Yahoo Finance More private investors take shots at sports, but do they score?
In early 2021, the NBA opened the door to private equity funds for the first time, allowing institutional investors to own up to a 20% stake in a single franchise. Three months later, a newly-formed private investment firm struck up a deal with the NBA's Golden State Warriors: a 5% ownership stake at a $5.5 billion valuation.
Later that year, Arctos Sports Partners, a firm that acquires minority stakes in professional sports franchises, more than doubled its Golden State bet, upping its ownership in the Steph Curry-anchored team to 13%. The firm, which was founded in late 2019, has acquired minority stakes in other professional sports franchises, including the Sacramento Kings and the San Francisco Giants.
As private investment firms become further entrenched in the ownership structures of professional sports franchises, time will tell if these sports-focused funds generate outsized returns for LPs.
For its part, Arctos took a thesis around investing in sports that has historically been specific to individuals—high net-worth investors who buy ownership stakes in franchises—and built funds around it. For example, in 2010, investors including Joe Lacob, a then-partner at VC firm Kleiner Perkins Caufield & Byers, paid $450 million for a majority stake in the Warriors. Since Lacob's arrival, and four NBA championships later, the value of the team has grown tenfold, and his 25% stake is worth over $1.4 billion, according to Forbes.
As minority owners, Arctos aims for similarly styled returns by focusing on operational improvements to its teams. The firm brings in consultants to analyze an organization and identify areas of improvement, like the team's stadium and the technology it uses to reach its fans.
A few months after its initial stake in the Warriors, Arctos bought a 17% stake in the Kings at a $1.8 billion valuation. For the Kings, one area of operational improvement analysts identified was its ability to leverage its position as a team with an arena.
Its thesis appears to be working. Its first fund in its sports-focused family, Arctos Sports Partners Fund I, is on track to outperform its peers, operating at an IRR of 41%, which is about 35% above the benchmark, according to PitchBook. Ares gets in the game In September 2022, the big-hitting asset manager Ares Management closed its Ares Sports, Media & Entertainment Finance Fund at $3.7 billion with capital commitments from some of the country's largest institutional investors, including CalPERS and the Maryland State Retirement and Pension System. The fund targets investments in sports leagues, teams and related franchises as well as media and entertainment companies.
As of the date of the fund close, it had made investments in 19 portfolio companies—spending about $1 billion altogether—for stakes in Spanish soccer club Atlético de Madrid, the San Diego Padres baseball team, British motorsport team McLaren Racing, and US soccer club Inter Miami CF.
Ares' US direct lending co-heads Mark Affolter and Jim Miller also hold seats on the board of Club Atlético de Madrid following an infusion of $219.87 million in development capital from the firm in 2021.
This summer, Ares provided Inter Miami with an additional $75 million, just as superstar Lionel Messi joined the major league soccer team. Going long Despite continued institutionalization of sports investments, it may be too early to tell whether these interests will be profitable in private capital structures. Arctos has yet to exit any of its stakes in its teams, and unlike a traditional private equity holding period of five to seven years, the firm designs its sports funds as evergreen funds—investment vehicles with no end date.
This long-termism is a recurring theme in private market investments in sports teams and leagues.
"Sports are a long-term hold. Period. I tell people that all the time; this is not a quick flip," said Brett Johnson, CEO of Benevolent Capital, a family office that holds varying degrees of ownership in professional soccer clubs.
In February 2021, Johnson led the firm's buyout of FC Tucson, a United Soccer League team in southern Arizona, which it spun out of Phoenix Rising Football Club (previously Arizona United SC before Johnson rebranded it), another club it bought a minority stake in in 2016 through a secondary transaction.
Longer holding periods are, in part, a product of media contracts, long-term agreements (typically more than five years) between broadcasting networks and teams to air games. In 2022, for example, the Big Ten signed a seven-year media rights agreement with Fox, CBS and NBC for more than $7 billion.
For larger teams in bigger leagues, like the NFL, NBA or MLS, media rights contracts typically underpin revenue, meaning the terms and status of the contract determines a large portion of the team's cash flow, said Mike Principe, CEO of sports agency GSE Worldwide.
"Taking ownership in a team and looking to flip it in five to seven years really doesn't match up well," Principe said. "With a new media deal, you may not see as much appreciation as you want in that time frame."
Featured image by Jenna O’Malley/PitchBook News
This article originally appeared on PitchBook News
