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April 18, 2023

NBPA to Passively Invest in Teams on Behalf of All Players Via League Approved PE Fund

The National Basketball Association (NBA) and NBPA (National Basketball Players Association) recently agreed on the framework for a new collective bargaining agreement. The pact will allow active players to invest in NBA and WNBA franchises for the first time.

The two sides remain in the process of finalizing the deal’s terms.

However, the contemplation is the NBPA will be permitted to passively invest in clubs –on behalf of all players– via a league-approved private investment fund, provided the investment does not exceed a small percentage of the fund's committed capital. 

The idea is to allow the players to participate in the long-term value they are helping to create.

But there is a more efficient way to do that. The league could raise a fund and ensure the NBPA is entitled to a piece of it.

The players are the ones pushing for the opportunity to gain an equity interest.

“They see these big increases in [franchise] valuations and want a piece of it,” Marc Ganis (managing director, Sportscorp Ltd.) said.

However, there the NBA presumably sees some upside in acquiescing their wishes.

The league should gain some positive PR as the details of its wealth building program are released, and perhaps the NBPA develops into a meaningful source of capital over the long-term.

But a lot of questions remain, and their answers will ultimately determine how impactful the program is.

For starters, it’s not clear how much money the NBPA plans to invest or where it will be getting the capital.

“Is it going to be general funds, like dues, or [will it come from] licensing revenue, voluntary player investments or some other source,” Ganis wondered.

It also remains unclear which NBA-approved fund the NBPA will be investing with or what it will do with the proceeds generated from investments made by the fund.

"Remember, members join the union as rookies and go in and out every year depending on whether they are active players or not,” Ganis said. “Will [the investment opportunity] extend to retired players?”

And it is still not known if the number of investment opportunities will be limited or if the league will mandate that every club makes a portion of itself available to the fund.

A broad-based fund with portfolio diversification (think: stakes in all 32 clubs), that is professionally managed, could be extremely beneficial to the players–if the teams want the investment.

However, if the holdings are limited to a handful of franchises, competitive balance issues could emerge.

The league’s best players could in theory migrate to and recruit for the franchise(s) they held a stake in in an attempt to drive their value.

There are some other potential problems associated with active players holding equity stakes in teams too.

“The single most important thing a sports league does is [its] collective bargaining agreement with the players,” Ganis said. “There are scenarios, such as a strike or lockout, where adverse consequences [could arise] if either of the parties wanted that to be the case.”

It remains to be seen if the players will be entitled to the same financial information as any other another LP in a fund investing in teams would be.

Ganis suggested issues including, but not limited to, potential conflicts of interest, capital calls, debt and non-related union strikes should also be considered as the NBA and NBPA establish investment parameters.

Like the NBA, the NHL and MLB allow private equity to invest in individual clubs. So, it’s reasonable to wonder if either league will follow the NBA’s lead and permit PA ownership.

It’s hard to imagine the latter going down the route–save as part of a major economic overhaul that included revenue sharing.

“The relationship between [MLB] and player’s association has been strained,” Ganis said. Extreme payroll disparity between teams presents another challenge.

But if the NBA can successfully navigate the challenges cited, there would seemingly be little keeping the NHL from altering its bylaws.

While the deal prohibits active players from investing directly in NBA teams or the PE funds that do (they will be able to invest directly in WNBA teams that are not owned by NBA owners), one would think it is just a matter of time until that threshold gets crossed.

The league has gone from not allowing private equity in '20 to allowing players to be a part of PE groups that invest in teams just three years later. 

The big four leagues have been working to avoid the inevitable next step for the last 50 years.

“Could we be moving to a scenario where a team wants to sign a player and offers him or her the opportunity to buy equity, or be granted equity or stock options, in the team,” Ganis wondered.

Today’s star players are making hundreds of millions of dollars in career earnings, know more about the business of basketball than most other businesses and would benefit from investment diversification.

“And it seems like the cap is off a lot of those [types of] conventions these days,” Ganis said.

The truth is the next step likely makes for a greater headline than real-world impact. Only the richest of players will be able to invest directly in teams and just a small fraction of club owners would want an individual player on the cap table.

The cleanest and easiest way for the greatest number of players to participate is for the league to raise a fund, negotiate with the union to ensure the NBPA receives a piece of it and buy up LP stakes in teams as they become available.

That would ensure the players were invested in the upside of the franchises. And because the league is spearheading it and sharing in the upside, the bulk of interests would be aligned.