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February 22, 2023

Suns Sale Viewed as Both “Real Validator” for PE Ownership Model, Lucky Outcome

Robert Sarver recently sold his 37% stake in the Phoenix Suns at an NBA record $4 billion valuation.

The sale was a win for the former club owner. He bought into the franchise nearly two decades ago in a deal that valued the team at $401 million.

It is also being viewed as an early victory for the private equity funds and institutional investors making passive minority investments in pro sports teams. Dyal HomeCourt Partners bought into the Suns in July ’21 at a $1.55 billion valuation.

“It is a real validator,” former Goldman Sachs partner Eric Grubman said. “It illuminates the viability of investing directly in LP interests with patient capital. LP interests generally have traded at a discount to the control value. Except when a club is sold, then the LP usually gets to sell at the same price. Buying a portfolio of LP interests enables the investor to participate in two potential upsides: the general increase in franchise values along with the step function increase from LP value to control value.”

But not everyone sees the Suns sale as proof of concept on PE investment in team stakes. Some view it as a singular positive data point. Dyal did not anticipate a control sale happening as quickly as it did when it made the investment and there’s an argument to be made the firm was lucky to get out from under an owner that had been bringing it negative attention.

As one sports banker said, “If you go to Vegas, put a million dollars on black, and it comes up black, it’s an awesome result. It does not prove consciousness on the betting strategy.”

Pro sports team valuations have soared to astronomical heights in recent years.

While that has undoubtedly been good news for stakeholders across the board, the growth has exposed weaknesses in the minority ownership offering (beyond the lack of control and liquidity). It has become evident that LP shareholders are often buying in at full price and exiting at a discount–and the disparity between the two is widening as valuations climb.

“The way [a team sale typically] happens is somebody decides to buy a franchise and puts together a consortium. All those people will pay the same control price going in,” Grubman said. “Then 10 or 15 years later, when an LP dies or wants to get out, [he or she isn’t able to] get a control premium unless the control owner [also] wants to sell.”

Ancillary benefits to LP ownership, like public recognition, have also dissipated as valuations have risen. “It used to be that $5 million could buy you a seat at the table and some attention,” Grubman said. “Now you can’t get a seat at the table or attention for $100 million.”

Because of the divergence in attractiveness between a control stake in a team and a limited one, private party interest in buying LP shares at significant valuations has dried up. The ultrawealthy “can own 1/10

of 1% as a vanity play. They don’t need to own 10%. And the local car dealership can’t afford it anymore,” Grubman explained.

That has created an opportunity for sports-centric private equity funds to roll up team assets at a discount.

“When you boil it down, the business plan of [funds like] Arctos Sports Partners, Dyal and Dynasty Equity is simple,” Grubman said. “They are going to get patient money, generational wealth, sovereign wealth funds, possibly insurance companies or pension funds that need 20- or 30-year plays, buy [up] LP interests at the [discounted] LP price and cash out at the control price. If they can get enough assets in the portfolio [and] one sale every five, ten, fifteen years, it will provide a nice return not correlated to the stock market.” 

The Suns sale is the first one on the board for Dyal.  

Previous reports indicated the alternative asset manager would remain a part of the team’s ownership group. A source familiar with the matter said that is inaccurate. The Blue Owl subsidiary no longer has an ownership position in the franchise.

From a financial perspective, rolling equity over made little sense. The return on Dyal’s Suns investment has been stratospheric and it is unrealistic to think the team will be sold again at a similar markup.

At least not anytime soon. New owner Mat Ishbia is 43 years old. He could conceivably control the franchise for the next four decades.

Remember, Dyal wouldn’t be rolling it over from a fundamental formation perspective at a discount either. By not selling, it would in in essence be rolling the equity back into the club at a $4 billion valuation.

Ishbia bought Sarver's piece of the Suns –and Dyal’s stake– at a $4 billion valuation. It’s not clear if the remainder of the LP interests he purchased were at that same premium.

A minority discount is typical. Dyal had tag-along rights with Sarver.

A few LPs, including Jahm Najafi, will stay on under Ishbia. The co-investors may have decided to retain a stake in the franchise, rolling over their investment and deferring capital gains taxes, as part of a longer-term investment strategy.

Najafi said in a statement, "In recognition of our enthusiasm for Mat, as the new steward of the Phoenix Suns and Mercury, Cheryl and I have decided to maintain all of our family’s investment in the team and to support fully Mat’s commitment to a positive workplace environment, social justice and dignity for all employees and players. I personally look forward to working with him and am honored to continue as Vice Chairman and Alternate on the NBA Board of Governors. We are excited for this new chapter of our invaluable community treasure.”