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Good Thursday Morning. Here’s the rundown of this week’s Sports Business Playbook:

• 📰 This Week’s Topic: The NFL’s group of owners approved a measure to allow private equity investment in the league. We break down the measure in more detail and what it means for the clubs and firms involved.

• 🍸️ Impress Your Friends at Cocktail Party: Want to show off your sports knowledge in a public setting but don’t have time to read the deep dive? Hit the “Impress Your Friends at Cocktail Party” section at the bottom for a CliffsNotes of this week’s topic

• 🤯 “Whoa of the Week”: The most lucrative drink in sports is back.

• 💪 Weekly Reminders that Sports are Awesome: A bobblehead bonanza, a major soccer upset, and a fantastic social media post.

Hey team,

Big news out of at the NFL owners’ meetings in Minnesota this week, as the group voted 31-1 to approve a measure that allows private equity funds to purchase minority ownership stakes in NFL clubs.

While it was expected and it is not a new paradigm in the sports industry — all other North American professional leagues and the global soccer ecosystem have all allowed institutional investment for some years — this is still a big deal given the NFL’s size and position as the king of sports.

And the change is expected to take effect quickly.

The initial set of approved investors are poised to jump in this year, with rumors of multiple deals being targeted for completion for by December, and there is a compelling case for many teams to look at this model in the short term.

That being said, this is a long-term game that the NFL is playing from a position of strength to help further “protect the shield” and solidify its future.

In this week’s SBP, we’re talking PE and pigskin. You’ll learn:

• What are the parameters of this new investment mechanism

• How it’s a very NFL-esque structure that looks different from the other leagues

• Why now, what it means for the clubs, and what it means for the firms involved

What are the rules and who are the players

This decision has been in the works for over a year, and the ownership committee tasked with this project went through an extensive process to not only set the parameters of the policy but also determine which investment firms it would allow in this first wave.

Here are the quick hits of the new NFL PE policy:

• Teams can sell up to 10% of their common equity to PE firms

• An individual firm can buy 3-10% of a team. They will be silent investors, having no governance rights or say in business/player operations

• Minimum hold period for each investment is six years

• No single fund can invest in more than six teams

• Funds must have at least $2 billion in committed capital, and no one team can represent more than 20% of a single fund’s allocated capital

There are four groups of buyers approved to purchase stakes in franchises initially, and it is a who’s who of investors.

• Arctos Partners — Stakes in over 20 professional sports teams around the world, and now an approved investor across all five North American professional leagues.

• Ares Management — Has worked with Atletico de Madrid, the Padres, McLaren Racing, and Inter Miami in the past. Raised a $3.7 billion sports-specific fund in 2022.

• Sixth Street Partners — Has invested in Real Madrid, Barcelona FC, the San Antonio Spurs, Bay Area FC, and owns a portion of Legends, the massive sports venue hospitality, live event services, and business agency.

• A consortium of Blackstone Partners, CVC Capital Partners, Carlyle Group, Dynasty Equity, and Ludis (founded and led by NFL Hall of Famer Curtis Martin) — while a consortium, Blackstone, CVC, and Carlyle are three of the six biggest PE firms in the world and have dabbled in sports.

These firms collectively have $2 trillion in assets under management, and the expectation is that they will raise roughly $12 billion of capital for this initiative.

While these are known entities with deep portfolios and gravitas, the NFL is still retaining a lot of control over this process, and its approach here has all of the hallmarks of its unique business style that separates it from other leagues.

• The league can force a sale of a firm’s equity stake if the firm violates league terms

• There may be specific provisions for limited partners (LPs) within the funds (see: foreign investment)

• The NFL will take a percentage of the profits when the private equity firms sell their stakes — known as “carry.” This cut will be considered league revenue and be split evenly among all clubs, just like media rights and national sponsorship

Given its apex predator status, the league often deploys its second mover advantage on many of the more challenging business decisions facing the sports industry.

Meaning, let the other leagues that need the near-term revenue jump in on what’s new and begin to prototype the path, mistakes and all. Once there is a defined opportunity, come in and use the league’s outsized leverage to dictate favorable terms.

In the past, it was streaming or sports gambling.

Now, it’s institutional capital.

In this instance, the NFL is using its leverage as the biggest show in town to protect itself from risk and is deploying its patented “all for one, one for all” revenue strategy that raises up all clubs and has helped it grow into the behemoth it it today.

What this means for clubs

So, business is booming. Why do this now?

While the NFL is far and away the biggest league in the world and has the best trajectory for sustained success, the 32 owners vary greatly in age, ownership structure, and liquid wealth.

Many of the clubs are owned by billionaires who made their fortunes outside of football, but others are legacy businesses that have been run by the same family for several decades and most of their wealth is tied up in the value of the club. Barring a liquidity event (sale of a portion of their stake), they’re comparatively “asset rich and cash poor.”

This creates challenges for a league that wants the rising tide to raise all ships, and in a way, the NFL has become a victim of its own success where the rising valuations continue to shrink the pool of viable investors that could potentially invest.

So, bringing in (highly vetted) institutional capital now gives clubs significantly more flexibility:

• Teams can get capital infusions to help pay for new stadiums or stadium renovations

• Asset rich, cash poor clubs can take money off table for themselves

• Teams can more easily navigate estate planning and succession — doesn’t sound like much on the surface, but it’s the “boogeyman” that keeps family-owned clubs and older owners up at night

Clubs rumored to be interested in moving quickly on this new rule and trying to get an agreement in place before the end of the year are the Eagles, Bills, and Raiders.

The Bears would also make a lot of sense too given their family-based ownership and current political challenges getting a new stadium deal done in Chicago.

Ironically, the lone nay vote — the Bengals — fit all three of the above criteria. Per Sportico, this dissent is on brand, though, so I guess we shouldn’t read too much into it.

What this means for investment firms

Sports investing has become a hot topic in the last 10-20 years. The broader industry has exploded, league/team valuations have skyrocketed on the back of increased media rights and interest, and outside capital has poured in — including private equity.

PE firms in general operate as later stage investors that are looking to generate solid returns with limited downside.

In other words, they don’t like risk.

Sports generally fit this bill the past few decades because it represents a fixed supply asset with capped costs, predictable revenues, and a low correlation with what’s happening in the stock and bond markets.

To that end, many of the established sports PE players have invested in teams over the last decade as other leagues have opened up for business, and the firms have ridden the hot hand to nice returns.

While there are potential storm clouds on the horizon for smaller and/or more risky leagues (see: the concerns around European soccer’s relegation risk and runaway spending) that may spook some of the more risk averse firms, nothing suggests the NFL will being slowing down anytime soon, particularly as media rights continue to consolidate and the networks/platforms continue to hunt for live audiences.

One should be wary of speaking in absolutes about the volatile world of investing, but I’ll spill the salt: the NFL is about as close to a risk-free investment as you can get.

NFL valuations are skyrocketing — 13.9% CAGR over the last five years, and the average club is now worth $5.93 billion. The Cowboys became the first sports organization to cross the $10 billion mark this year.

This is primarily due to the ever increasing media rights and the revenue sharing model that sees each NFL team receive more money from national revenue each year ($425 million in 2023, before factoring in any local revenue) than the average of all other leagues.

To put it in perspective, there are only 15 sports franchises from other leagues around the world that are worth as much as the lowest valued NFL club (Bengals at $4.71 billion).

So, the NFL’s status as a sports business juggernaut is not in question. The business fundamentals are about as solid as they can be, and the socialized approach to revenue ensures that the downside is effectively capped.

The only risk I see coming out of this announcement is who the buyer(s) will be on the other side of this hold period.

PE firms only make true money when they sell the assets in their funds and capture the “carry.”

Assuming a similar growth trajectory of the last five years at 13.9% CAGR (Compound Annual Growth Rate), a 10% equity stake in an average valued club — worth more than $500 million — would cost over $1.3 billion at the end of the six-year minimum hold period.

This dollar amount is not that much in the world of private equity and institutional capital, but, it is a lot for only a small ownership stake and no control over the business outcomes.

To mitigate this risk, you may see some of the smaller approved investors come out of the gates quickly and then attempt to sell to the consortium that includes the bigger players later on.

Plus, the league will likely expand its approved investors list to larger firms (with guardrails around them similar to the ones in this initial set) and help shepherd along exit opportunities for the first wave of investors.

This was likely the NFL’s plan all along too. By artificially limiting the supply of investors, the league can create healthy competition and maintain a strong demand for those minority stakes in the coming years when the hold periods are up.

This is what the NFL does. It has created so much leverage due to its core product strength and market dominance that it can broker these types of low-risk scenarios where all entities involve win.

As always, never bet against the Shield.

P.S. — these memes about traditional PE coming into the NFL sent me.

🍸️ Impress Your Friends at a Cocktail Party

Want to show off your sports knowledge in a public setting but don’t have time to read the deep dive? This section is the CliffsNotes of this week’s topic

• Opener: Big news out of at the NFL owners’ meetings in Minnesota this week, as the group voted 31-1 to approve a measure that allows private equity funds to purchase minority ownership stakes in NFL clubs. The NFL is using its leverage as the biggest show in town to protect itself from risk and is deploying its patented “all for one, one for all” revenue strategy that raises up all clubs and has helped it grow into the behemoth it it today.

• Shot: Here are the quick hits of the new NFL PE policy:

  • Teams can sell up to 10% of their common equity to PE firms

  • An individual firm can buy 3-10% of a team. They will be silent investors, having no governance rights or say in business/player operations

  • Minimum hold period for each investment is six years

  • No single fund can invest in more than six teams

  • Funds must have at least $2 billion in committed capital, and no one team can represent more than 20% of a single fund’s allocated capital

• Shot: There are four groups of buyers approved to purchase stakes in franchises initially, and it is a who’s who of investors.

  • Arctos Partners — Stakes in over 20 professional sports teams around the world, and now an approved investor across all five North American professional leagues.

  • Ares Management — Has worked with Atletico de Madrid, the Padres, McLaren Racing, and Inter Miami in the past. Raised a $3.7 billion sports-specific fund in 2022.

  • Sixth Street Partners — Has invested in Real Madrid, Barcelona FC, the San Antonio Spurs, Bay Area FC, and owns a portion of Legends, the massive sports venue hospitality, live event services, and business agency.

  • A consortium of Blackstone Partners, CVC Capital Partners, Carlyle Group, Dynasty Equity, and Ludis (founded and led by NFL Hall of Famer Curtis Martin) — while a consortium, Blackstone, CVC, and Carlyle are three of the six biggest PE firms in the world and have dabbled in sports.

• Shot: What’s in it for the clubs? While the NFL is far and away the biggest league in the world and has the best trajectory for sustained success, the 32 owners vary greatly in age, ownership structure, and liquid wealth. Barring a liquidity event (sale of a portion of their stake), many of the owners are comparatively “asset rich and cash poor.” So, bringing in (highly vetted) institutional capital now gives clubs significantly more flexibility:

  • Teams can get capital infusions to help pay for new stadiums or stadium renovations

  • Asset rich, cash poor clubs can take money off table for themselves

  • Teams can more easily navigate estate planning and succession — doesn’t sound like much on the surface, but it’s the “boogeyman” that keeps family-owned clubs and older owners up at night

• Chaser: What’s in it for the firms? The NFL is about as close to a risk-free investment as you can get. NFL valuations are skyrocketing — 13.9% CAGR over the last five years, and the average club is now worth $5.93 billion. Plus, the league will take care of its partners. By artificially limiting the supply of investors, the league can create healthy competition and maintain a strong demand for those minority stakes in the coming years when the hold periods are up. This is what the NFL does. It has created so much leverage due to its core product strength and market dominance that it can broker these types of low-risk scenarios where all entities involve win.

🤯 “Whoa” of the Week

Insane, mind-blowing things constantly happen in the sports business world. Here was my favorite of the past week.

1. It’s U.S. Open time, and that means the most lucrative drink in sports is back.

💪 Weekly Reminder that Sports are Awesome

This newsletter is, of course, mostly centered on the business side of sports and the things that happen off the field. That being said, it’s important to remember why we fell in love with sports in the first place, though.

This section is meant to highlight the amazing things that happened in sports this week that serve as that reminder.

1. Fans lining up well before Sho-time in LA

2. We love a wacky European soccer upset

3. Only thing we love more is a cheeky sports social media team

Thanks for reading! Let me know what feedback you have.

Also, if you enjoyed this breakdown, please consider sharing it with your friends and network by clicking the social media icons at the top of the newsletter.

Until next time, sports fans!

-Alex