Business Blog: Private equity's NFL toss-up

Presented by CIBC

Private equity makes it into the end zone as the NFL allows investments—but who is getting the better deal?

August 29, 2024

Morning! This is Luisa Beltran, finance reporter, subbing for Allie.

We've had some time to digest the NFL's groundbreaking policy change that will allow private equity to invest in teams. The changes, announced late Tuesday after an owner vote, spell out that private equity funds can own up to 10% of a franchise, and investors must hold their position for at least six years. The NFL provisionally preapproved several PE firms to invest in NFL teams, including Arctos Partners, Ares Management, Sixth Street, and a consortium that includes Blackstone, Carlyle, CVC Capital Partners, Dynasty Equity, and Ludis, an investment company run by former NFL player Curtis Martin.

Most of the executives I've spoken to are very excited by the pending change. Dan Malone, a partner at law firm Haynes Boone, who is cohead of the private equity practice and a member of the sports and marketing department, thinks the framework is a great deal for private equity. The NFL is the holy grail in terms of revenue and customer engagement in sports, Malone said. "[This] opens the door to an otherwise exclusive market that private equity just does not have access to," he said. Malone thinks the new policy is a first step in a possible long-term relationship between the NFL and institutional investors and "not a one-bite, only-bite" type of scenario, he said.

While other leagues allow private equity to take up 30%, the NFL has set the maximum that one fund can invest in a franchise at 10% while the minimum is 3%. This requirement will help spur a higher scarcity value for NFL teams, said Matthew Eisler, global head of sports at the law firm Hogan Lovells. Eisler has advised on many sports deals, including the $6 billion sale of the Washington Commanders last year and the $4.65 billion sale of Denver Broncos in 2022.

Eisler also thinks the NFL agreement is a good deal. "There are only a few funds allowed to [invest] which gives them a jump start on current valuations," he said. "There is a new wave of media deals kicking into the market in 2030 which could continue to increase valuations. Plus, this has the added benefit of raising the profile of these funds and attracting more LPs."

The average NFL team is worth about $6 billion, so the collective fair-market value of all 32 franchises is roughly $190 billion, according to Sportico. The NFL's policy means that a new avenue of liquidity, about $19 billion, could become available to owners. "How many high-net-worth individuals would it take to get to $19 billion?" Eisler said.

Not that everyone is enamored with the NFL's announcement. One private equity executive, who has advised professional sports leagues, said it will be hard for private equity to exit, calling the teams "illiquid, low IRR investments." The NFL is just creating liquidity for its billionaire team owners, the PE exec said. "I don't get the investment interest by any sophisticated investor, nor the media's fascination," they said.

Malone, of Haynes Boone, said there are ancillary opportunities like media and development rights, as well as stadium and licensing, that could be available to minority owners that have to keep the investment for longer than six years. "There are incredible opportunities beyond the investment in the franchise for revenue generation," Malone said.

The NFL's policy change also comes with terms that hit at the heart of private equity, namely the carry. If a private equity firm sells a stake in an NFL team, the league gets a cut of the profit. It's unclear how big this cut will be. The PE investments will also be common equity, so the downside protection that other leagues afford private equity won't be available with the NFL.

The NFL has not disclosed the details of the PE profit sharing. "It all depends on how the sharing would work. At a certain price point it may make investing unattractive," said Stephen Roddenberry, a partner with law firm Akerman, who has advised on many M&A transactions, spin-offs, and restructurings. "The PE firms have fiduciary duties to their investors, so the projected returns must be attractive.”

Personnel change: David Fann has joined VSS Capital Partners as a senior managing director and head of IR. Fann was previously vice chairman of Apogem Capital, a subsidiary of New York Life Investment Management. He is the former president and CEO of TorreyCove Capital Partners, an alternative investment advisor that was sold to Aksia in 2020.

Luisa Beltran
Twitter:@luisarbeltran
Email: luisa.beltran@fortune.com
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Nina Ajemian curated the deals section of today's newsletter.

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PRIVATE EQUITY

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