Private Equity in the NFL is a Double-Edged Sword Yearning For Blood
The NFL has exploded. The league’s initiatives to go worldwide, with games this year in Brazil, Germany, Mexico City, and London signals a sign that the organization has set its sights on a long horizon– one that’s cash-filled and attention grabbing. With expansion however, comes costs– usually significantly. Growth also comes with an unintended consequence.
As the league is in the midst of its golden era, team valuations have soared to astronomical heights. The NFL salary cap saw its biggest nominal jump ever this year, topping $30 million. Miami Dolphins’ owner Stephen Ross turned down a $10 billion offer in May to buy the team and all its assets. The average NFL team is now worth $5.1 billion— a 14% increase from last year. The Washington Commanders– a subpar team over the past five years grappled with lawsuits and bad press sold for $6.1 billion just last year, a billion dollars over the 50th percentile.
All that skyrocketing has started to price investors out– namely whole purchasers. Rising costs have begun to crowd out would-be buyers as the league deals with a shrinking pool of individuals looking to acquire stakes in teams. One solution that has been proposed and put on the table: institutional investment.
Private equity firms– companies whose sole purpose is to manage investors’ funds and allocate them by buying stakes in entities, have been nipping at the NFL’s heels for a while. The league is the last bulwark in a sports world quickly consumed by succumbing to external investment in order to fuel rapid expansion. The NFL, unlike nearly every other major sports league in the United States still bans private equity firms from buying out any stake– minority or controlling in teams. That ban stretches well beyond just private equity, it encompasses sovereign wealth funds, pension funds, 401k managers, and even the modern day individual investor.
The league dictates that a controlling owner must at least have a 30% stake in the franchise, caps the ownership group at 24, and prohibits publicly-traded corporations from buying stakes. The Green Bay Packers– who are publicly-owned by their fans have been grandfathered into this rule since the team has been owned by the community since its inception. Every other team must abide or get lost.
The NFL has been able to get by with these stringent laws for nearly all of its lifetime because of its’ relative brand presence and popularity. The league employs a revenue-sharing model for its teams similar to other sports but one could argue it’s much more robust. Teams have a hard salary cap and cannot get around it by paying a luxury tax– which makes small market teams much more enticing and equitable to the average investor. Fanbases have usually been loyal and owning a team has historically guaranteed a steady revenue stream in order to sustain operations and turn a profit.
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It’s brand presence as the country’s number one sport has also given it bargaining power to advertisers and broadcast companies. The NFL has been able to get top-dollar for its broadcasting rights and events like the Super Bowl and playoffs have forced companies to be obsequious to the league’s asks. With all that, the league is still focused on expansion– skating quickly into global dominance.
Team values have been on the uptick more swift than paced and there seems to be no signs of slowing down. From 2005 to 2008, the league increased its revenue from $6.15 billion to $7.47 billion, a 21% increase. Using the same time length, 2018-2022, growth topped 30%, showing an explosion in team growth. While the NFL can keep up strictly revenue-wise, the league and teams would like to start hedging their bets. Investment from private equity firms means that teams and owners won’t have to sink as much money into projects with the risk of it going haywire and south. Teams would essentially be able to take on less liability while still reaping the rewards when money is pooled into projects with multiple sources.
This also means valuations are getting way too high, pricing prospective investors out and limiting the cash-out and purchase options for franchises.
“Unless you’re one of the wealthiest 50 people [in the world], writing a $5 billion equity check is pretty hard for anyone,” Commanders’ new owner Josh Harris said.
In recent years, teams and owners have tried to find new sources of funding to leverage their investments. The tried and true method has, for most of teams’ existence has been to rely on taxpayer money for capital expenditures. However, as fuel for public funding massive projects that are hard to justify utilizing government money on wavers, teams are coming to terms with the fact that that might not a sustainable option after all.
Voters in Kansas City overwhelmingly rejected a sales tax increase that would’ve funded $800 million to a renovation of Arrowhead Stadium. A portion of that sum would’ve also gone to the MLB’s Royals who planned to use that money for a new downtown stadium. The measure failed with 58% of voters making clear that they didn’t want to use taxpayer money– with the notion that billionaire owners should pay their own way for renovations.
This creates a unique opportunity for private equity firms, who are able to inject the league’s 31-eligible franchises (excluding Green Bay due to their unique ownership structure) with much needed cash. Owners would get the necessary funding they desire by allowing for private equity firms to take a stake in a franchise. On the same note, private equity funding would allow owners to get some well-needed liquidity when it comes to their franchises. They can cash out at any time by selling shares to the firms, who will gladly take them if they feel they can turn a profit on them. For the owner, there’s no more restructuring and figuring out how to avoid the 24-owner mark.
“These people are not just the owners of sports teams,” said Brad Humphreys, a sports economist and professor of economics at West Virginia University. “Look at where most of these guys made their money. It’s not in sports. It’s somewhere else.
“You’d probably love to have $100, $200, $300 million cash infusion so you can go and invest that in some other of your very profitable business ventures where you made your money before you bought a team.”
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On the other hand comes the pitfalls of private equity. If the NFL allows PE firms to purchase controlling shares (which seems unlikely), those firms rarely have much incentive to listen to the public. As with any financial services firm– or any company for that manner, PE firms are out to make money. They’ll simply follow the profit if the money isn’t there. Firms can simply pack up and move cities if profits aren’t what they anticipated in a city as they have no physical ties to a certain geographical location.
The more likely option in terms of pure structure is that the NFL follows templates from both the NBA and NHL where only sovereign wealth funds and private equity firms are allowed into the club. This bars them of any real decision making power. It’s also improbable that the NFL will allow the 30% rule for owners to dissipate. The benchmark sets a solid and well-maintained guideline for the structuring of a team, something the league wants to retain.
With most cash-hungry and feisty investors, they want to see a return on investment. This means that private equity firms could demand concessions at the mercy of fans and other stakeholders in the franchise. Whether that means increasing ticket prices and stadium food or refusing to make improvements on stadiums is unclear until it’s set in motion in the NFL, but be wary of the negative impacts.
Most PE firms have horizons– the timeline in which the firm is legally and contractually obligated to sell their shares, of ten years. With such a short lifespan and investment in the franchise, firms don’t have time or the impetus to sink money in long-term projects that will take a long time to recuperate. This means building a new stadium might not be in the cards, and teams that need new stadiums, for example the Commanders and Chiefs might not even get the initial private equity investment until they build a stadium since PE firms wouldn’t want to touch it with a ten-foot pole.
The other issue is private equity firms only increase the gap and disconnect between the fans and a team’s ownership when management should be trying to bridge it.
“In business, the key is EBITDA or stock price. In sports, it’s about winning games and delivering championships for the city; the second job is to create memories and be a steward to these franchises,” Harris says.
PE firms tend to prioritize profits over the experience of the fan, leading to much more mistrust and malaise within an organization. The NFL has always been trying to erase the “at the end of the day it’s a business” adage, a decision to loop in institutional investors goes against that very ethos– a direct rebut to the NFL’s stance on company goals.
Nearly every expert agrees that private equity firms, if allowed, should take a passive role in investing in franchises. This is the same approach that other leagues have taken in order to find a happy medium between capital growth and maintaining a product for fans. MLS and the NBA, NHL and NWSL allow for up to 20% ownership by one fund. MLB has a 15% cap.
In Harris’ perfect world, “no one can force an exit; the primary owner decides pretty much everything.”
“The value of the franchises are reaching such levels, the opportunity to have more flexibility to provide financing and keep a family in control without having to sell major blocks of their ownership—there are models that can work,” says Arthur Blank, the Atlanta Falcons owner. “It’s something the NFL is looking at from a positive standpoint, but we’ll see how it shakes out.”
The NFL is the bastion when it comes to financial purity in the world of sports. The league has survived on so long without having to rely on Wall Street directly. But there comes a time where it all comes full circle, and the league has to get with the times. In the MILB, one firm owns over 25% of teams. Diamond Baseball Holdings, has steadily been buying up teams to add to their portfolio, which has brought up questions of a conflict of interest.
RedBird Capital Partners, a New York-based firm has invested heavily in the UFL and Boston Red Sox. Their website states, “RedBird invests with an entrepreneurial, company-building mentality, with an emphasis on capital appreciation and compounding equity returns over longer holding periods.”
Whether or not the league decides to go that route is unknown– but one thing is certain, the money will be there waiting.
