In permitting private equity investment in National Football League (NFL) franchises, the sport’s custodians did little more than push the door ajar. Four groups were granted pre-approval and their exposure to a single team is capped at 10%. But the significance is lost on no one.

“This gets you in the door with the NFL and provides you access to the ecosystem around the franchise, which you could build business models around,” said Kevin Desai, private equity sector leader at PwC.

Seth Allen of Inner Circle Sports, a sports-focused investment bank, warmed to the same theme, noting that private equity sponsors could inject capital into the infrastructure rebuilds teams might need – and which historically were partially financed by taxpayers.

Arctos Partners, Ares Management [NYSE:ARES], Sixth Street Partners, and a consortium comprised of Blackstone [NYSE:BX], Carlyle [NYSE:CG], CVC Capital Partners [AMS:CVC], Dynasty Equity, and Ludis, which is led by Hall of Fame running back Curtis Martin, are the lucky four investment groups. At least two are said to be already lining up deals.

Dallas-based Arctos is reportedly in talks to buy into the Buffalo Bills, while Los Angeles-based Ares has been linked to an investment in the Miami Dolphins. The latter mooted transaction might be described as real estate-plus: it would include the Dolphins’ Hard Rock Stadium, the operating rights of the Formula One Miami Grand Prix, and about half of the Miami Open tennis tournament.

This kind of structure makes perfect sense to PwC’s Desai. A franchise looking to build a new stadium could sell a stake to private equity and put the proceeds towards a more ambitious project that includes a surrounding entertainment district, he suggested. In this context, the same sponsor could play a strategic role as well.

“A real estate arm [of the sponsor] could come in and help develop not just the entertainment district but buy land and opportunities around the entertainment district,” Desai said.

A wider reach

Broadcast rights represent another broad opportunity set. Similar investments have already been executed in other sports using a variety of structures. For example, in 2022, Sixth Street provided financing to F.C. Barcelona in return for a 25% share of the soccer giant’s Spanish league broadcast rights over a 25-year period.

In the same sport but a different country, F.C. Internazionale Milano (Inter Milan) issued bonds through Inter Media and Communication, the entity that holds its media, sponsorship and merchandising rights. Even when the Italian club slipped into bankruptcy, bond prices hardly fluctuated.

In May, Los Angeles-based Oaktree Capital took control of Inter Milan after its previous owners failed to repay a EUR 275m (USD 290.3m) rescue loan. Fitch Ratings noted that the takeover would not affect the rating of Inter Media’s EUR 415m senior secured fixed-rate notes.

“There are lots of great debt opportunities,” said Shehriyar Antia, head of thematic research at PGIM, an asset management arm of Prudential Financial [NYSE:PRU]. “Lending against the broadcast rights is a stable, steady source of cashflow.” 

Private equity investors can also provide expertise as franchises explore new markets, bringing a level of sophistication that may have been lacking in NFL boardrooms. Select games are already taking place in Europe, but Paul Harris, a principal at KPMG, believes the technology side of international expansion –  data analytics, audience engagement – will be among the areas targeted to help drive growth.

Franchises could leverage streaming platforms to widen their global appeal much like Formula One has done through Netflix’s [NASDAQ:NFLX] Drive to Survive series, according to PGIM’s Antia. “There’s a pretty good shot that Netflix would attract a global audience for something like the NFL,” he added.

In May, Netflix announced it will stream at least one NFL match globally on Christmas Day for the next three years for a reported USD 75m per fixture. The league also signed a seven-year deal with Alphabet’s [NASDAQ:GOOGL] Google for the rights to broadcast Sunday games.

Last season’s playoff encounter between the Kansas City Chiefs and the Dolphins set new streaming records by attracting 23 million viewers to Comcast’s [NASDAQ:CMCSA] NBCUniversal’s Peacock service.

The NFL generates 95% of its revenue from the US. Even though the league’s takings are 30% larger than those of the National Basketball Association (NBA), it trails basketball in terms of international revenue, Lamar Cardinez, a principal at Blue Owl [NYSE:OWL], told the 2023 Mergermarket M&A Forum Miami.

Dyal Capital, a division of Blue Owl, has acquired stakes in the NBA’s Atlanta Hawks, Sacramento Kings and Phoenix Suns. Arctos also has NBA exposure – via Golden State Warriors and Utah Jazz – as well as interests in franchises across Major League Baseball (MLB) and the National Hockey League (NHL). All three leagues have accepted capital from financial sponsors for some time.

Anticipated deal flow

NFL-related deal flow could come relatively quickly. PwC’s Desai expects about five franchises to accept private equity investment over the next five years. The Los Angeles Chargers have been referenced in this context, as well as the Dolphins and the Bills.

The investment conditions set by the NFL are restrictive compared to those adopted by the NBA, MLB, and the Women’s National Basketball Association (WNBA). The four pre-approved groups may invest in no more than five franchises each, said a source familiar with the NFL’s discussions.

The average value of the NFL’s 32 franchises is USD 5bn, with about USD 500m in debt, the source added. The league asked the pre-approved groups to earmark about USD 2bn in dedicated funding for investments. No single investor may account for more than 7.5% of a fund used for those deals. This means only the biggest sponsors, with the largest funds, qualified.

The NFL has been conservative at opening up to private equity investors, according to KPMG’s Harris. “It’s a price ticket and a price point at which only a few funds can play,” he said.

Several have already raised dedicated sports investment vehicles. Arctos, the only pure-play sports investor of the four, announced the final close of Arctos Sports Partners Fund in August. It received commitments of more than USD 4.1bn, including co-investment pools and parallel affiliated vehicles.

Ares closed its inaugural sports offering – Ares Sports, Media and Entertainment Finance – in September 2022 on USD 3.7bn. CEO Michael Arougheti has said the sponsor is working on several open-ended and closed-end products around the strategy aimed at institutional and retail investors.

“We’re seeing significant demand from investors seeking access to the growing and differentiated value for various sports-related franchises,” he said.

CVC – which has previously invested in rugby, soccer, volleyball motorsports, and tennis – closed its ninth flagship fund on EUR 26bn (USD 27.4bn) in July. The sponsor could easily carve out a USD 2bn NFL investment vehicle from that fund, the source familiar noted. Blackstone, Carlyle, and Sixth Street operate at similar scale.

“These are experienced funds with a track record of having invested in sports before and focused on sports,” added KPMG’s Harris. “The NFL has been selective in its first cut but over time they may relax the rules a little and bring others into the approved ecosystem.”

Pushing the frontiers

That the NFL acquiesced at all is regarded by some industry participants as further confirmation of sports as a distinct asset class. According to KPMG’s Harris, it appeals because it seems recession-proof, relying on the enduring support of loyal fan bases. He has seen a significant uptick in clients looking at the space, from private equity sponsors to family offices to corporates.

“In just over three years, we have seen the demand for sports as an asset class grow tremendously,” David J. O’Connor, managing partner at Arctos, said in a statement to Mergermarket.

Ares’ Arougheti highlighted the scale of the opportunity during his prepared remarks on Ares’ Q324 earnings call. As professional sports leagues around the world continue to open up to institutional capital, he observed, the addressable market is estimated to be worth more than USD 750bn.

The problem with such statistics is that they date quickly because the frontier for sports investment is still being pushed out. Women’s leagues are tipped as the next big target. The WNBA, for example, has accumulated a huge following – physically and digitally – on the heels of stars like Indiana Fever’s Caitlin Clark and Las Vegas Aces’ A’ja Wilson.

“The audience and viewership are growing rapidly,” said PGIM’s Antia.