment model is for North American teams there are financial advisors out there who may not even be aware it is an option. “And they certainly don’t know about how to go about doing it,” he said. Advisors who do invest in the sector tend to appreciate the portfolio diversification, inflation protection and other benefits that come with it, he noted.
“And what a lot of people don’t understand is when you own a team in a league in North America, you own a pro-rated share of the entire league. So, if you own an NBA franchise, whether you are in last place or in first place, you still get your dividend from the NBA from the profitability of the entire NBA,” he added. “That means you are going to get, depending on the year, millions of dollars without ever potentially even winning a game.”
However, Zook does not expect to see opportunities for investing in sports franchises through the private market to become widely available to retail investors any time soon. That’s because any fund that invests in a professional team in North America has to be approved by the league, and they are not likely to give the green light to a fund of funds, he said.
Another potential obstacle for financial advisors unreservedly recommending investing in professional sports to their clients is that there is scarce data available right now about what the exit from that investment may look like, according to iCapital’s Shah. That’s compounded by the fact that the process for team sales is governed by league rules more than by private equity firms’ interests.
“You also want to get your money out, and so far, the getting the money out part is more of a question mark,” he said. “And that’s why advisors may not be ready to say yes to something they don’t know how to monetize.”