Covenant Lite #21: Billion-Dollar Ballers: The Hidden Financial Game of NBA Teams
The Knicks, Wall Street, and the New Playbook for NBA Team Finance
As Jalen Brunson and the New York Knicks electrify Madison Square Garden during their playoff run, another high-stakes game is unfolding behind the scenes: Wall Street’s elite private credit investors are quietly reshaping how NBA teams are financed. Welcome to the playoffs you don’t see on TV: the financial battle for a stake in basketball’s most prestigious franchises.
Over the past five years, the NBA has opened its doors to institutional investors and private credit, reshaping franchise financing. Since 2020, at least six NBA teams have sold minority stakes to private equity funds, unlocking liquidity at soaring valuations.
While some of these sales are outright passive equity stakes, others are rumored to be “structured equity” sleeves (customized preferred equity or otherwise) with bells-and-whistles that make them look more like private credit than private equity.
These financing structures are attractive to owners since they enable them to retain control (preferred equity typically comes without voting rights or operational control) as well as most of the future upside beyond the preferred investors’ dividends and liquidation preferences.
The other benefit is that while preferred equity behaves like debt in many ways, it legally counts as equity. This is good since NBA rules strictly cap traditional debt, making it difficult for teams to raise sufficient capital through borrowing alone.
The NBA Doesn’t Like Debt
The current team debt limit in the NBA is $475 million per team. Teams all borrow via the NBA’s central credit facility (NBA Hardwood Funding LLC), which is backed by revenues from their national broadcasting agreement, ensuring a high credit rating and favorable borrowing costs.
With the average NBA franchise valuation around $3-5 billion, debt represents 10-15% of the typical team’s market value, a fairly conservative leverage ratio. Part of the reason for this low leverage ratio is the limited profitability of the average NBA team.
Per Forbes NBA Valuations (2023), average NBA Team EBITDA is $40-80 million per year. Using the midpoint EBITDA ($60 million) and applying that against the team debt limit of $475 million would mean that the average team had a debt / EBITDA ratio of ~8x (significantly less conservative of a leverage ratio).
The modest EBITDA generation of the average NBA team means a limited ability to service cash interest. Instead, firms like Dyal HomeCourt (Blue Owl), Arctos Sports Partners, and Sixth Street Partners use creative PIK structures to defer cash interest until a liquidity event.
Preferred Equity: The New Financing Playbook
Preferred equity in NBA franchise deals is structured uniquely due to the specific financial characteristics of sports teams—high asset values, modest cash flows, long investment horizons, and league-imposed constraints on leverage.
Coupon / Payment Structure
Typically structured as a Preferred-to-PIK arrangement:
PIK (Payment-in-Kind): Instead of regular cash interest or dividends, the coupon accrues and compounds annually. For example, an 8% preferred dividend might compound annually without any cash distribution, increasing the invested amount until redemption or sale.
Some structures may include a small current-pay dividend (e.g., 2-3%), but many teams push fully deferred (100% PIK) structures to avoid cash outflows.
Return Target (IRR Hurdle)
Typical IRRs for these instruments range from 12% to 15%, driven primarily by franchise appreciation rather than current yield.
Preferred equity positions might have IRR-based exit hurdles: upon sale or redemption, investors first receive accrued principal and cumulative PIK dividends plus a targeted IRR before any common equity holders receive proceeds.
Liquidation Preferences
Essential in nearly all preferred equity deals in sports: investors receive their invested capital back first (principal + accrued PIK dividends) upon liquidity events such as team sales, refinancing, or recapitalization.
Typical liquidation preference is 1.0x principal plus cumulative compounded dividends before common shareholders receive anything. Some aggressive structures might have a higher multiple (e.g., 1.25x), but 1.0x is standard given the relatively safe underlying asset.
Governance and Control
NBA explicitly limits governance rights of institutional investors. Preferred equity is thus typically structured as passive equity:
No voting control on operational matters (team management, personnel, etc.).
Limited minority rights focused on protecting economic interests (sale approvals, new debt issuance).
Potential veto rights over certain fundamental transactions (change of control, additional leverage beyond league limits, certain major capital expenditures).
Exit Mechanisms and Redemption Terms
NBA preferred equity structures usually have specific exit triggers:
Liquidity Event (Team Sale): Upon sale of the franchise, investors redeem their principal plus accrued returns first.
Recapitalization or Refinancing: A refinancing or new equity issuance can trigger redemption, giving investors the right to be bought out.
Put Options or Call Rights: Investors might have negotiated rights after a set period (5–7 years minimum holding per NBA guidelines) to require the controlling owner to repurchase their position or facilitate a secondary market sale.
These structures offer investors downside protection combined with upside exposure, making NBA teams highly attractive institutional investments.
Comparison with Other Leagues
Compared to other prominent leagues, the NBA is moderately conservative on leverage but fairly progressive regarding allowing institutional investment. The NFL remains the most conservative on having outside investors, having only recently relaxed rules to allow institutional investment.
The most aggressive league of all is the English Premier League, which offers significant flexibility (no leverage or ownership limits), but at the expense of stability, as seen in various financing issues faced by clubs over the years (see Manchester United, Leeds United, Portsmouth FC, where high debt levels led to relegation, fan protests or other poor outcomes).
The Road Ahead: More Deals, More Innovation
Looking forward, the role of private credit in NBA financing will only expand:
Higher Debt Limits: Upcoming lucrative media rights deals (projected around $75 billion) could allow NBA to raise team debt caps significantly, opening further private credit opportunities.
Financial Innovation: Expect new structured products like synthetic NAV loans (loans secured by diversified stakes in multiple teams), minority ownership liquidity solutions, and arena-focused financings.
Navigating Volatility: As teams navigate challenges like shifting local media landscapes, private credit could provide vital short-term bridge financing solutions.
As the Knicks continue their playoff push, private credit firms are quietly playing their own championship game—reshaping the NBA’s financial landscape and setting the stage for a new era of sports finance innovation.
Covenant Lite