How investment in equipment will work

The National Football League is opening its doors to private equity investors, but is limiting its involvement in the league for now.

Last week, NFL team owners voted to allow an initial group of private equity firms to take up to a 10% stake in a franchise. Still, investors are expected to take quiet roles in America's most exclusive professional sports club.

The vote came after lengthy discussions, and the NFL had the benefit of seeing how private equity ownership played out in other major U.S. leagues, which have allowed it since 2019.

“This means that big sports is an investment class right now,” Bain Capital co-president Steve Pagliuca said on CNBC last week. “This is not a case where private equity is going to come in and exert influence over the franchise.”

According to industry experts, many teams will likely welcome private equity funding, which could go toward stadium improvements and construction. It could also help cushion teams’ skyrocketing valuations, which are worth an average of $6.49 billion, according to CNBC’s official 2024 NFL team valuations.

While the league and its owners will welcome private equity money, it won't give corporations a full seat at the table.

NFL teams have traditionally been owned by families (sometimes for multiple generations) and high-net-worth individuals. Franchise purchase prices have skyrocketed in recent years: the Washington Commanders sold for $6.25 billion in 2023, the Denver Broncos changed hands for a price of $6.2 billion in 2022, and the Carolina Panthers sold in 2018 for $2.275 billion.

“The problem is that there aren't many people who can afford a team anymore. How many families have that much money?” said Shirin Malkani, co-chair of Perkins Coie's sports industry group. “So there's a liquidity problem if you don't allow more entities to enter the market as buyers. Ultimately, this will help valuations. It's a no-brainer.”

For team-owning families facing inheritance taxes, selling a stake to private equity firms also offers some relief.

“You can use this additional liquidity to go in any direction. That 10% from private equity represents an opportunity, but not an obligation,” said Anthony Mulrain, co-chair of the sports industry team at law firm Holland & Knight, adding that having access to private equity allows them to make those payments.

The NFL is the last major U.S. sports league to allow private equity firms to take a stake in its teams, and the league was likely watching closely.

Since 2019, the National Basketball Association, Major League Baseball, the National Hockey League and Major League Soccer have begun allowing private equity ownership of up to 30% of teams.

“The NFL has been very thoughtful in its approach,” said Michael Considine, a partner at Kirkland & Ellis who leads the law firm's professional sports efforts. “Just like every other league that has created rules around institutional capital, these rules were created to protect the integrity of the game.”

Under NFL rules, each fund or consortium would be allowed to trade with up to six teams. The minimum holding period for their investments would be six years.

The league has also informally communicated to owners and investment firms that it intends to keep a percentage of private equity proceeds on future ownership stake sales, CNBC previously reported. No other league keeps a percentage of so-called carry, the investment profits from a fund that managers typically receive as compensation.

“We think a minimal distribution, and it's very minimal; the number hasn't been finalized yet, of the proceeds is equitable and the private equity groups have agreed,” Cleveland Browns owner Jimmy Haslam said on CNBC.

Private equity has been keen to buy into the sport as team valuations rise, largely due to growing media rights deals, but the industry will have little to do with the teams beyond providing them with funding.

As investors, private equity firms often take on board and management roles. The playbook for sports is different, especially in the United States, where companies don't have much control over team operations and personnel.

While professional sports teams, especially in the NFL, tend to be a recession-proof investment, limited partners who invest their capital in private equity funds could still face some challenges.

Private equity investments typically have a fixed duration — in many cases, it can range from three to seven years — and an expected return. Sports team investments don’t offer a clear exit or path to gaining control, nor do they typically allow for governance, which can run afoul of some limited partner requirements in funds, said some private equity investors who declined to be identified because of their investments.

“These ownership interests are basically those of a silent partner, so nothing changes for the team. Everything stays the same,” said Holland & Knight's Mulrain.

“But many private equity firms invest in two things: cash and human capital. So there can be some managerial ingenuity where investors whisper in the owners' ears when it comes to the franchise's connectivity to other businesses,” Mulrain added.

The NFL's reluctance to allow private equity investments is reflected not only in the length of time it took, but also in the short list of investors initially approved to join the group.

Together, these investors have $2 trillion in assets and intend to deploy $12 billion of capital to raise, including leverage, over time, CNBC previously reported.

Approved funds have a track record of investing in sports as well as a significant amount of money at their disposal.

The three individual companies that were given approval to invest in NFL teams have amassed a large amount of investment in a short period of time.

While Ares Management is a giant across the board as an investor, it officially planted its flag in sports in 2022 when it raised a $3.7 billion fund dedicated exclusively to sports and media. The fund also has an advisory board made up of former players and sports and media executives. The firm has already been part of several transactions involving equity or debt, in teams such as European soccer’s Atlético de Madrid, MLB’s San Diego Padres and the NHL’s Ottawa Senators, among others.

One of the newest investors on the approved list, Arctos Partners, has a slew of investments in teams that put it among potential NFL investors as the league discussions were underway, according to people familiar with the matter.

Founded in 2019, the firm closed its second sports-focused fund earlier this year, with a total of $4.1 billion in commitments. This is a quick follow-up to its first fund, which had closed with more than $3 billion in assets under management.

In that time, Arctos has acquired roughly two dozen stakes in sports and esports teams, including the NBA’s Golden State Warriors, MLB’s Los Angeles Dodgers and MLS’s Real Salt Lake. It also owns stakes in Harris Blitzer Sports & Entertainment, the owner of the NHL’s New Jersey Devils and the NBA’s Philadelphia 76ers, along with Fenway Sports Group, parent of MLB’s Boston Red Sox and the NHL’s Pittsburgh Penguins.

Arctos also owns a stake in the NHL's Tampa Bay Lightning, which is up for sale. Arctos is expected to divest its stake as part of the process, according to a person familiar with the matter.

Arctos would be the only firm approved to invest in equity in each of the five most popular North American sports leagues, pending final approval.

Sixth Street Partners, another firm that is among the initial circle of investors who can buy stakes in NFL teams, invests in a variety of sectors but has been rapidly increasing its presence in media and sports. The firm has invested in Bay FC of the NWSL, the San Antonio Spurs of the NBA and Real Madrid of Spanish soccer, as well as in the media rights of FC Barcelona.

In addition to these three firms, a consortium formed by Dynasty Equity, Carlyle Group, CVC Capital Partners and Ludis, a platform founded by investor and former NFL running back Curtis Martin, may acquire stakes in teams.

Investors declined to comment beyond previous statements released after the NFL vote.

Note: Sixth Street Partners has invested in the media rights of Spanish club FC Barcelona.