ments in the NBA ’ s Atlanta Hawks and Phoenix Suns . The Suns , along with the WNBA team the Phoenix Mercury , were sold in 2022 to billionaire mortgage lender Mat Ishbia for a record $ 4 billion .
Valuations of franchises are growing “ like gangbusters ,” says Steve Amato , partner with the special acquisition services group at consulting giant Deloitte . “ More people are getting excited about professional sports . There ’ s more investment in women ’ s sports and the secondary leagues , and we ’ re seeing a lot of money move back and forth between the U . S . and Europe ,” he says .
Beating Stocks
Diversification and the excitement of owning a slice of a sports franchise are among the reasons many private equity investors are adding sports assets to their portfolio . But these investors are aiming to beat the gains delivered by stocks . And general , has gained 15 % over that period .)
“ One of the constraints for institutions seeking to invest into professional sports is that they do not have benchmarking data ,” Zach Baran , a director at Arctos , said in an email . “ We believe that the [ index ] is equipping investors with the resources they need to complete their diligence and compare the asset class to other public and private market asset classes .”
“ The allure of advisors being able to offer clients a small piece of an NBA team , or elsewhere in pro sports , is an exciting differentiator , but more importantly is backed up by investment data ,” says Brett Hillard , GLASfunds ’ chief investment officer , who added that an allocation of 5 % of a portfolio to sports investing “ could make some sense .”
The returns of the four big leagues even bested small-capitalization stocks . Houston-based private equity firm Caz Investments noted on its website that
“ The allure of advisors being able to offer clients a small piece of an NBA team ... is an exciting differentiator , but more importantly is backed up by investment data .”
— Brett Hillard , GLASfunds sports investing has sprinted far ahead of equities over the long term .
Dallas-based Arctos Partners LP , a private equity firm with about $ 7 billion in assets and stakes in the Golden State Warriors of the NBA , baseball ’ s Los Angeles Dodgers and other teams , has provided what investors need to feel comfortable betting on a nascent sector : data .
In June , Arctos launched the Ross- Arctos Sports Franchise Index measuring franchise valuation growth across the four major leagues going back to 1960 . The index , compiled with the University of Michigan ’ s Ross School of Business , tracks more than 400 transactions .
The franchise index has returned 13 % annually over the past 20 years , outpacing the benchmark Standard & Poor ’ s 500 by 2.5 %, Arctos said in an email to Financial Advisor magazine . ( Private equity , in the Russell 2000 returned 8 % annually between 2002 and 2021 . Over the same period , the NBA , NFL , MLB and NHL leagues saw an 18 % combined compounded return . That outperformance was driven mainly by a 1,057 % gain in the average price for an NBA team ( now close to $ 4 billion , says Forbes ). The S & P 500 returned 458 % over that period .
Another appealing factor for private equity investors is that a sports asset isn ’ t correlated to traditional asset classes , or financial or economic cycles . Sports franchises are relatively unique business models , blessed with recurring revenue streams , almost boundless opportunities to add cash streams , sticky customers ( their fans ) and low leverage . According to Arctos , the average debt level for a North American pro team is typically around 10 % to 20 % loan-to-value . Among other factors , the leagues restrict borrowing by franchises . Sports ’ revenues proved quite resilient even during the pandemic years of 2020 and 2021 .
Arctos also noted that North American sport is one of only three industries , along with healthcare and education , that has grown revenue at a compound annual rate of 7 % or more over the last 30 years .
The Essence Of ‘ Buy And Hold ’
Finally , sports investing is no day-trading affair . Since the value of most investments isn ’ t realized until the franchises are sold — which is relatively rare — exiting the holding could take up to 10 years or more . That ’ s the essence of “ buy and hold .”
Christopher Zook , the chairman and chief investment officer of Caz Investments , which allocates money on behalf of pensions , fund managers and institutional investors , is comfortable with a long lockup period of even 20 years . “ I will not personally put my money into anything that ’ s not liquid unless I have very high confidence that I can get at least a minimum of a 15 % annualized return and a two-times multiple on my money ,” says Zook , whose firm has $ 6 billion under management . “ Most of these sports transactions would be in the high teens to low 20s at the minimum , and a two-times to a two-and-ahalf times [ multiple ] at a minimum .
“ But at the same time ,” Zook adds , “ I love the benefits of owning assets for long periods of time that are going to compound and grow . But obviously we expect to make a lot more [ than the minimum thresholds ] over a decade or two .”
Private equity investing has been around for many years . But franchises , owned mainly by individual multibillionaires and holding entities such as Madison Square Garden Sports Corp . ( owner of the New York Knicks basketball team and the Rangers hockey team ), stiff-armed private equity investors for many years , turned off by the Gordon Gekko corporate raider reputation private capital earned in the greed-isgood ’ 80s . Ownership across the five big leagues in North America is quite fragmented . About 130 different groups own
40 | FINANCIAL ADVISOR MAGAZINE | SEPTEMBER 2024 WWW . FA-MAG . COM