PE Investment in the NFL Kicks Off: What Dealmakers Should Know

It may still technically be summer, but for many, football season marks the unofficial kickoff to autumn. This year may be an especially exciting one for M&A dealmakers after the National Football League cleared the way for PE investment in teams up to 10% last August.

Speaking with Middle Market Growth, Mark Wilhelm, a partner in the Private Equity Practice Group at Troutman Pepper, shares how investments in NFL teams could shape out and what team owners should consider as PE steps onto their playing field. 

Middle Market Growth: As private equity interest in sports grows, what is driving interest among PE firms in the NFL specifically?

Mark Wilhelm: The NFL provides a unique and interesting opportunity because the league and its teams are highly valuable assets that have appreciated in value year over year for a long time. But up to this point the teams have not been accessible to private equity funds as investments. In a sense, until recently it has been as if the NFL owned a vacant lot in the middle of a major downtown business district. All of the other landowners (the other professional sports leagues, in this analogy) have allowed development but the NFL held out. The NFL has now come around to developing its lot, and there are plenty of investors excited to be a part of that development.

MMG: What kind of deal structures should we expect to see as a result of PE entering the space?

MH: I would expect the legal structures for investments in teams to be consistent with the tried-and-tested structures used by private equity investors in investments in other industries. While I generally subscribe to the view that “sports are different,” state laws and the Internal Revenue Code will still cause teams and investors to use a spiderweb of corporations, limited liability companies and limited partnerships to implement the typical economic, control and tax structuring associated with these investments.

MMG: What issues do you anticipate arising from PE ownership in NFL teams?

MH: The initial problem will be a lack of precedent deals: To this point, there are no examples of what an investment in an NFL team looks like. Of course, there are similar transactions that have happened in other professional sports leagues that will almost certainly serve as models for an NFL team investment. The first couple of owners or teams to sell a minority stake, however, will set the mark for both economic and legal terms. Those owners and teams will be looking at later deals, asking if they could have done better. Owners and teams who take on an investor after the initial flurry of investment activity will try to improve upon whatever initial terms become known to them. And private equity funds will try to use the initial deals as a benchmark for pricing later deals. All of this to say, it is critically important to all parties involved to achieve favorable terms in the initial investments.

MMG: What impact would teams see as a result of selling a stake to a private investor?

MH: The NFL appears to have deeply considered the perceived and actual on-the-field impact of private equity investments when it created its requirements and limitations around private equity investments. Consistent with how other leagues have approached these investments, it’s been reported that the NFL has implemented percentage ownership limitations and required that equity associated with those investments be non-voting. Those requirements will naturally limit the influence that a private equity investor can have over the day-to-day operations of the team.

Also consider that an NFL team taking on a private equity partner could be the business equivalent of the introduction of advanced statistics in baseball: New partners will likely bring new thoughts and business strategies that to this point have not been implemented or tested. Teams that take on private equity investments will undoubtedly have access to the best resources that private equity sponsors can provide to improve the business operations of the team. And those private equity-backed teams may end up being some of the most profitable in the league.

Private equity-backed teams may end up being some of the most profitable in the league.

MMG: What considerations are there for team owners considering selling a stake?

MH: Owners and teams will first have to consider who is selling equity in the team: the owner or the team? The answer to that question will determine where the money from the sale goes and the related use of proceeds. Team owners likely have a large proportion of their personal wealth tied up in an incredibly illiquid asset—the team they own. If an owner needs cash or wants to mitigate the risk associated with having so much wealth tied up in an illiquid asset that could lose value in the future, then they may decide this is the right time to sell a portion of their stake.

Teams on the other hand could use the proceeds from private equity investors as an alternative to debt financing to fund operations or capital projects, like new stadiums or practice facilities. That decision to use equity financing will obviously be made on a team-by-team basis and be very dependent upon the facts and circumstances of any given situation. However, teams may find the option valuable in a high interest rate environment or where debt financing is not reasonably available on commercially acceptable terms.

MMG: What will continue to drive PE interest in the NFL in the years ahead? How do you expect this space to evolve?

MH: One of the most critical drivers of continued private equity interest in NFL teams will be the sustained and projected increase in value of NFL teams. Whether teams increase in value is obviously subject to a huge number of extrinsic known and unknown risks. For example, will the NFL continue to command incredibly lucrative media licensing deals? Will the reported decrease in youth participation in football affect the popularity of the sport and quality of athletes around a decade from now when the NFL-mandated initial hold period on private equity investments is expiring? Will a LIV Golf-type competitor emerge and threaten the NFL’s decades-long dominance in football?

Of course, the NFL is at the same time taking active steps to increase the value of teams by, for example, playing games in international sites strategically placed around the world and attempting to capitalize on the focus on games (down to a play-by-play basis), teams and individual players brought about by the relaxation of gambling restrictions in the United States.

But assuming those risks and opportunities are managed and the value of teams grow, I wouldn’t be surprised to see the number of private equity funds allowed to invest in NFL teams grow. Once the currently approved private equity investors have met their hold periods, they will need to make a strategic decision about whether to liquidate their position in a given team. At that point, another private equity fund is the likely buyer of that interest. Will the currently approved sponsors simply trade ownership interests back and forth among one another? I think it’s more likely that new investors are allowed to invest.

Carolyn Vallejo is ACG’s digital editor.