Historically, investing in sports franchises, at least in the United States, was mainly dominated by wealthy families or passed down through generations. As valuations in sports franchises ballooned, these properties became extremely valuable assets and have now attracted the attention of institutional investors that in the past had not considered sports as an investible asset class.
This all changed in 2019 when Major League Baseball became the first major North American league to approve private equity investment in their franchises. In 2020, the COVID-19 pandemic sparked a watershed moment whereafter the NBA, NHL and MLS altered their bylaws to allow minority investments into franchises, creating additional investment opportunities for investors.
This trend was accelerated primarily due to the lack of revenue sports teams were generating as fans were no longer allowed to attend games once the leagues began to play again. Each league has their specific guidelines regarding the new allowance of private equity investment. For example, the NBA has set 30 percent equity as the maximum percentage a team can sell to private equity funds and limits one fund from owning more than five teams in the league.
These figures are mostly similar across the other leagues, except for MLB. MLB allows funds to own an unlimited number of teams, yet limits funds to own a maximum of 15 percent equity in one team (compared to the 20 percent maximum of the NBA, NHL and MLS). The NFL has yet to formally allow private equity investment into its franchises, but it appears that a change is imminent.
VALUATION GROWTH
Valuations across the major sports leagues in the United States have been on an upward trajectory for the past 20 years, and they do not appear to be contracting any time soon. There are several factors attributed to this growth, such as market size, increasing quality of facilities and scarcity, but overall broadcast rights have been one of the main reasons for the explosive growth.
Of the four major U.S. leagues, the NBA has experienced the most growth on average over the past decade. A big driver of this growth was the media rights deal that was signed by the league in 2015 with ESPN and Turner worth $24 billion. This deal is set to expire after the 2024-2025 season, and there are indications that the next NBA deal in 2024 could reach up to $75 billion over nine years, per CNBC.
The NFL’s growth accelerated tremendously in the late 1990s and early 2000s after their landmark media rights deal in 1998, which was valued at $17.6 billion over eight years, according to The Washington Post. The annual revenue teams received nearly doubled from $40 million to about $80 million under the new agreement, which at the time was by far the richest contract in the history of sports.
Now the question is, which league will experience the most growth over the next decade? Several investors are expecting the MLS to be that league, with all the tailwinds surrounding the sport such as the upcoming 2026 World Cup and the involvement of youth demographics, both male and female. Late in 2022, MLS and Apple agreed to a 10-year media rights deal worth $2.5 billion, demonstrating the heightened interests of nontraditional media players, such as Apple and Amazon, to have ownership of these scarce assets.
Sportico published a value-to-revenue multiple chart toward the end of 2022, demonstrating how valuable some of these franchises have become and also the differences in growth prospects for each sport and league. MLS currently has the lowest average revenue per franchise at $57 million and an average value per franchise of $582 million resulting in the highest average multiple of value to revenue at 10.2x. Of the four major professional leagues, the NBA leads the way with an 8.4x multiple, followed by the NFL at 7.6x, MLB at 7.4x, and the NHL at 5.0x.
RELATIVE PERFORMANCE
One of the major reasons sports franchises offer an attractive and differentiated investment option is their steady, consistent growth paired with relatively stable revenue streams. All four of the major leagues in the United States outperformed the major stock indexes from the time period of 1991-2016.
To compare performance and consider correlation to other asset classes, a basket of franchises across the four major leagues was created. The basket, comprised of 40 teams, 10 from each league, evaluates the trajectory over a 10-year period from 2013 to 2022. On a 10-year average basis, the basket experienced superior performance to the other asset classes to the tune of 16.66 percent per year and did not suffer a negative year over the time period.
While the S&P 500 may have demonstrated superior growth during a few years, the volatility and downward capture of the index exceeded that of the sports basket and resulted in an average annual performance of 13.59 percent over the 10 years. This is just one example of the strength and stability of sports franchises over time. If we were to expand the timeframe even further, beyond the 10-year period, the outperformance gap expands and again demonstrates the resilience of franchise growth over decades.
Sportico published an analysis displaying the greatest value growth of franchises from 1996 to 2021 and again, on average, all of the leagues experienced an outperformance relative to the S&P 500 growth of 6.4x. The NFL saw the greatest increase at 19.9x, the NBA was just behind at 19.6x, followed by MLB at 16.5x, and lastly the NHL at 12.1x. Overall, they all exceeded the S&P growth by more than 2x, besides the NHL which was slightly under at 1.89x.
The growth of sports franchises overall certainly offers an attractive opportunity for investors, but as with all investments there are risks involved, namely liquidity and the changing consumption patterns of the younger generation. While there are some challenges surrounding liquidity (as these are not commonly traded assets), there have been some recent changes by the leagues allowing more flexibility in the exchange of minority interests, including permission for private equity funds to invest as well. The next decade will be a major indicator of how this asset class evolves and whether liquidity will become less of an obstacle for investors.
Some of the recent sales across the four major leagues have garnered significant attention as they continue to break previous records. In the NBA, the Phoenix Suns were sold by embattled owner Robert Sarver to Mat Ishbia for the price of $4 billion — Sarver had purchased the Suns in 2004 for a then-record of $401 million. The deal additionally included the WNBA’s Phoenix Mercury, and happened to be the first sale of a franchise that included a private equity ownership stake. Dyal HomeCourt Partners, a division of Blue Owl Capital, was the first private equity firm permitted to invest in the NBA and purchased a minority stake in the Suns in 2021 at a valuation of $1.55 billion, resulting in a 158 percent appreciation in roughly 18 months.
In February of this year, Marc Lasry sold his 25 percent stake in the Milwaukee Bucks to the Haslam family at a valuation of about $3.5 billion, according to Bloomberg. Lasry acquired the Bucks in 2014 alongside Wes Edens for roughly $550 million and since then the team went on to win an NBA championship in 2021.
In the NFL, the Denver Broncos were acquired in August of 2022 by the Walton family for the price of $4.65 billion. At the time, this was the highest price ever paid for an American sports franchise, though likely short lived. The most recent transaction of note that has yet to be officially confirmed is the sale of the Washington Commanders by longtime troubled owner Dan Snyder. The likely winning bid of $6 billion is made up of a consortium led by Josh Harris, along with former Los Angeles Laker Magic Johnson, and would be the highest sale price of any franchise worldwide in the history of sports.
While Washington is most definitely a major market in the United States, it is remarkable that the sale price reached these record levels in essentially what was a forced sale by the NFL, with a team that has one of the oldest stadiums in the league in addition to a myriad of other issues. One can only wonder how high the price may have risen had it been less of a dysfunctional franchise.
THE FUTURE OF SPORTS INVESTMENT
As previously mentioned, the increased involvement of private equity and institutional investors in sports franchises will likely have ripple effects on the industry in the years to come. Experienced investors and operators will continue to bring their expertise to these organizations and leagues, allowing them to become more efficient and potentially more profitable. At the MIT Sloan Analytics Conference in 2022, several sports business leaders discussed how some of the best practices from leading industries (such as technology and healthcare) are increasingly becoming transferred to the sports industry. This continued application of best practices will further drive innovation within the sports business.
It is difficult to forecast how the ownership model will evolve, but one possible model that investors, such as David Rubenstein of The Carlyle Group, have suggested is having sports teams become platform investments. Under this model there would be a platform franchise that would then be complemented by “add-on” franchises, most likely in smaller leagues and different sports, that then aggregate to become a diversified sports and entertainment business.
With this diversified aggregation of revenues, the combination of franchises could be an attractive investment for public investors if this platform were to IPO. While sports franchises trading publicly is nothing new, it is not the most common, and this platform structure would offer a much different proposition than what Manchester United and other singular franchises offer currently. There is a similar model that already exists with the concept of ownership of different franchises that has been implemented by Arthur Blank through AMB Sports & Entertainment and Stan Kroenke with Kroenke Sports & Entertainment. There are several others such as Harris Blitzer Sports Entertainment and Kraft Group, but again the idea of a fund owning the platform or it being a publicly traded holding company would be the biggest differentiating factor.
There are risks that come with the involvement of institutional investors such as the depersonalization of ownership and the volatility of fan loyalty. As seen in Europe with several soccer clubs such as Sevilla FC and Red Star FC, fans have turned against a franchise with foreign ownership. However, up until this point, the American leagues have been able to manage the relationship relatively well. Ultimately, it is a balance and the leagues in the United States have been cognizant of these sensitive issues and have put guardrails in place to prevent the loss of fan engagement and connection. Of the leagues that have allowed investment from private equity funds, each one has their specific guidelines in terms of percentage of ownership allowed, and a maximum number of teams within a fund structure. Additionally, the leagues conduct extensive due diligence on the funds they allow to become investors in order to ensure the incentives are aligned and that reputable funds are in place.
As more funds begin to invest in sports franchises and leagues, it will be interesting to track the profile of the limited partners that are committing capital to these sports-focused investments. Several of the most powerful and influential LPs in the investing community are university endowments and pension funds, and the moment may be coming for their investment committees to allocate portions of their capital to sports, if they are not doing so already.
Only time will tell what the future holds for sports franchises in the United States, but it certainly appears the asset class that has been developing is not fading away any time soon.
Felipe Villahoz is a second year MBA student at the Goizueta Business School at Emory University.