Sports law and regulatory expert Darren Bailey explains why the NFL continues to set the standard with its rigorous framework for private equity investment.
For a code typically at the forefront of sports innovation and commercialisation, the decision by the NFL on 27 August to allow private equity to acquire stakes in its teams seems somewhat behind the times.
Other leagues in the US and Europe have long had their doors open to various forms of external investment and over recent years the cash has flowed in, dramatically altering the ownership landscape and control of major teams, particularly in European football.
It is likely, however, that many leagues and event owners across sport which have been among the first to allow private equity into their organisational frameworks will be looking enviously at the NFL strategy and approach, many marvelling at the controlled, sports-specific methodology adopted around the introduction of private investment opportunities in its teams.
A comprehensive and inclusive process
The process leading up to the decision to permit private investment has been comprehensive, measured and collaborative, with the NFL commissioner, Roger Goodell, sensitive to the different needs and views of its teams and the opinions of fans and viewers.
Following a detailed consultation process and surveys across all franchises, a committee was commissioned by the NFL to review the necessity for private equity at this point in the evolution of the sport, to assess all relevant opportunities and risks, and identify regulatory safeguards needed to maintain the essence of the existing ownership structure and the benefits it delivers.
The experiences of other sports in relation to investment have no doubt been the subject of intense scrutiny in developing the new regime, including often negative fan reaction.
It certainly appears many lessons have been learned from the unintended consequences that have flowed from the more open free market approach adopted in other territories ,with the NFL preferring a much tighter, prescriptive regime that is designed to meet specific objectives linked to access to liquidity, succession planning and disposal of teams.
Permitted investments
The parameters of the investments permitted in NFL teams are certainly tight. For example, only 10 per cent of an NFL team can be owned by private equity, and even then only by a vetted group of permitted funds that satisfy relevant criteria determined by the NFL.
In contrast to other leagues, direct investment by sovereign wealth funds and pension funds in NFL teams will not currently be allowed. While such investors can be part of an overall private equity fund, such stakes are limited to a very small percentage of shared ownership in a team.
Other rules prescribe that teams may sell stakes to multiple funds up to the 10 per cent cap, but each such stake must represent at least three per cent in the team.
Significantly, multi-team investments have also been recognised as valid, with the NFL permitting approved funds to hold stakes in up to six teams simultaneously. A rigorous information disclosure protocol has been drawn up which must be complied with by funds that own stakes in multiple NFL teams.
Significantly, given the traditional agile approach of private equity investors and desire for exit flexibility, any investor in a team will be obliged to retain the investment for a period of six years before being able to sell its stake, a measure no doubt designed to maintain stability and avoid purely speculative investor activity.
A victim of its own success ?
Valuations of NFL teams are continuing to escalate and while this is great news for owners it also leads to liquidity and disposal challenges. By way of illustration, as the expectations of fans in terms of stadia, facilities, and engagement increase, so investment in new venues, hotels and all-around match day experiences will be necessary for many teams over the coming decade.
The ability of owners to sell small stakes in the team can provide the cash needed to fund such stadia improvements, generating more revenue and maintaining fan and viewer interest in the sport.
In addition, there are very few individuals or entities who can afford the multi-billion-dollar cost of acquiring an entire team at current market rates. The new regime should also encourage more investors to bid for teams in the future, which will certainly appeal to team owners and open the market.
The importance of stability and control
The NFL has been keen to stress that most existing NFL team ownership rules remain in place and that, in essence, minority passive investment by private equity funds facilitated by the new policy will result in little or no real change in the way in which teams are run or operated.
Rather, the new regime is seen as a forensic and limited adjustment to ownership arrangements designed to meet the specific needs of the sport and owners at this point in the evolution of the NFL. In the words of Roger Goodell:
“We’ve been very deliberate on this private equity. I think it’s an access to capital that I think has been of interest for a long time. Other leagues have been doing it; we’re doing it with a cap at 10 per cent. So [it’s a] much less significant position [than other leagues].
“I think it’s an appropriate thing to give teams that liquidity to reinvest in the game, into their teams. I think it’s a positive development for us. I don’t think all teams will take advantage of that, but they will if they need that. It’s a very good opportunity for them.”
What could have been….
The NFL continues to set the standard in terms of on-field interest and commercial growth in the US and beyond.
In this instance it has also demonstrated its ability to proactively manage and administer the sport, identifying a pragmatic and proportionate solution to private equity investment that provides liquidity, promotes team and infrastructure investment, and expands the market of potential team buyers, but without compromising its traditional values and structures or alienating fans.
One wonders how many of those other leagues and teams that have perhaps under-regulated external, private investment activity and suffered the unintended consequences of such an approach would like to turn the clock back and do it the NFL way.
Darren Bailey is a consultant for and on behalf of Charles Russell Speechlys LLP.