In a few days, the National Football League (NFL) season will begin. Millions of Americans are chattering about the upcoming season and getting involved with their fantasy football groups. For a business news junkie such as I, what turned my head was a rule change that will let private equity firms** buy in to NFL franchise ownership.
There are some caveats:
1) A maximum of 10% of any club can be owned by private equity funds. More than one fund can be involved but the total may not exceed 10%.
2) Pension funds and sovereign wealth funds (often foreign governments) are not allowed.
3) The controlling owner of a team still must maintain a minimum of 30% ownership. Additionally, no team may have more than 25 total owners.
4) Private equity will have no voting power.
5) Personnel decisions of any magnitude will not be made or involve the private equity folks.
6) A private equity fund can invest in as many as six NFL teams but must hold at least a 3% equity position on each team it chooses. Also, the holding cannot be sold for a minimum of six years.
7) A careful review process will be taken to be sure that every private equity group passes muster with the NFL.
Okay, so who cares?
Well, actually this is nothing new in the world of sports. The MLB, NBA, NHL and Men and Women’s Soccer leagues all allow 30% ownership of a franchise by private equity. The NBA, NHL, and MLS also allow a single private equity fund to own 20% of a franchise while the MLB and NWSL limit it to 15%.
Why is this being done? For years, major league sports franchises were often referred to as a plaything of a rich businessperson or family. As the value of franchises have soared, particularly in the NFL, it may be hard to find new buyers.
As an aside, I have often found people refer to successful people as billionaires. Well, a billion is one thousand million. According to FORBES, there are approximately 2,780 billionaires on earth with the U.S. having just over a quarter. The number floats a bit depending on equity and real estate market conditions. So, there are not that many people out there who can buy a franchise outright. Some have no interest in it, others wish to keep a low profile, and others do not want to sell lucrative business interests or take a huge loan to buy the franchise.
Also, prices are moving up smartly. Just last year, the Washington Commanders sold for an estimated $6 billion. Other franchisees are easily worth significantly more and several years from now could easily double in value.
Selling off a portion of your club without losing any voting control “unlocks” some value for the franchise owners. Rumblings are that stadiums could get a facelift or facilities could be upgraded. The private equity folks are locked in for six years and, by then, the franchise could be worth much more.
Why get involved without voting rights? Owning a franchise or a small piece of one is the armchair dream of many. I did it myself. Back in the 90’s, the then Cleveland Indians (now Guardians) went “public”, and you could buy shares. As a child, my dad, a Midwesterner, generally only took us to Fenway Park in Boston when the Cleveland ballclub was visiting. It stuck with me. So, as a bit of a lark, I bought a few shares. It felt great even though I was not sent free playoff tickets. About 15 months later, I sold out for nearly triple my money when the club was purchased. I was no longer an “owner”, but it was a great, fun, lucky and somewhat lucrative experience.
So, some private equity groups may want to participate as voyeurs or for diversification or thinking that the long-term payout could be good when a franchise was sold.
Interestingly, many observers feel that private equity is often unsavory. You read that many are asset stripping operations where they buy a company, sell off divisions or products, pocket some money and employees are left high and dry in a firm that is greatly diminished in size or future prospects. Don’t believe it? Here is what Warren Buffett and the late great Charlie Munger had to say about it at last year’s Berkshire Hathaway annual meeting:
https://www.youtube.com/watch?v=r3_41Whvr1I
Or, for a deeper dive, read the recent book of my favorite financial journalist, Gretchen Morgenson—THESE ARE THE PLUNDERERS: HOW PRIVATE EQUITY RUNS—AND WRECKS--AMERICA.
With the NFL, to me, there is a likely twist. NFL owners are largely tough minded and smart billionaires. Maybe they are inviting private equity players into their tents but the owners may benefit far more you might think.
If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.
**What is private equity? The SEC defines it as “a pooled investment where the investor pools together the money invested in the fund by all the investors and uses that money to make investments on behalf of the fund. …….They often focus on long term investment opportunities that take time to sell with an investment time horizon typically of 10 or more years.
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