If you had invested in a North American sports franchise between 1991 and 2022, you would have earned a sevenfold return for an NHL team or more than a 14-fold return for an NBA team on your investment, bettering the return from the S&P 500 over that period of time by at least a 2:1 ratio. According to sports media, in the past year alone, the average value of an NFL franchise has increased by 24%.
The prestige of being one of very few franchise owners in each league has always kept values high. But what's been the cause of these more recent soaring valuations? Media rights, sponsorships, cable-package sales, streaming, naming rights and signage are some of the factors. Modern multibillion-dollar, multiuse stadiums not only improve the game-day experience, but also serve as more attractive venues for non-sporting events throughout the year.
Rules and regulations regarding ownership and debt limits can have an outsized impact on franchise valuations. Historically, the leagues emphasized local family ownership of their franchises, limiting the ability of franchises to raise funds from institutional capital investors. Recently, many leagues have liberalized rules regarding institutional ownership, allowing these franchises to capitalize on valuation increases.
As franchises begin to routinely trade at multibillion-dollar valuations, the pool of qualified individual investors has shrunk. Bidders form buyer groups containing multiple billionaires to make bids on franchises -- see Josh Harris' ownership group assembled for its $6.05 billion purchase of the Commanders.
Institutional investors are becoming more attracted to sports franchises as a capital investment. Their lack of cyclicality makes them an attractive investment; during the Great Recession of 2009, sports franchise valuations resisted the decrease in valuations experienced by other market investments.
However, institutional investors will need to be aware of some of the risks involved with investing in sports franchises. Often profits generated by the franchise are invested back into the franchise, making a sale of their interest the only source of liquidity. The pool of potential buyers for any sale of its minority investment will be more limited than with other investments due to both the ever-increasing rise in valuations of sports franchises and the significant transfer limitations imposed by the leagues.
Since leagues have implemented rules allowing for institutional investment, there has been a flurry of institutional activity. Most active has been Arctos Sports Partners; the three-year old firm has raised over $2 billion for sports investments. Arctos has moved quickly to retain minority ownership stakes in franchises, holding stakes in six MLB franchises, four NBA franchises, two NHL franchises and two MLS franchises. The pending sale of a 5% stake in the parent company of the NBA's Wizards, NHL's Capitals and WNBA's Mystics at a valuation over $4 billion to the Qatar Investment Authority represents the first investment by a sovereign wealth fund.
Regardless of whether or not an investor desires a controlling or non-controlling interest in a sports franchise, the same league rules will apply to each investment.
The NBA, which was the first North American major sports league to accept investments from institutional investors and sovereign wealth funds, has the most relaxed ownership requirements among the five North American major sports leagues. Prospective owners are only rejected if they do not satisfy the NBA's minimum ownership criteria. Likewise, there are no special financial requirements placed on prospective investors by the NBA's governing documents.
The NHL broadened its pool of potential investors, by allowing institutional investors and sovereign wealth funds. Like the NBA, there are no special financial requirements contained in its governing documents. The NHL governing documents do specify that, for a controlling ownership, there needs to be evidence of a single individual who is accountable for operations and is empowered to make club decisions.
MLS rules are slightly more restrictive, and the United States Soccer Federation (USSF) has imposed additional restrictions. Investors do not invest in the individual franchises, but in MLS itself, as MLS is a single-entity sports league. While MLS does allow for institutional investment, it does not allow investment from governmental or quasi-governmental authorities, nonprofits or charitable organizations/foundations, or any investor that does not satisfy the MLS's minimum ownership criteria. Each ownership group must have a principal owner who owns at least 35% of the franchise's equity and has the sole authority to bind the franchise. The USSF also imposes additional financial suitability requirements.
MLB requires controlling owners to own 30% of the franchise's equity and only restricts trusts, nonprofits and charitable entities from investing in franchises. Its governing documents do not impose any strict financial obligations on prospective owners and allows for non-controlling owners to fund as many as five different MLB franchises so long as their equity in a single franchise does not exceed 20%.
However, documents created or modified by the franchise's ownership, including governance agreements, must be approved by the MLB commissioner. Investors should be aware of the strong centralized oversight that the commissioner's office enjoys.
In contrast to the other leagues, the NFL's ownership requirements are the most restrictive. The rules do not allow for institutional investors nor sovereign wealth funds to invest in franchises. The rules only allow for 25 individual investors. However, the NFL does allow family companies and trusts to be considered a single individual when calculating that limit. NFL franchises are subject to a $1.1 billion debt limit, which restricts the debt-financing for purchasers.
However, the NFL does provide more flexibility than the other sports leagues in how it calculates a controlling interest. Normally, the entity owning an NFL franchise must have the majority of the franchise's equity and voting power vested in one individual. However, the NFL allows the following exceptions:
- For limited partnerships and LLCs, where 30% of the equity is owned by a single general partner/controlling member with total voting and management control.
- For corporations with multiple classes of stock, where 30% of the entity's equity is owned by an individual who has full voting control.
We expect the leagues will continue to adapt their rules in light of the seemingly never-ending valuation bubble. It remains to be seen how long the NFL will continue to hold out. As the most popular North American league, the NFL will start earning $10 billion per year in media rights for the next 10 years -- an annual sum that handily tops the media rights deals of the other leagues combined. The NFL has built its success on the model of the family-run, local owner who is active in their community. But at these valuations, how long can that continue?
Originally published by Sport Business Journal.
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