There’s A New Player In The NFL – Private Equity

Written by: Colin Fisher

On Tuesday, August 27th, 31 of the 32 National Football League (NFL) teams voted in favor of allowing private equity ownership in the NFL. The newly adopted policy provides that a specific group of preapproved firms can hold up to a 10% ownership interest in a team. Each firm is limited to investing in a maximum of six teams, and its investment in a team must be held for at least six years. Also, each individual stake must represent at least a 3% ownership interest in the team for the transaction to be approved by the NFL.

The NFL is the last of the four major U.S. sports leagues (baseball, basketball, and hockey are the other three) to approve private equity ownership of their teams. Historically, the NFL has applied strict criteria for candidates hoping to purchase one of its 32 teams. Of the 32 teams in the league, 24 of them have to approve a new owner. Making it more difficult is the requirement that the head investor taking part in the purchase is responsible for personally allocating 30% of the capital. To put this rule into perspective, the lowest valued team in the NFL is the Cincinnati Bengals at $5.25 billion. This means that a lead investor would need to invest at least $1.575 billion of his or her own capital to even begin the process. Based on these two requirements alone, which are not the only impediments to ownership, it is easy to see how difficult it is to become an NFL owner. Now, however, private equity can enter the field of play.

As noted above, private equity has previously owned interests in baseball, basketball, and hockey teams. However, football is viewed as the most attractive investment among these sports. The value of NFL teams has continuously grown in value, skyrocketing over the past decade. In 2014, the average team was worth $1.43 billion. Today, the average value of an NFL team has increased to $6.5 billion, which is 4.55 times its worth only ten years ago. How are such significant increases in valuation possible? The answer is the NFL’s television deals. Without digging too deep into the specifics of its media contracts, the NFL is reeling in over $12 billion through deals with Comcast, Disney, Fox, Paramount, and other media giants. Such revenue is then equally split among the 32 NFL teams. This amount does not even include the revenue individual teams receive from sponsorships, luxury suites, and other sources of income. Given the significant amounts of revenue generated by NFL teams each year, it is easy to see why private equity wants to be involved. In fact, when examining the last ten NFL teams sold, seven of them have outperformed the S&P 500 since their sale from a percentage-gained basis. Thus, the return on investment provided by purchasing NFL teams creates an attractive opportunity for private equity firms that were previously unavailable to them, that is, until now.

It’s clear why private equity firms want to invest in the NFL, but what does the league gain from this? The answer is simple – capital. Although the league is comprised of some of the world’s wealthiest people, expenses in the NFL can be extremely high. The net worth of many of the league’s owners is primarily tied to their franchises, and they may not have additional sources of revenue to provide them with the capital they need to invest in their teams. Even owners who actually have the resources may be unwilling to tie up more of their own wealth in their teams, instead preferring to allocate their capital to other investment opportunities. This is where private equity comes in. When the league voted in favor of allowing private equity ownership, they also agreed on the list of firms that could participate. The list includes many well-known leaders in the financial industry, such as Ares Management, Blackstone, Carlyle, and CVC. What all these firms have in common is their extremely deep pockets that can pour capital into the teams they invest in, as well as the fact that almost all of them have made prior investments in sports teams in other leagues.

The influx of capital could be spent by NFL teams in a variety of ways. Most football fans will want it earmarked for their team’s payroll to sign (or re-sign) the league’s top players, but the league’s salary cap somewhat limits this plan. The salary cap is an annual dollar amount set by the league that a team cannot exceed in the aggregate in paying its players. It is usually calculated by taking about 50% of the NFL’s total annual revenue and dividing it equally among its 32 teams. However, most NFL executives (and fans) refer to the cap as a “soft cap” because teams can actually exceed this number in cash spent in any given year. More specifically, when a player signs a contract, the team can include a bonus as part of the player’s compensation. The bonus can be prorated for salary cap purposes, which means that it is divided over the length of the contract when calculating how close a team is to the cap, even though all of the money is received by the player upon signing. For example, a team can sign a player to a five-year, $100 million contract, pay half of it in the form of a bonus when the contract is signed, and yet only $10 million of that $50 million upfront bonus counts against that year’s salary cap. This all means that teams can actually use some of the influx of capital from private equity investors to pay their players more money and improve their rosters. However, this approach to managing the salary cap does not allow a team to spend an infinite amount of money (even if available from eager private equity investors) since the bonus payment still counts against the cap; its impact is merely being spread out over the life of the contract and can still cause cap problems for an unwary general manager. Thus, while certainly helpful, additional capital from the private equity community will not have as great an impact on a team’s success on the field as its fans would hope. More likely, the team’s owners will use their newly found capital for another purpose.

The construction of an NFL stadium costs an exorbitant amount of money and takes years to complete. For example, the recently built SoFi stadium cost over $5 billion and took almost four years to build. Many of the NFL owners do not have, or are unwilling to put up if they do, the necessary capital to fund such projects. In the past, they have looked to the cities in which their teams are based to provide the required funding, citing the new stadium as a boon to the city’s economy that will generate increased revenue for its residents. However, it is growing increasingly difficult for owners to obtain these subsidies from local governments, which has curtailed the development of lavish new stadiums. Enter private equity – the addition of extremely wealthy partners that can allocate plenty of capital to fund such projects. As a result, new or renovated stadiums will become even more prevalent since the money needed to majestically transform them will be readily available and the benefits to the team’s owners and players of a new venue will be significant.

From the owner’s perspective, a new stadium results in a material increase in the value of the team. First, simply put, the team now has an additional multi-billion dollar asset on its balance sheet. A new stadium also becomes a tourist attraction. Even those who are not traditional football fans are drawn to games merely to take in the experience of the new stadium. Consequently, teams can raise ticket prices given the increased demand to attend their games and will also enjoy more revenue from their concession stands with the larger crowds. For the team’s players, the stadium and its facilities are their workplace. It is as if an office building just received a multibillion dollar renovation resulting in many new amenities for its employees. For a football team, it means improved locker rooms, player cafeterias, and playing fields, all of which will attract higher quality players to the team.

The NFL was the last of the four major U.S. sports leagues to approve private equity ownership. Once teams begin to sell ownership interests to such firms, both sides will reap the benefits. Owners will receive an influx of capital that they can use to increase their teams’ value, while private equity firms will receive a significant return on their investment. Private equity has been subbed in from the bench, and now the NFL is a whole new game.

References

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Understanding the salary cap, dead money and impact of 2021 decrease – Sports Illustrated

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NFL Loosens Strict Ownership Rules to Allow Private Equity Investments | TIME

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Forbes Announces 17th Annual NFL Team Valuations

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Rising NFL valuations mean massive returns for owners. Here’s how good the investment is (msn.com)

2024 NFL franchise values: Cowboys hold top spot at record-setting $11 billion – NBC 5 Dallas-Fort Worth (nbcdfw.com)