• Osa Iluobe & Harman Tutt

Private Equity in Sports

Updated: Sep 16

Source: @GordonFilworth (Medium.com)

On July 15, 2010, California Private Equity magnate Joe Lacob purchased the Golden State Warriors of the NBA for $450 million. Nearly 11 years later, the franchise is worth $4.7 billion (as estimated by Forbes). That’s more than a 1,000% increase in value over a decade, which is considered one of the greatest Private Equity investments in recent history. According to Forbes, the Warriors are now the 5th most valuable sports team in the world. They are just behind the Dallas Cowboys and New York Yankees; and ahead of internationally recognized teams like Real Madrid, Los Angeles Lakers, and FC Barcelona.

Lacob and the Warriors sparked a renaissance in the world of sports ownership. Historically, sports team owners tended to be extremely wealthy individuals who bought a team as a fun side project (as one does). There was generally less concern with the bottom line and more focus on the thrill of competition. Many famous owners entered the industry through this route, like Jerry Jones, George Steinbrenner, and Mark Cuban. However, Lacob’s venture revealed the value and profits to be gained from investing in a sports franchise in a major league. Given their international brand recognition and marketability through players, it was soon discovered that these teams were being “undervalued.” As a result, Private Equity firms have been purchasing majority stakes in sports teams at breakneck speed over the past decade. Though this has increased the valuations of the teams and increased the salaries of players, it also has led to conflicts of interest with general sports fans.

Why are teams so valuable?

As far as pure return on investment, sports teams in major leagues (NBA, NFL, MLB, EPL, etc.) are historically one of the safest investments to make. They consistently appreciate in value and almost never sell for less than what they were purchased for. In fact, one of their biggest advantages is that they are virtually recession-proof. As Michael Kenworthy, head of sports investment banking at Goldman Sachs said “Sports assets have shown a low correlation relative to the broader market, with teams selling for record values through the 2008 financial crisis and Covid-19.” In other words, the masses love their sports no matter the economic climate, which makes them a typically safe investment.

Second, athletes are some of the most marketable people in the world. Teams make money beyond ticket sales. Many teams rely on the marketability of individual players to build the brand of the team. A player’s success can lead to jersey sales, advertisements (to which teams typically own the rights), and other memorabilia.

Third and most importantly, the rise of TV contracts. Sports leagues and teams rely on TV money as a source of income, which have become very lucrative. Given the marketability of sports, TV networks are willing to bid large sums of money to broadcast certain team’s games. For example, the Los Angeles Dodgers struck an $8.35 billion dollar deal to broadcast their games within just the LA market. The NFL’s TV deal is worth over $100 billion for national games.

Why the rush of PE acquisitions?

Based on the three factors listed above, Private Equity firms identified them as untapped sources of value in the market. Though the buy-in price was high (usually at least requiring $100 million investments), they provided a diverse option for steady returns of value. Once Lacob made his initial purchase of an NBA franchise, firms began to take notice of the exponential returns on investment. A buying boom has been occurring ever since. More and more firms bought large stakes in teams which drove up the sale prices, valuation, and TV contracts across the leagues. For example, in 2011 the least valuable franchise in the NBA was the Milwaukee Bucks at $268 million (per Forbes). Now the Milwaukee Bucks are worth $1.6 billion and the least valuable team in the NBA is still worth $1.3 billion (per Forbes). Given the immense returns and potential for growth, sports teams are no longer pet projects for the wealthy, they are now profit-driving vehicles for large Private Equity firm’s bottom lines.

Implications for this Trend

Due to the emergence of Private Equity in sports, there have been a few implications (positive and negative) for the greater sports industry. Furthermore, these positive and negative implications affect different parties in a variety of ways.

First and foremost, as a result of the increased cash flow within sports leagues, salaries for players have skyrocketed. In 2011, Kobe Bryant earned the highest annual salary in the NBA at $25.2 million. In 2021, over 44 players have an annual salary over that amount. The largest belonging to the Warriors’ Steph Curry at $43 million per year. This is obviously a positive for the players. They are the most prevalent money drivers for these teams and are now being paid more for their services.

Sports leagues (and individual teams) are also bringing in record amounts. For example, in 2019, Major League Baseball brought in a record $10.7 billion in revenue. Just 10 years ago (before the insurgence of Private Equity), MLB’s revenue was just above half that price. So, the commissioner, the owners, the executives, and the players are clearly benefitting greatly from these streams of cash.

However, the flip side of these implications is that they are almost all negatives for the spectators and fans. Due to the rise in player salaries, ticket prices for matches have escalated greatly. In 2011, the median NBA game single-seat ticket cost about $62. That number shot up to $90 in 2019. As a result, fans are less able to afford to attend games or support their teams as they once had. A further complication, now that teams are used as investments for the bottom line of Private Equity firms, the ownership of such teams might be unwilling to take a loss in order to field a competitive team. The purpose of sports (and the reason why fans watch them) is to remain competitive and try to win. Owners of the past age may have been more willing to invest at a loss to field a competitive team in the name of competition. That is less likely the case. In fact, this has led to the increased use of “tanking.” This is where a team trades away all of its expensive, experienced players for younger, cheaper players. Management is more willing to field terrible teams that are very cheap to pad their profit margins. As a result, the competition level of the league is heavily hampered. The majority of talented players are harvested by only a handful of teams.

Future Concerns?

There are also a few concerns for the future should this wave of Private Equity in sports continue. First and foremost, are these teams’ valuations reaching a boiling point? The values have skyrocketed in a short period of time, which has created some concerns of a potential bubble. This could lead to a potential sell-off of teams, which would greatly hamper the financial stability of the leagues and the teams that make them up. In any case, the more these franchises appreciate in value, they become an increasingly risky investment (more upfront cost for reduced ROI). Second, will leagues consider letting firms hold stakes in multiple teams that compete against each other? This could further hamper the competitive balances of the league and lead to potential conflicts of interests. These concerns haven’t been realized yet, but they remain possibilities should the insurgence of Private Equity in sports remain.