1. RW Group Project
Private Equity
LBO: The Charlotte Hornets
By:
Cameron Elafros, Wyndham Burney, Gouthum Chiluvuri, and Alex Koper

2. XYZ Ventures provides venture capital on high-valued, late-stage investments. XYZ was
founded by Gouthum Chiluvuri, Cameron Elafros, Wyndham Burney, and Alex Koper in 2016
and is based in Charlotte, North Carolina. The funds first fund is XYZ Ventures 1 which had 1
Billion committed capital. To date only 5% of the firms committed capital has been invested.
The founding idea for XYZ ventures is to find undervalued companies where we can make
minority investments, add significant value through brand expertise, increasing sales, and by
adding key partnerships. XYZ believes in holding onto their investments for a long time, with
growing revenue providing stable returns for investors, and an eventual strategic exit by
facilitating the sale of the company.
Summary Investment Terms:
Size of Fund 500 Million
Term 10 Years
Investment Period 3 years from Jan/1/2016
General Partner Commitment 1% of committed capital up to 5,000,000
Annual Management Fee 2% of aggregate capital commitments
Carried Interest Subject to 8% hurdle
The associates of XYZ Ventures have recently pitched a potential investment
opportunity to the investment team; a strategic minority position in the Charlotte Hornets
basketball team. After the investment, we would partner with the management and players in
order to decide which changes need to be made throughout the organization. This would be
the first professional sports franchise in our portfolio that has enormous upside if the Hornets

3. franchise approached this deal as a strategic proposition. XYZ is looking to invest 75 million for
a 10% equity stake in the business.
The National Basketball Association is an attractive target industry that has seen
exponential growth in recent years. In the past 15 years alone, the average team value has
increased from $207 million to $1.3 billion dollars, which would translate into a 13% compound
annual growth rate. We chose to analyze this industry using Porter’s five forces, which takes in
to consideration barriers to entry, powers of suppliers, power of buyers, substitute products,
and competitive rivalry. The NBA as an industry has substantial barriers to entry for new firms
looking to compete. The league has 30 teams who compete on a yearly basis and any new
addition would require a long drawn out approval process, and subsequently a vote by all
owners. This is a positive sign for firms competing in the industry in that there is little threat of
an additional team becoming a reality. The power of the NBA’s suppliers, or its players, is
relatively high due to collective bargaining agreements teams must engage in and abide by
throughout all of their interactions with players. This is viewed as a negative aspect by any firm
in the industry and limits their power over its suppliers. Fans, media outlets, and corporations
make up the NBA’s buyers and as a group carry a substantial amount of power. Without any
one buyer, any firm in the NBA would suffer financially and be unable to carry on its day-to-day
operations. Due to the casual nature of the majority of NBA fans, the threat of substitute
products is relatively high to a firm in the NBA. Fans would have a low switching cost to switch
to another sport. The competitive rivalry of the industry is low due to the equality-driven
structure of the league. There are a few aspects to level the competition in the league such as
salary caps, revenue sharing, reverse draft picks, and maintaining authority over expansion.

4. We believe that the Charlotte Hornets franchise is a good opportunity for the fund for
various reasons. First, there have been a number of private equity transactions in the sports
arena that have generated sizeable returns for investors and fund managers. The major sports
popularity in the United States has continued to grow tremendously and there is no sign of it
slowing in the near future. Basketball has even picked up popularity since the turn of the
century. Due to past successes and a growing market, this could be a very profitable
investment. Second, we view the Charlotte Hornets as an underperforming operating asset. As
of January 2016, the Charlotte Hornets were worth an estimated $750 million dollars, which
ranks near the bottom of the National Basketball Association. The three most valuable
franchises in the NBA are the New York Knicks, Los Angeles Lakers, and Chicago Bulls. They are
worth an average of $2.67 billion dollars each. The Charlotte Hornets are worth significantly
less and we see an opportunity for our investment to grow and create favorable wealth not
only for the franchise, but also for XYZ Ventures. If we do our job well and create the next big
name in the NBA, there is obviously huge potential to grow.
The investment would garner the attention of local and national media, making us
accountable for every decision we make for the team. Our plan would be to help the current
owner, and basketball hall of famer, Michael Jordan revamp the culture and system, create
organizational pride, and provide a platform for players to succeed. We would start by
developing a relationship with Hornets management to increase the value of the team and
bring a more exciting brand of basketball to the city of Charlotte. Our initiative is to increase
the operating revenue for the team by bringing a new personality to the franchise and to
reduce costs that are eating into the bottom line. Although this might be seen as a contrarian

5. investment, there is long term equity value in the Hornets that should be a great opportunity.
We have identified 5 ways to create value in the franchise that we believe can take this
underperforming operating asset to a profit maximizing business.
The first way we would improve the organization would be through boosted operational
or game day revenue. This would include bolstering ticket sales, concessions, and parking at
the arena. According to Forbes, the Hornets only receive $28 per fan, which is abysmal.
Comparatively, the Lakers pull in $46 per fan and the Thunder pull in $70 per fan. This low
figure for the Hornets indicates that the citizens of Charlotte view the Hornets as nightly
entertainment, as opposed to being heavily invested in the team. We plan to bring in an expert
marketing team with a unique strategy. We want to make the games more entertaining, with
more half time shows, timeout dances, and a better overall fan experience. By selling this new
fun atmosphere, the team will soon be the talk of the town. We also plan to bring more unique
food items to the games other than the regular popcorn, hot dogs, and burgers. We plan to run
social media campaigns that create a new food item of the month that fans vote on through
Twitter and Facebook. This way we will be involving the end-consumers with the products they
will be enjoying at the game. Finally, we plan to revamp parking by adding a bigger valet
system. Fans love coming to the game, however parking has become a nightmare. We plan to
fix this headache to make the game day experience the best it can possibly be.
The second method to increase the value of the franchise is to negotiate new media
rights. ESPN and Turner sports have recently agreed to a 24-billion-dollar contract that will split
the revenue evenly among the 30 teams in the NBA. With this new deal, ESPN and Turner were
awarded the rights to 2300 games over nine years. Though this is a great source of revenue for

6. the team, this revenue sharing does not include contracts with local TV deals. Currently, the
Hornets do not have a network deal with a local sports channel. Comcast and Fox Sports have
expressed interest in signing a long-term television contract, which would broadcast games in
Charlotte, Raleigh-Durham, and the Winston-Salem market. If we were able to help get a deal
done, this could be an instrumental increase in revenue for a virtual licensing deal. The Hornets
would only be required to offer space for their television cameras and announcers for the
games. Nearly every team in professional sports is able to make money through this revenue
stream, and it is not far-fetched to think that the Hornets could make this a reality as early as
next basketball season.
The third mechanism to increase the value of the Hornets franchise is to bring in new
sponsorship opportunities. As of the current season, attendance has increased by 11% with the
team’s first playoff appearance in five years. With on court performance increasing, the
Hornets added 20 new sponsors, which helped bolster sponsorship revenue by 22%. Key
endorsements included Time Warner Cable and the Grant Thornton Accounting Firm. The
Hornet’s agreement with the two sponsors includes leasing a suite at the arena, courtside
advertising, and having the firms name attached with a private company for roughly 33 million
dollars each. We also plan to offer other perks to sponsors including first rights to advertise on
local television during the games as well as opportunities to meet the players. These deals show
that as fan attendance increases, new sponsorship opportunities go hand-in-hand. We believe
that fan attendance will increase due to an increase in on the court performance and other
organizational changes that we have detailed. Therefore it is logical to project more

7. sponsorship opportunities in the future for the franchise and thus a growth in this revenue
stream.
One vastly under-utilized resource the team has not tapped into is iconic brand appeal
of team owner Michael Jordan. Michael Jordan is a legendary figure not only in the arena of
basketball but global reach. As of March 2016, Jordan has endorsement contracts with Nike,
Sirius Radio, Gatorade, Hanes, and XEL at an estimated $547.6 million dollars. This could be an
immense, untapped revenue stream for the franchise. One strategy we were considering was
to place the iconic Jordan logo on the court to associate the success of Jordan with the
Charlotte Hornets. Another idea is to leverage the existing Nike partnership with Michael to
make a unique line of Charlotte Hornet basketball shoes. This way the franchise could possibly
gain popularity as the shoes gain popularity. The biggest basketball shoe brand in the world is
the Jordan brand. If the franchise could capitalize on this opportunity, it could be huge for the
successful growth of the Hornets. Finally, we want to get Michael more involved with the
players on the team. After playing the game at such a high level for so many years, it is a shame
to not see him coaching the players at least as an assistant. The players could vastly increase
their performance on the court with his help. As team performance increases, so too does
every facet of revenue for the team. We believe these techniques will increase fan attendance
and affiliation with the team, and thus will boost revenue.
The fourth method to increase franchise value is to bolster merchandise and licensing
sales. The Hornets rank 26th in apparel and licensed good sales. Sponsors are continuing to
throw money at NBA clubs to get brand names on the front of Jersey’s and t-shirts. Over the
past 5 years, merchandise sales have nearly doubled, however Charlotte has yet to take a huge

8. share of this extra revenue. In order to help grow this revenue stream, we want to facilitate a
deal between a major company and the Charlotte Hornets to place their logo on the front of
merchandise and jerseys. Teams in the NBA do not place alternate logos on the front of the
jerseys to preserve the integrity of team logos, however, it is not against NBA rules to place a
sponsorship logo on the front of merchandise and fan jerseys. According to the Deloitte
rankings, Manchester United signed a seven year, $559 million dollar deal with general motors
to place the Chevy logo on the front of the jerseys. By adopting the sponsorship strategy used
in Premier League Soccer, The Hornets could vastly improve its merchandise sales with brand
association. Though it will not provide over 500 million dollars in extra revenue, it is a unique
idea that could set the stage for the future of merchandising sales in the NBA. Although this
method will not actually increase merchandise sales for the Charlotte Hornets, of the
merchandise they do sell, the revenue per item will instantaneously go up, with a minimal cost
of adding a logo. This will drive profit margins up and go straight to the bottom line for the
franchise.
The fifth and final method to boost the value of the Charlotte Hornets is to use subsidies
for stadium funding. As of 2008, the city of Charlotte pledged 265 million dollars for arena
renovations, paid for with hotel and rental car taxes. The arena is used for for a variety of
events including games for the NHL’s Carolina Hurricanes, numerous NCAA basketball games,
and even NASCAR events. By serving as a venue for additional events, there has been
significant wear of the arena. Charlotte taxpayers have been open to the idea of new tax
proposals to help fund renovations for the arena. In 2014, the city council had issued new
municipal bonds and gave the Hornets $34 million dollars. The team is planning to use a

9. majority of this funding to install a state of the art scoreboard with 1080p resolution in the
center of the arena. In addition to the new scoreboard, the team is adding four retractable
scoreboards in the corners of the upper level and renovating the suits and locker rooms. We
believe that by lobbying for additional funding, we could be able to again fund renovations for
the arena. With a newer, nicer atmosphere at games, fans will respond better to increases in
food/drink, ticket prices, and merchandise items. This revenue opportunity may not be present
immediately, however as the team gets better and time goes on, we will be able to increase the
value of the franchise by increasing prices across the board of products offered at the games.
There are a number of challenges and deal risks we would face partnering with the
franchise in an acquisition. In sports leagues, there are 29 to 30 owners that are competing for
the same resources, players, and coaches. It is the ultimate people orientated business and
building the right combination of scouts, coaches, and franchise executives is one of the
hardest things to do for a sports franchise. Ultimately, we want to establish stability and a
culture of winning within the franchise. Unfortunately, fans would want to see immediate
results with the team. If we do not institute the correct culture, fans will be the first ones to
lash out against the team. This will be a direct hit to the revenues the team can generate. The
good news is that Charlotte is not accustomed to winning, therefore we would be granted a
level of patience from the franchise. However, the pressure to win in the NBA is tremendous,
and a series of losing seasons could cost the city its team. We have seen recently different
teams have to relocate to different cities after fan-bases give up on their franchises. In
basketball it is all too familiar for the Hornets used to be from New Orleans, and the
Supersonics were relocated from Seattle to Oklahoma City and renamed the Thunder. Although

10. this would not result in a complete loss of investment, it would be a risk where declining
revenues and even negative net income would not generate value for our investment.
Perhaps the biggest deal risk derives from the chance of a lock-out by the players. If the
players union and the owners are not able to reach an agreement when the current deal
expires, the team could potentially lose all game revenues from the games not being played.
The contract currently allows for 8 more years, however it can be resettled as early as 2017.
Lock-outs have happened in the past. In 1998, the season was shortened by 32 games, resulting
in a loss of nearly 40 percent of game revenue. In 2011, the season was shortened by 16 games.
Especially for an underperforming team, this can be devastating for investors. The last thing we
would want to happen is yet another labor dispute in 2017. We would want to consult with the
player’s union representatives as well as the NBA owners in order to ensure that the next
contract negotiations are going smoothly and will not cause another serious lock-out situation.
Another risk with the NBA is that the best way to generate talent comes from the draft.
The control of generating talent is out of your hand as an investor when it comes to making
general management decisions. You will not be able to ensure that they are picking the right
players, making the right coaching decisions, and ultimately will only have a say in the profit
maximizing complexities of the business. The draft is also set up as a lottery system. If we were
to have a horrific losing season, there is no guarantee to getting the best player available in the
following draft. However, with the right executives, scouts, and coaches in place, establishing a
winning program will include developing players to maximize their potential. Draft picks are
only part of the equation.

11. Another deal risk is the actual players on the team. We will not have control of what the
players do in their free time. We have seen in the NBA, NFL, and MLB that players get into
trouble with the law. This is a negative reflection on the organization and can deter fans from
showing up to games. It can even deter sponsors from associating their brand with your team
brand if you have players not acting correctly off the field. Thus, it could cost millions of
sponsorship dollars if players are behaving incorrectly. This is a constant risk that must be
monitored at all times throughout the season and off-season.
Another deal risk surfaces due to the abundance of college basketball teams in the area.
North Carolina has been home to storied college teams such as Duke, North Carolina Chapel
Hill, and Wake Forest. Many fans and alumni flock to watch their alma mater play and forgo
professional sports teams in the Charlotte area. However, with the recent success of the
Panthers and Hurricanes, the Charlotte sports fan on average spending more time watching
professional sports franchises. We want to capitalize on this opportunity and help the
management and front office develop key relationships that will bring awareness to the
Charlotte Hornets. Though this is not a huge risk for the franchise, close competitors will take
away some business from the Hornets.
The final deal risk we have identified is that this investment would account for roughly
15 percent of our committed capital. This is a huge risk to put a lot of our eggs in one basket. If
all goes well, we will obviously reap those rewards tremendously, however if the investment
does not go as planned, it will be extremely hard to justify to our limited partners. It is risky to
have one investment that can make or break the IRR on the fund for its future. It could affect
our ability to raise capital in the future, or could even break apart the fund.

12. The ultimate exit strategy would be to be bought out by another investor down the line
when value has been added and the purchase price would be along the lines of the value of the
top basketball sports franchises. Recently, Steve Ballmer bought the Los Angeles Clippers for an
extremely high price of 2 billion dollars. He saw the vision of the increase in value, and had a
special attraction to the team. Previous owners were able to profit tremendously off of the
transaction, however specifics were not disclosed. In an ideal scenario, we would be able to
return significant dollars to the fund immediately when we wanted to sell. However, the
trouble would be finding the buyer at the right price and the right time. There are not endless
billionaires willing to buy a sports franchise. Thus, it is a huge risk in that we could end up being
“stuck” with our investment for a number of years until the right buyer comes along.
Fortunately, even if the perfect investor did not come in to the business right at the moment
we wanted to exit, the team would likely be profitable, and we would be generating stable
revenues for XYZ Ventures.
In conclusion, we have detailed the investment opportunity with the Charlotte Hornets
Franchise. We are seeking to make a minority investment to partner with the Hornets
management and ownership to bolster the value of the franchise. XYZ partners will have to go
through a very thorough process with the NBA in order for approval of our ownership stake.
Therefore, we should approach this as a long-term investment rather than a short term quick
flip. Our goal is to invest with the franchise for the long haul and facilitate the team rebuild its
on-court performance, team brand, and bring a product that will fuel demand in the city of
Charlotte.