Hedge fund and private equity: NBA opened the door, will European basketball follow this trend? / News - Basketnews.com

Credit: Panagiotis Moschandreou/Euroleague Basketball via Getty Images Credit Panagiotis Moschandreou/Euroleague Basketball via Getty Images

It's not a secret that in the last few years, the world of professional sports has been swamped by a new wave: money coming from investment and hedge funds to buy into teams.

A new reality has now kicked in and become the normality, especially in the football world.

Just in Italy, for example, historical football teams like AC Milan, FC Internazionale, and Atalanta are controlled, in their majority or with minority stakes, by investment funds or private equity companies.

And that type of trend has spread throughout all of Europe in football: England, Spain, France, even smaller leagues like Denmark, Slovakia, and the Czech Republic. But private equity and hedge funds are now also shifting their attention to the NBA.

In early 2020, the NBA changed its rules, allowing firms to buy shares of NBA franchises. Until that point, only individual people were allowed to own shares of the teams.

The NBA, though, also put some guidelines for the firms that want to invest in the league. No firm can own more than 20 percent of a team, and the league also has the power to veto some firms to invest in NBA teams if some of the investors in the fund are not considered completely 'clean' by the league.

As reported by The Athletic in a recent article, the first two firms to invest in NBA teams were Arctos Sports Partners and Blue Owl, through the Dyal HomeCourt fund. The two companies, though, received different conditions.

The NBA stroke a larger deal with the Dyal HomeCourt fund. They can buy into an unlimited number of teams, and they give the NBA a management fee, basically a percentage of the investments that Dyal raises. Arctos Sports Partners, on the other hand, was limited to buying into a maximum of five NBA teams.

When the deals were finalized and approved, Dyal quickly reached agreements with the Sacramento Kings and the Phoenix Suns. Dyal acquired around 5% of the shares of Sacramento and around 10% of the Phoenix Suns. A few months later, they also acquired around 6% of the shares of the Atlanta Hawks.

Arctos, on the other hand, bought stakes of the Golden State Warriors, around 13%, and the Sacramento Kings, around 17%. They also made investments in another 15 professional sports teams in the USA. Another firm, Sixth Street, has acquired a 20% stake in the San Antonio Spurs.

The value of the NBA franchises has skyrocketed in the last 20 years. The American magazine Forbes valued the Los Angeles Lakers as the most expensive team in the league back in 2002 with a value of $400 million. Last year the Lakers were valued at around $5 billion.

Teams becoming more valuable and expensive also explains why private firms will become even more present in the coming years. For singular individuals will be increasingly difficult to collect that type of money, while for investment funds, it's much easier to make this type of operation.

Another element of the equation: having firms or investment funds owning 20-30% of a team reduces the number of people involved in the ownership of a team, which makes things easier for the majority owner who has to deal with less conflict and doesn't need to hear from 15-20 different voices every single time there's the need to make an important decision.

NBA has huge TV and sponsorship deals, so it's not surprising that private firms want to get into the business as soon as possible.

In the European basketball environment, though, this type of trend hasn't found much traction so far. In the majority of European countries, most of the teams are controlled by local businessmen or entrepreneurs, the presence of investment funds or private firms or even investor groups from abroad is very limited.

In EuroLeague, for example, there's only one team, Monaco Basket, which is owned by a foreign investor, Russian businessman Alexey Fedorychev, who controls 46% of the shares of the club.

In the last few years, we saw some 'outside' moves in France. In 2018, David Kahn, the former president of the Minnesota Timberwolves, together with many other American partners, decided to invest in Paris Basketball to finally bring a stable team in the French capital.

Last summer, American group Counterpoint Sports bought the majority of the shares of French club Elan Bearnais Pau-Orthez, with former NBA executive Stu Jackson as the face of the project.

However, these cases look like exceptions to a general situation where foreign investors and private equity are not exactly super interested in doing business.

With EuroLeague living a stagnant situation, in which teams are struggling to generate real financial profits from the competition, could the entry of hedge funds and private firms be the solution for European basketball?

A new line of cash flow could definitely help since the 2015 deal between EuroLeague and IMG hasn't produced the revolution that it was supposed to generate. Still, European basketball, in most cases, is still not attractive enough financially to draw interest from the private equity environment unless we're talking about very specific situations and places (Monaco, Paris).

But with these entities becoming increasingly present in the professional sports world and European basketball clearly in need of change, it would probably be smart to follow the NBA model and start thinking about how to find ways to attract these new capitals in our system too.

Sure, basketball in Europe it's still, in most cases, a losing game, as very few teams generate positive revenues. Still, it's also undeniable the allure and the tradition of it and the huge fan bases that several teams have.

All these aspects can be very attractive for private equity and foreign investors, and with a few organizational tweaks, the whole situation might change drastically.

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