In late August, NFL owners voted to allow private equity funds to buy stakes in NFL teams, ushering in what could end up being a marked change in the financial makeup of America's most valuable sports league.
For now, PE funds will only be allowed to own up to 10% of any given NFL team, and crucially won't be given voting rights, but the door has been kicked open. This move follows in the footsteps of other professional sports leagues across North America and Europe in allowing greater influence to private equity funds. This shift towards PE involvement has implications not just for team finances, but potentially for how teams are managed, how leagues operate, and ultimately, the fan experience.
For years, in sports leagues across Europe and North America, private equity has been exercising increasing influence, and team valuations have skyrocketed, perhaps as a result. For example, since 2019, when the MLB opened its doors to private equity, club valuations have increased from an average of $1.78B to $2.64B. This dramatic increase in valuations is not unique to baseball, as we'll explore in other major sports leagues.
In this article, we'll take a look at the broader historical and financial rationale of PE participation in America's sports leagues, valuation and investment structure trends, and wrap up by discussing what it means for the future of the NFL, and North American sports more broadly.
Why is PE interested in American Professional Sports?
There are a handful of contributing historical and financial factors that have made American sports leagues an attractive vehicle for opportunistic PE firms, chief among them the exclusive and in-demand nature of the content that professional sports franchises produce on a weekly basis.
Fanatical viewership habits, premium ad-rates, and increasing media-rights valuations make professional sports a deeply intriguing prospect for private investors. As David Rubenstein, co-founder of the Carlyle Group stated bluntly in September of 2022 "It’s very difficult to buy a sports team and lose money. Some people have done it, but it’s very rare…In the NFL, you make your money all the time, because it’s so profitable.”
On the viewership side, nearly 18 million Americans tune in weekly to watch an NFL game, which is up nearly 8% from the previous year.
When it comes to ad rates, the average revenue per viewer/hour for an NFL game in 2021 was $2.95, a marked difference from the $0.60 generated by Facebook in the same year.
In some sense, the PE thesis could be distilled down to viewing professional sports teams as monopolistic content producers.
PE firms want to tap into some of the world’s most valuable, time-dependent content studios, and recent openings on the other side of the equation have made this a possibility across the sports landscape in the US.
Why have American Sports leagues opened their doors to PE investment?
With that understanding of the investment thesis we can turn to the other side - why would executives in various sports leagues or teams be interested in courting PE investment? There are a few hypotheses.
For one, at the team level, the COVID-19 pandemic seems to have accelerated trends in American sports which has led to club owners and league management being more open to external, PE-backed investment. The pandemic negatively impacted the financial picture of most franchises, forcing some teams to look externally towards institutional capital as a lifeline.
For example, in a decision at least partially driven by pandemic financial concerns, in 2021 the NBA ratified a decision allowing private equity firms to acquire up to 20% ownership in a single NBA franchise. This move provided a lifeline for teams grappling with pandemic-induced financial pressures and offered an avenue for owners to cash out portions of their unrealized appreciation in team valuations.
The response to this rule change was swift and substantial. By 2023, over two-thirds of NBA teams had established a private equity connection or investment. Firms quickly moved to acquire minority stakes in multiple teams, demonstrating the pent-up demand for these investments. Despite the initial economic impact of the pandemic, NBA team valuations continued to rise, reaching an average of $4 billion per team by 2024. This growth not only made PE investment more necessary due to high valuations but also more attractive due to the potential for further appreciation, solidifying the symbiotic relationship between the NBA and private equity firms.
Investment Structure and Valuation Trends
The past five years have seen a major shift in the ownership landscape of North American sports leagues, with private equity firms increasingly gaining a foothold. This trend has been accompanied by skyrocketing valuations and evolving investment structures, painting a picture of a sports industry that's rapidly becoming a darling of institutional investors. Let’s take a look at approved structures for PE investment across the American sports landscape.
League-Specific Actions and Structure
The MLB, as mentioned earlier, voted to allow PE investment back in 2019. The league permits PE firms to own up to 15% equity in a team, with no limit on the number of teams a fund can invest in. This approach has seen valuations climb steadily, with the New York Yankees now worth $7.1 billion, up from $4.6 billion in 2019.
As mentioned earlier, the NBA's embrace of PE has been swift. By 2023, over two-thirds of NBA teams had established a private equity connection or investment. NBA team valuations have reached an average of $4 billion per team by 2024.
Both the NHL and MLS have opened their doors to PE investment in recent years. NHL valuations, while generally lower than their NBA and MLB counterparts, are still impressive, with the New York Rangers topping the list at $2.2 billion.
As mentioned earlier, the NFL was the last holdout. The league's recent decision to allow PE investment, albeit with a conservative 10% ownership cap and no voting rights, marks a policy shift sure to have ramifications down the road for NFL teams and fans.
Broader Investment Trends
Across all leagues, the typical investment structure involves minority stakes, with leagues placing caps on ownership percentages to maintain control. This approach allows teams to access capital and expertise without ceding too much power to outside investors, at least for now.
There's a growing trend towards viewing sports teams as platform investments. PE firms are increasingly looking to aggregate multiple franchises across different sports and leagues, creating diversified sports portfolios.
North American sports league valuations have consistently outpaced the S&P 500 over the past few decades, making them attractive investments even in turbulent economic times. PE firms are targeting 15-20% annual gross returns on sports investments, a figure that's hard to ignore for institutional investors.
Future Implications of PE in American Sports
As PE firms deepen their involvement in American sports, we're likely to see significant changes in how teams and leagues operate. One potential shift likely lies in more data-driven decision-making, both on and off the field. PE firms, being perhaps more analytics-driven, may push team management to pursue more data-driven strategies to maximize team output. Devoted fans are likely already aware of the ubiquitousness of “analytics-driven” play calls in the NFL, and it’s likely we will continue to see more AI-powered playcalls and decision making across the MLB, NBA, and NHL.
We might also see an acceleration in the 'arms race' of fan engagement technologies. PE firms could drive investments in areas like augmented reality experiences, personalized content delivery, and innovative stadium technologies. For example, ARound, a New York-based startup, has developed AR technology for in-venue experiences. They've already partnered with teams like the Los Angeles Rams (NFL), Minnesota Twins (MLB), and Cleveland Cavaliers (NBA) to provide interactive AR games and experiences for fans.
However, this influx of PE money isn't without controversy. There are concerns about the potential corporatization of sports, with fears that the pursuit of profit might overshadow traditional sporting values. The question of whether PE involvement will lead to higher ticket prices and more commercialization is a hot topic among fans and sports commentators alike.
Another point of contention is the potential for conflicts of interest. As PE firms invest in multiple teams or even across different sports, there are worries about the integrity of competition falling victim to financial considerations. Leagues will need to navigate these waters carefully to ensure that the valuable, competitive product that fans love doesn’t deteriorate.
Despite these challenges, the trend towards increased PE involvement seems set to continue. The deep pockets and business acumen of PE firms could help sports leagues weather future economic storms and capitalize on emerging opportunities in the ever-evolving media landscape.
Conclusion
From the NFL's recent decision to allow limited PE ownership to the NBA's swift embrace of institutional capital, it's clear that sports leagues see PE as a valuable partner in navigating the challenges and opportunities of the modern sports business.
While PE firms are drawn to the fanatical viewership habits and appreciation potential of sports franchises, leagues and team owners are leveraging PE capital and expertise to drive innovation and expansion.
However, as the influence of PE grows, so too do the questions about its long-term impact on sports fans around the world. Will the increased focus on profitability enhance or detract from the fan experience? Can leagues maintain competitiveness in an era of complex ownership structures?
As PE impact becomes more structured and pervasive over the coming years, we can be certain that the playing field of sports ownership is changing, and private equity is poised to be a major player in shaping the games we watch for years to come.
Sources
https://www.statista.com/statistics/289979/nfl-number-of-tv-viewers-usa/
https://boardroom.tv/sports-private-equity-investment-nba-mlb-mls-nhl/
https://en.wikipedia.org/wiki/Forbes_list_of_the_most_valuable_NBA_clubs
