Basketball fans revere Michael Jordan as the best basketball player of all time and the fierce and charismatic competitor who led his Chicago Bulls to six National Basketball Association championships in the 1990s. Private equity investors, though, likely regard the long-retired legend as a champion investor who sold his majority stake in the lowly NBA franchise Charlotte Hornets for a reported $3 billion.

That represented a whopping 990.91% uptick from the $275 million the now 61-year-old Jordan paid for the stake in 2010.

That’s a score any investor—whether or not they’re a hoop fan—can get excited about.

Those kinds of nosebleed valuations for sports franchises are pulling private equity into the booming game of sports investing. Since 2019, when Major League Baseball became the first of the big North American leagues to open franchise ownership to outside investors, private equity has poured $59 billion into sports investing—and the spigot remains open.

Bulls are smartly betting that the growth of investing in professional sports leagues both here and abroad is just in its first quarter. National TV broadcasting rights for the NBA, the National Football League, Major League Baseball and the National Hockey League are soaring; this year the global sports TV contracts hit a high of $62.4 billion. Media rights are the fuel powering the rocket that is franchise valuation, and market observers don’t see it falling back to Earth anytime soon. The number of sports-focused funds is also expected to expand to absorb all that capital gushing into the alternative asset class. Furthermore, women’s sports teams, such as those in the WNBA, which has recently gained more attention because of the rivalry between Caitlin Clark and Angel Reese, are spurring intense interest, along with emerging sports ranging from lacrosse to men’s volleyball to bull riding. Women’s soccer especially is drawing eyeballs and multibillion-dollar TV rights deals.

To meet the demand from RIAs, advisors and high-net-worth investors, some firms are democratizing sports investing, which has otherwise been the sandbox of multibillionaires like Steve Ballmer, the former Microsoft CEO and longtime owner of the Los Angeles Clippers. In March, alternative platform GLASfunds of Cleveland added the sports-focused HomeCourt Partners Fund from alternative asset manager Blue Owl Capital to its platform. The fund will allow investors to get a piece of the sports action for as “little” as $50,000, according to the firm. HomeCourt is a $627 million vintage buyout offering started in 2021 and has had investments 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 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 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 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-a-half 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-is-good ’80s. Ownership across the five big leagues in North America is quite fragmented. About 130 different groups own 153 franchises, according to Arctos.

Seeking to broaden the buyer base for their increasingly valuable assets, teams eventually opened the gates to private capital, and now at least a dozen teams in the NBA, NHL and MLB have private equity groups among their owners. Besides Arctos and Blue Owl, some of the major firms in the space include Bruin Capital, RedBird Capital Partners and Clearlake Capital, owning pieces of franchises ranging from the Los Angeles Dodgers to Formula 1 racing to women’s soccer.

Can We Play?
What about non-billionaires? The most efficient way for them to add, say, a piece of the hometown Red Sox to their portfolio is through sports funds. There are about eight firms with sports-focused strategies, and sports fund options are expected to expand swiftly. Private equity giant Sixth Street Partners in San Francisco is reportedly launching its first such fund. The firm manages $75 billion and has stakes in European soccer team Real Madrid, among others.

While sales of big-league franchises are rare, they are happening more often as prices keep rising. A group led by private equity firm the Carlyle Group recently closed on a deal to buy the Seattle Reign, the women’s soccer team, for $58 million. The team was purchased for $3 million in 2019. Carlyle also reportedly made a failed attempt to buy the NBA’s Minnesota Timberwolves alongside another investor, baseball great Alex Rodriguez. In January, a group led by Carlyle co-founder and Baltimore native David Rubenstein agreed to acquire 70% of the Baltimore Orioles for $1.725 billion. The group eventually took full control of the franchise.

Outside of the recently concluded Olympic Games in Paris, this past summer most eyes in the sports investing ecosphere were on the professional football and basketball leagues. In July the NBA, as expected, tripled the value of the $24 billion media rights deal it signed with ESPN and Warner Bros. Discovery, home of TNT, in 2014. The marketing-savvy, globe-trotting league signed a record $76 billion, 11-year contract with Disney, Amazon and Comcast to broadcast its games on ESPN, NBC/Peacock and Amazon Prime Video.

Meanwhile, the NFL, which Forbes estimates is the most valuable sports league in the world, with guaranteed television deals that could be worth more than $126 billion by 2033, could finally open its golden ownership doors to private capital this fall or next year.

Nothing Goes Straight Up
Zook sees a continued rise in the value of broadcast rights, especially for live events. “If there’s an audience, there’s an advertiser, and if there’s an advertiser, there’s money to be made,” he says.

But he’s especially bullish about the cash-flow opportunities of streaming services, as he sees consumers’ move from broadcast and cable continuing. “Nothing goes straight up,” Zook cautions about the trajectory of sports broadcast rights. “You’ll have a stairstep; but as long as the trend of cord-cutting continues” the bidding will only go higher too.

Still, investing in sports is no slam dunk. Teams do lose money, especially European soccer clubs. The vetting for private capital to buy a piece of a team is restrictive. Furthermore, outside firms can own only up to 30% or so of a franchise, and funds, for one, have little say about when or why team management might pursue the sale of the team. Even Zook is nervous about valuations getting out of hand.

“The only real risk in North American sports leagues right now is if somebody is just overpaying,” he says. “At some point, if prices get silly, then obviously we won’t keep buying; we’ll be a seller. But we don’t see that happening at this point.” (In fact, on the afternoon of his Financial Advisor interview, Zook was scheduled to meet with someone pitching professional men’s volleyball.)

It should be noted that not all investors are eager to jump into the sports investing market.

Jonathan Farr, director at wealth manager Homrich Berg, says he sits comfortably on the sidelines. He admits to not being much of a sports fan, and he isn’t impressed with the pitches he’s been getting from managers pushing their sports funds. “I’m staying away from allocating any dollars” in sports, he says. “It’s just a very new space; valuations are high. When I’m thinking about somebody that I want to give money to, I want to see several transactions that have run full cycle. At this point, I don’t have data to figure out who’s a winner and who’s a loser.”