NBA Eager To Increase Team Liquidity Amid Rising Values
By Zachary Zagger
Law360 (October 18, 2019, 7:04 PM EDT) -- The NBA is looking to ease a liquidity crunch among its franchises by becoming more flexible in how investors can buy into teams, a move that experts say could enable owners to cash in on the surge in franchise values in recent years and broaden the pool of potential investors looking to capitalize on the popularity of sports.
NBA franchises have been selling for record amounts in recent years, pushed by the increasing value of media rights and expanding sports markets. According to Forbes team valuations released in February, the average value of the NBA's 30 teams is $1.9 billion, up 13 percent over last year and triple what it was five years ago. The top team, the New York Knicks, is valued at $4 billion.
The Houston Rockets sold for $2.2 billion to restaurateur Tilman Fertita in 2017, the highest price ever paid for an NBA team. More recently, Alibaba Group co-founder Joseph Tsai took control of the Brooklyn Nets and its arena the Barclays Center in a deal that reportedly valued the team at $2.35 billion.
But experts say those multibillion-dollar price tags coupled with limitations on owner debt and limits on the number of investors is creating a liquidity crunch by limiting the pool of potential buyers able and willing to pay such sums, not only for a team but for minority or limited partner stakes as well.
"The issue involves the structure of the ownership, where there are limited partners or minority owners," said Mark Zyla, the managing director of consulting firm Zyla Valuation Advisors LLC and chairman of the International Valuation Standards Council's standards review board. "Generally, a minority owner, like in any business, you think of the value as a pie, if you own less than a controlling position your position is worth less than a pro-rata portion of the pie because you have additional risk."
Minority partners have no say in the direction of the team, as with player contracts and team operations. Even if minority owners want to sell, they are limited to only those who will shell out millions for such limited say. A 10% share of an average-value NBA team could be $190 million.
"In some cases, there may be some synergies, it may enhance your visibility in a marketplace, but for the most part minority ownership is a prestige thing," Zyla said.
But the NBA owners are considering the creation of an investment vehicle to allow the purchase of minority interests across multiple teams to provide additional liquidity for team ownership interests and to bring in a new pool of investors, according to a Bloomberg report last month.
The owners were set to discuss the vehicle at a Sept. 20 owners meeting, but its status is unclear. This month Major League Baseball said it is also changing its rules to allow institutional investors to buy stakes in teams. The NBA did not respond to a request for comment.
Selling minority interests is important for controlling owners and other minority or limited partners as it helps them diversify their investment and bring other individuals into the fold who may later want to purchase a majority stake, as with the Nets and Tsai, who started by purchasing a 49% stake.
But owners also want to cash in on some of the rising value of their assets, which can really only be done by selling the team or shares in the team.
"Owners can only get that when they sell," said John T. Wolohan, an attorney and sports management professor at Syracuse University. "Therefore, by selling shares of the team they can tap into that value. Kind of like refinancing the house, to tap into the real estate value increase."
Chuck Baker, co-chairman of the sports-industry practice of law firm O'Melveny & Myers LLP and lead counsel on several team transactions, said that as the values of teams in the NBA and other U.S. leagues increase more quickly than the list of approvable buyers, it's no surprise that some current owners are interested in alternative liquidity sources for themselves and their limited partners.
A vehicle like the one proposed by the NBA could boost the value of minority ownership or limited partnership stakes by creating a market to more easily buy and sell those shares, experts said. Minority owners could sell shares to the fund at a price based on the team's full valuation, which could then hold the asset or flip it to other investors.
Whether it is the fund itself or other institutional investors, they are going to what so-called tag-along rights, meaning a right to recoup a proportionate portion of the sale price should the entire franchise be sold, experts said.
"Under this NBA fund, one of the benefits of the fund is that it may create a different asset class," Zyla said. "So it may increase the interest of institutional investors, so more than just individuals, for example, hedge funds may buy for investment purposes. It may increase the value and marketability in that sense as well."
However, it remains to be seen how a fund like this would be reconciled with NBA rules limiting the number of team owners and preventing an owner from owning stakes in other franchises. The NBA reportedly adopted a rule to limit teams to 25 owners to prevent owners in name only after the Nets, as part of its move to Brooklyn, brought in the Brooklyn-born celebrity Jay-Z as a minority owner with a reportedly less-than-1% stake.
Such rules may have to be amended, procedures that would involve approval from the owners, but experts say they would not be surprised to see that happen as owners have a strong desire to continue to increase the value of their assets.
"It is an interesting idea," Zyla said. "In theory, it does make sense and should increase the value of those minority interests."
--Editing by Brian Baresch.
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CORRECTION: An earlier version of this story misstated Mark Zyla's affiliation. The error has been corrected.