The Stock Market Rally Can Continue

Private equity investors are making bets on a speedy economic recovery…

Right now, a major firm is looking to buy into a pro basketball team. It seems an unlikely bet, given the havoc that COVID-19 has wreaked on every major sports league.

But considering private equity’s expertise at buying assets on the cheap, it speaks volumes about the firm’s confidence in the U.S.’s economic potential.

And it’s another reason the recent market rally can continue.

Let me explain…

The San Antonio Spurs are selling a minority ownership stake in their franchise. The Financial Times recently identified the investor as CVC Capital Partners.

The Luxembourg-based buyout group is in talks with the team to acquire a 15% stake for approximately $200 million, which values the franchise at $1.3 billion.

The Spurs were purchased back in 1996 for an estimated $76 million. The team is one of the NBA’s model franchises. They went to the playoffs for 22 straight seasons before 2020, winning five titles along the way.

Still, the COVID-19 pandemic has decimated attendance at sporting events around the globe. No league is immune. Franchises are hemorrhaging money due to the lack of ticket, apparel, and concessions sales.

The NBA has lost millions. During the 2019 to 2020 season, revenue dropped 10%. And considering that fans were able to attend a number of games in the early part of last year, it’s likely this year will be worse.

But like any other business, the NBA needs to make money to continue operating. Producing games is expensive. So the Spurs and other teams are finding ways to bring revenue back into the fold.

Importantly, the tough times could be about to change. As the approval and rollout of coronavirus vaccines continues, it should allow people to go about “normal” daily routines once more… including going to games in person.

CVC is betting that this return to normal is on the horizon. And betting on pro sports teams is something private equity has done successfully in the past…

We saw a similar situation play out after the financial crisis. Fans couldn’t afford to go to games. Sports leagues and their franchises were paying out money while seeing less revenue at the gates. They had to do something.

Private equity and hedge-fund investors stepped in. These folks are great at buying underappreciated or undervalued assets and companies. And they use leverage to maximize returns for their shareholders.

In 2014, Avenue Capital co-founder Marc Lasry and Fortress Investment co-founder Wes Edens purchased the Milwaukee Bucks for $550 million. In 2018, the team was estimated to be worth $1.1 billion. Now, that value is close to $1.9 billion.

In 2011, David Blitzer of Blackstone and Josh Harris of Apollo Global Management purchased a stake in the Philadelphia 76ers for $280 million. At the time, the franchise was estimated to be worth $330 million. Today, that number is estimated to be more than $2 billion.

Timing can be everything in investing. And as you can see, these savvy institutional investors have a great sense of timing.

When a group like CVC is working to buy a stake in the San Antonio Spurs, it shows what CVC thinks of the team’s economic potential. The firm has teams of analysts poring over models to estimate when the economy could bounce back. And those same teams are identifying opportunities where they can generate maximum returns.

All of this should point toward a sharp rebound in economic activity as life moves back toward “normal” in the second half of this year. That should support a steady rally in the stock market going forward.

Good investing,

— Scott Garliss

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Source: Daily Wealth