NBA to Permit Sovereign Wealth Fund Investors in Franchises as Valuations Soar

By Alexander Chester

The National Basketball Association (“NBA”) Board of Governors has voted to permit sovereign wealth funds, pension funds and university endowments to invest in NBA teams. Major U.S. sports leagues have traditionally limited who they permit as owners of their franchises, not just for controlling general partners, but for limited partners as well, even though limited partners are traditionally passive owners with no governing rights. However, two years ago the NBA became the first major U.S. sports league to permit private equity investors, and now the league is broadening the scope of potential investors as franchise valuations continue to skyrocket. There are only so many Americans with pockets deep enough to afford franchises that are being sold for several billion dollars, and so the NBA has realized that it needs to expand the pool of possible buyers.

Sovereign funds are already able to invest in most international soccer and basketball clubs, but American leagues have a unique global appeal, especially the NBA, which is the most globally popular of the American professional sports leagues. Deep-pocketed potential investors could drive up franchise values even further, benefiting every team in the league.

The new rules will cap the investment by a sovereign fund to 20% of the franchise, with a 30% cap on total team equity held by funds, with limitations preventing these investors from becoming controlling parties. The new rules follow the NBA expanding into the Middle East in new ways earlier this year, including opening an NBA store in the United Arab Emirates and hosting a preseason game in Abu Dhabi for the first time this past October, moves which ESPN described as now having “a more transparent underlying purpose”, given the preponderance of sovereign wealth funds in these rich gulf states.

Of course, there are ethical, political and public relations concerns with allowing certain sovereign wealth funds to invest in the NBA. The NBA does not want to be accused of participating in “sportswashing” as international soccer and golf have in recent years. When Mikhail Prokhorov became the first international majority owner of an NBA franchise in 2010, he underwent a league approval process that took far more time than the league’s typical approval process. The NBA has stated that “human rights” and “geopolitical standing” will be factored into its approval process prior to accepting investments from any funds.

But the bottom line is that these new rules may drive up the valuations of NBA franchises, and the other major U.S. leagues may soon face pressure to follow suit. Those interested in investing in a major league team may find extra incentive to do so quickly, while those who are already invested may see their valuation increasing.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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