NBA considers investment fund as team values soar: Is it a slam dunk?

Rising team prices could limit the pool of potential buyers.

This is the fifth installment part of a five-part series about how Wall Street investors and private equity firms are impacting the value, ownership and state of America's sports.

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As top NBA franchises draw multibillion-dollar valuations that few would-be owners can afford, league officials are mulling closer ties to private equity firms capable of covering the astronomical cost of team ownership.

In a memo to the league’s 30 owners earlier this year, the NBA asked for feedback regarding the potential creation of a capital vehicle that would be authorized to purchase minority stakes in individual franchises. The league said the fund would “provide additional liquidity for the sale of team ownership interests” and increase the number of prospective buyers.

Few additional details are known about the NBA's potential initiative, which remains in an exploratory phase. If launched, the capital vehicle could smooth the transaction process for NBA owners and their limited partners at a time when steep price tags have made it difficult to offload stakes. NBA franchise valuations have increased threefold over the last five years, with the average team worth $1.9 billion, according to Forbes.

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“Given the size of what the clubs are worth, you don’t want to cut out private equity from being able to purchase, because it eliminates a very important group of potential purchasers and investors,” former NBA Commissioner David Stern told FOX Business.

While all U.S. pro sports leagues have had dealings with private equity in one form or another, the NBA allowed a private firm to buy a significant interest in one of its franchises as recently as 2011. At the time, the league allowed hedge fund magnate Tom Gores to buy a 51 percent majority stake in the Detroit Pistons for $325 million while his firm, Platinum Equity, bought the other 49 percent. Gores later bought out the firm's interest.

Bloomberg was first to report on the league memo. The NBA declined to comment.

The rising cost of NBA team ownership was made apparent as recently as August, when Alibaba co-founder Joseph Tsai acquired total ownership of the Brooklyn Nets in a deal that valued the team at a record $2.35 billion and included an additional $700 million for its home arena, the Barclays Center.

The record valuations hurt the appeal of minority stakes in NBA franchises, as limited partners have no say in how teams are operated and stand to profit less than majority owners if the team were to sell. Still, the stakes do come with some attractive perks, such as luxury suites, access to pro basketball players and the bragging rights of owning a slice of an NBA team.

“The buyer is hoping for an increase in value,” said Joel Maxcy, president of the International Association of Sports Economists. “Major league sports teams are a pretty good bet in this regard, as they have appreciated considerably in value, especially this decade.”

The financial upside, however, is limited. A minority stake in an NBA franchise “would not increase in value at the same rate as full ownership shares,” Maxcy added.

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The challenges posed by soaring team valuations aren't limited to the NBA. Major League Baseball recently altered its own ownership rules to allow investment funds to acquire minority stakes in its teams, sources told FOX Business. As with the NBA, sources said the decision was motivated by a need to find investors.

While the NBA has yet to sign off on an investment vehicle for private equity firms, the league’s ownership ranks are full of hedge funders who bought limited partnerships with their individual wealth. Boston Basketball Parents LLC, the investment group which owns the Boston Celtics, consists of several private equity heavyweights, including Glenn Hutchins, a founding partner at Silver Lake Partners.

Boston Celtics' Jayson Tatum goes to the basket against Sacramento Kings' Richaun Holmes during the first quarter of an NBA basketball game Monday, Nov. 25, 2019, in Boston. (AP Photo/Winslow Townson)

Joe Lacob, the majority owner of the Golden State Warriors, amassed his fortune at the Silicon Valley venture capital firm Kleiner Perkins. Mark Stevens, the Warriors investor who received a one-year ban after a courtside altercation with Toronto Raptors guard Kyle Lowry during the 2019 NBA Finals, was a partner at Sequoia Capital until 2012.

Private equity can also bring a dash of Hollywood beyond the glamour and glitz of the Los Angeles Lakers. Tony Ressler, co-founder of marquee investment firms Apollo Group and Ares Management, purchased the Atlanta Hawks in 2015 for $850 million. Actress Jamie Gertz ("Twister," "Square Pegs") is married to Ressler and she has an active role in operating the team.

The potential value of private investment isn’t lost on NBA players. Brooklyn Nets guard Spencer Dinwiddie declared his intent in September to allow investors to buy “shares” of his three-year, $34.4 million contract in the form of digitized tokens on the Ethereum blockchain. The investors, who would be asked to make a minimum investment of $150,000, would essentially be betting that Dinwiddie will play into an even more lucrative contract in the future.

Brooklyn Nets guard Spencer Dinwiddie (8) dribbles the ball as Toronto Raptors guard Isaiah Taylor (17) defends during the fourth quarter of a preseason NBA basketball game Friday, Oct. 18, 2019, in New York. (AP Photo/Sarah Stier)

Within days of his announcement, the NBA ruled that Dinwiddie’s plan would be in violation of the collective-bargaining agreement. Dinwiddie reportedly plans to pursue the venture anyway.

Silicon Valley fund Silver Lake Capital reportedly made a strong push to acquire a significant majority stake in the NBA’s New York Knicks and the NHL’s New York Rangers earlier this year as their parent firm, the Madison Square Garden Company, prepared to spin off their sports and entertainment arms into separate publicly traded entities. The Knicks are considered the NBA’s most valuable franchise.

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Silver Lake's reported ambition fell apart earlier this month after MSG revised its reorganization plans. Rather than retain ownership over one-third of its sports franchises, MSG said it would give up all equity interest in its sports properties, meaning that any fund interested in acquiring ownership would have to do so on the public market.

Still, the massive equity fund’s interest in the Knicks illustrated the type of money required to make a serious play for one of the NBA’s top franchises.

"There are only so many Steve Ballmers and Joe Tsais," a league source told Axios earlier this year.

PART 1 OF 'CHANGING THE GAME': WHY PRO SPORTS INVESTMENTS ARE WALL STREET'S NEWEST PLAY

PART 2 OF 'CHANGING THE GAME': NFL PLAYBOOK FOR PRIVATE MONEY HAS LIMITED OPTIONS AND NO AUDIBLES 

PART 3 OF 'CHANGING THE GAME' : NEW MAJOR LEAGUE BASEBALL RULE PUTS PRIVATE EQUITY IN SCORING POSITION

PART 4 OF 'CHANGING THE GAME' : HOW THE NHL MAY BE SKATING TOWARDS A NEW FINANCIAL REALITY

PART 5 OF 'CHANGING THE GAME' : NBA TEAMS AND OWNERS EYE NEW FINANCIAL GAME