How investing in teams will work

The National Football League is opening its gates to private equity investors — but it is limiting their involvement in the league for now.

Last week, NFL team owners voted to allow an initial group of private equity firms to acquire up to a 10% stake of a franchise. Still, the investors are meant to take silent roles in the U.S.’ most exclusive professional sports club.

The vote followed extended 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.

“It really means big sports is an investment class right now,” Bain Capital co-chair Steve Pagliuca said on CNBC last week. “This isn’t a case where private equity is going to come in and have influence on the franchise.”

Many teams will likely welcome private equity’s deep pockets, industry experts said. The funding could go toward stadium upgrades and construction. It could also help to cushion the skyrocketing valuations of teams, 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 cash, it will not give the firms a full seat at the table.

NFL teams have traditionally been owned by families — sometimes for multiple generations — and high net worth individuals. Purchase prices for franchises have skyrocketed in recent years, as 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 not many people can afford a team anymore. How many families have that much money?” said Shirin Malkani, co-chair of the sports industry group at Perkins Coie. “So there is a liquidity problem if you don’t let more entities into the market as buyers. It will ultimately help valuations. This is a no-brainer.”

For team-owning families facing estate taxes, offloading a stake to private equity also opens up breathing room.

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

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

Since 2019, the National Basketball Association, Major League Baseball, the National Hockey League and Major League Soccer have begun to allow 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 pro sports efforts. “Just like in every other league that has created rules around institutional capital, these rules are created to protect the integrity of the game.”

Under the NFL’s rules, each fund or consortium will be able to do deals with up to six teams. The minimum hold period for their investments would be six years.

The league has also informally told owners and the investment firms that it intends to take a percentage of private equity profits on future sales of ownership stakes, CNBC previously reported. No other league takes a percentage of the so-called carry — a fund’s investment profits that managers typically receive as compensation.

“We thought that a minimal, and it’s very minimal — the number hasn’t been finalized yet — sharing of the profits is equitable and the private equity groups agreed,” said Cleveland Browns owner Jimmy Haslam on CNBC.

Private equity has been eager to take stakes in sports as team valuations rise, mainly due to ballooning media rights deals. But the industry will have little to do with the teams beyond supplying funding.

As investors, private equity firms often take management and board roles. The playbook for sports is different, especially in the U.S., where firms do not get much control over operations and team personnel.

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

Private equity investments typically have a set duration — it can range from three to seven years in many cases — and an expected return. Investments in sports teams do not offer a clear exit or a path to control, nor do they typically allow governance, which may chafe against some limited partner requirements in funds, said some private equity investors who preferred not to be named due to their investments.

“These ownership interests are basically those of a silent partner, so nothing changes for the team. It’s business as usual,” said Holland & Knight’s Mulrain.

“But many private equity firms make investments of two things: cash and human capital. So there may be some management ingenuity where the investors whisper into the owners’ ears when it comes to connectivity of the franchise and other businesses,” Mulrain added.

The NFL’s reluctance to allow private equity investment shows not only in how long it took, but also in the short list of investors initially approved to enter the mix.

Collectively, these investors have $2 trillion in assets and intend to commit $12 billion of capital to be raised, inclusive of leverage, over time, CNBC previously reported.

The approved funds each have a track record of investing in sports, as well as a large amount of money at their disposal.

The three individual firms that were given approval to invest in NFL teams have amassed a deep bench of investments in a short time period.

While Ares Management is a behemoth 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 consisting of former players and sports and media executives. The firm has already been part of various transactions involving either equity or debt, in teams including European soccer’s Atletico de Madrid, MLB’s San Diego Padres and the NHL’s Ottawa Senators, among others.

One of the newer investors on the approved list, Arctos Partners, has a deep bench of team investments that put it among the likely NFL investors as league discussions occurred, according to people familiar with the matter.

Founded in 2019, the firm closed its second sports-focused fund earlier this year, totaling $4.1 billion in commitments. This was 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 e-sports teams, including the NBA’s Golden State Warriors, MLB’s Los Angeles Dodgers and MLS’ Real Salt Lake. It also owns stakes in Harris Blitzer Sports & Entertainment, the owner of the NHL’s New Jersey Devils and NBA’s Philadelphia 76ers, along with Fenway Sports Group, parent of the MLB’s Boston Red Sox and 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 exit 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 across each of the five most-popular major North American sports leagues, pending final approval.

Sixth Street Partners, another firm among the initial circle of investors that can take a stake in NFL teams, invests across various industries, but has been quickly growing its footprint in media and sports. The firm has invested in the NWSL’s Bay F.C., the NBA’s San Antonio Spurs and Spanish soccer’s Real Madrid, as well as media rights in Spanish league soccer.

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

The investors declined to comment beyond earlier statements released after the NFL vote.