Prospects of Private Equity as a Professional Sports Holder: The Boston Red Sox Deal with LeBron James

Over the last few years, professional sports organizations such as the National Basketball Association (NBA) and Major League Baseball (MLB) have modified ownership restrictions to encourage private equity interests in individual franchises.

The recent partnership between LeBron James and an upstate New York company has offered a vision of private equity taking over team ownership and management in the American sports scene.

The Fenway Sports Group was inked up for about an 11% stake or roughly $7.3 billion by RedBird Capital Partners, which operates the Boston Red Sox and the Premier League’s Liverpool after the deal was approved. Under the agreement, James will now own approximately 1% of Fenway Sports and would likewise become a part-owner of the Boston Red Sox.

New York, USA – November 22, 2012: Boston Red Sox baseball cap. The Boston Red Sox are a professional baseball team based in Boston, Massachusetts, and a member of Major League Baseball’s American League Eastern Division.

Through Fenway Sports Group’s deal, RedBird Capital Partners has moved private equity into the team control and ownership of US professional sports, a position that the specialized asset class has long coveted but has barely been able to reach. This can be a boost for the private equity industry, which prides itself on its ability to earn profits during a market downturn. “It’s the only industry in the world that has its own column in the newspaper daily,” said a sports investment broker who requested anonymity when building a new fund.

Several private equity firms have increasingly created headlines by buying shares in major sports leagues worldwide, generating much needed resources despite sales shortfalls induced by the global pandemic. The collegiate Pac-12 Conference, a leader in collegiate athletics that is made up of 12 of the most prestigious universities in the world and part of the National Collegiate Athletic Association (NCAA), has proposed selling a 10% share of its broadcasting rights to a private equity investor.

Also, Fenway Sports is the parent corporation of NESN and NASCAR‘s Roush Fenway Racing, a profit-generating sports network that holds the television rights to the Boston Bruins and Red Sox.

In particular, a more significant proportion of earnings comes from ticket purchases that NBA and NFL teams pull in. The pandemic has significantly reduced the MLB’s 2020 ticket sales and shrugged team revenues. Luckily for the MLB, in 2019, Commissioner Rob Manfred introduced a new regulation encouraging minority investments in franchises and giving owners who are lacking sufficient funds more access to liquidity.

Previously, private equity funds have been kept out from purchasing teams since they usually have an acquisition cycle of 5 to 7 years.

Businessman working on laptop with PRIVATE EQUITY inscription, new business concept

However, as franchise prices began to grow, the number of private investors who can make compelling offers for teams has decreased. Also, SPACs were unable to respond. RedBall Acquisition, a blank-check business founded by RedBird Capital, had negotiations to purchase a passive stake in Fenway Sports last fall through earlier this year when its fundraising allegedly fell through, putting the SPAC run by Oakland Athletics executive Billy Beane and RedBird founder Gerry Cardinale without a team to back.

The NBA Board of Governors officially endorsed a proposal in January for venture investors to acquire up to a 20% interest in individual franchises. The NBA has also teamed up with Dyal Capital Partners, who is rumored to be raising a $2 billion fund to buy passive stakes in several NBA teams. According to a Sportico article, Arctos Sports Partners has even requested the league for approval to become an investor in NBA teams. Arctos did not answer to a comment request.

In order to stay viable, the NBA needs extra funds. It is reported that the League’s sales fell by 10% to $8.3 billion, about $1.5 billion short of its goal last year. According to Financial Times, The San Antonio Spurs have already discussed the possibility of a partial sale and engaged in negotiations with CVC Capital Partners of Europe. CVC has a sporting investment business that recently acquired a 14.3% stake in Six Nations Rugby for up to £365 million (approximately $508 million).

Some US professional sports leagues, such as the Major League Soccer (MLS), have expressed a readiness to allow private equity funds to purchase individual clubs. The National Hockey League (NHL) is now following the new trend, indicating that investors’ appetite has hit record levels.

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