A very bad economy and the shutdown of sports resulting from the government-mandated shutdown of businesses amid the coronavirus pandemic is going to result in an usually large number of limited partners in MLB, NBA, NFL and NHL teams selling their stakes, according to sports bankers who spoke with me off the record.
As is usually the case, rather than use debt, some principal owners of baseball, basketball and hockey teams will make capital calls to raise money from their investors (limited partners) to make debt payments, fund new stadiums or renovate existing ones, fund operating losses, help finance the purchase of a team, or meet short-term liquidity needs.
The LPs usually have no decision-making rights in a team, and if they fail to meet the capital call, their investment in the team could be reduced equal to the amount not funded. In some cases, the LPs could forfeit their entire investment.
The problem for many LPs, say sports bankers, is that their non-sports businesses are not generating the revenue they were just a few months ago. Nor are they worth nearly what they were prior to the economy tanking. Imagine trying to get a valuation on a car dealership or restaurant chain today. Lower business valuations also make it harder for these LPs to borrow money against their other businesses to use for capital calls.
As a result, these LPs may be forced to sell their stakes. The bad news for the LPs is that small stakes in sports teams typically sell for a 20% to 25% discount. The good news is that the values of baseball, basketball, football and hockey teams have risen dramatically during the past decade, so LPs who bought in a while ago should still be able to make a profit when they sell.
Read more on https://www.forbes.com/sites/mikeozanian/2020/04/10/why-an-unusually-high-number-of-investors-in-sports-teams-will-be-selling/?fbclid=IwAR2iGAe7tSlxtqarQb_5jz-cPF_oNzYsccbFUJMDRcNk39-zkeNMaFuNFDc#63c9a7dc5e46