A look at the new era of investment by private equity funds, sovereign wealth funds, and other institutional vehicles in U.S. professional sports teams, collegiate athletics and related businesses, and what it means for the broader sports industry.
The landscape that once prevented private investment funds, sovereign wealth funds, and other institutional vehicles from investing in U.S. professional sports teams has changed dramatically in recent years. One by one, U.S. professional sports leagues have adopted policies creating pathways for institutional investors to acquire ownership stakes in teams. The shifting landscape and other outside influences have also led institutional investors to begin to dip their toe into college athletics and other related industries. The institutional investment era in professional sports is still young, and institutional investors looking to capitalize on this shift require a deep understanding of league-specific rules, governance constraints, and structural considerations that demand careful navigation. Below are eight key takeaways for anyone seeking to understand this rapidly evolving area.
1. A Historic Barrier Has Fallen. For most of the modern era of U.S. professional sports, institutional investors were effectively excluded from team ownership. Some leagues expressly banned investment funds from becoming owners, while others made institutional participation impractical through policies limiting the number of permissible direct and indirect owners, imposing extensive disclosure requirements, establishing minimum ownership percentages, requiring all direct and indirect owners to provide indemnification, releases, representations and warranties and covenants to the leagues and/or maintaining informal preferences for individual ownership. In recent years, however, every major U.S. professional sports league has adopted policies that create a pathway for institutional investors to acquire stakes in teams, marking a fundamental shift in how franchises are capitalized.
2. Rising Valuations and Capital Constraints Are Driving the Shift. The change has been driven by converging pressures on teams, their existing owners and prospective purchasers. On the team and ownership side, franchise valuations have risen to levels where fewer individuals can write the check required to materially invest in a U.S. professional sports team, and once an individual invests, league rules prevent ownership of an interest in multiple teams in the same league. However, teams need new sources of capital to keep up with rising operating costs, for example, and league rules that limit the amount of debt a team can carry only intensify that need. Additionally, existing minority owners of teams have historically faced limited options in finding prospective purchasers of their equity interests in teams in a relatively illiquid market, and a prospective purchaser of a controlling interest in a team may need alternative sources of capital to round out its investor group in order to fund the purchase price for its acquisition. Institutional investment can offer a solution in each of these instances by offering a deep pool of patient capital that can absorb the price points at which teams now trade. From the investor side, private investment managers are drawn to sports teams as a scarce, historically uncorrelated asset class offering diversification benefits that are difficult to replicate elsewhere. The scarcity value of a U.S. professional sports team (as there are, after all, a finite number of teams in any given league) creates a basic value proposition that has attracted attention during a period of unprecedented capital accumulation by private investment managers. Put simply, there is more money chasing fewer opportunities, and sports teams represent a category that institutional investors have long coveted but were previously unable to access.
3. League Rules Vary Significantly. The implementation of these new ownership policies varies meaningfully across leagues, and that variation, plus updates made to these policies, presents both opportunities and challenges for investors and their counsel. The NBA, for instance, recently expanded the number of teams in which a single fund can hold a stake, raising its cap from five to eight. Major League Baseball has no team-count limit but caps any single fund at fifteen percent of a given franchise and imposes additional restrictions on funds that invest in multiple MLB teams. The NFL allows stakes in up to six teams. The NHL permits five, MLS four, and the NWSL three, with the NWSL uniquely permitting institutional funds to take controlling positions. Generally, the leagues do not look to one another as precedent. Each operates independently, and practitioners must approach each league’s rules on their own terms.
4. The Passive Investment Requirement Creates a Structural Tension with Private Equity’s Business Model. Across U.S. professional sports leagues (other than the NWSL, as noted above), institutional investors are required to be passive. That means limited information rights, restricted voting authority, prohibitions on attending board meetings in most cases, and no perquisites of the kind that individual owners might enjoy. For private equity funds, whose value proposition typically rests on active management of portfolio companies, this creates an inherent tension. Funds must also satisfy their own internal requirements: fiduciary duties and obligations of the funds’ general partners, the ability to execute intra-fund transfers without requiring team consent, and appropriate economic alignment with the controlling owner of the team. The requirement to comply with both the aforementioned internal requirements and league rules can present challenges to large, diversified funds, including given that leagues maintain the right to update their rules over time.
5. Deal Structure Matters Enormously. How the passive-versus-active tension is resolved depends largely on the transaction structure. A fund that joins an investor group in a control acquisition has the advantage of drafting a fresh operating agreement that can be tailored to include fund-specific provisions and limitations from the outset. A fund acquiring a minority stake in an existing ownership group, whether via the issuance of equity through a primary offering or a secondary sale of existing equity with a selling or exiting owner, has less flexibility and may need to negotiate a side letter or joinder agreement if the operating agreement does not already contemplate institutional participants. Where an ownership group holds teams in multiple leagues, all applicable league rules must be satisfied simultaneously, which sometimes requires creative structuring to accommodate different leagues’ requirements.
6. Hold Periods and Transfer Restrictions Are Not Deterring Institutional Investors. Beyond the governance constraints, institutional investors must also contend with significant transfer restrictions. Leagues impose minimum hold periods, blackout periods on transfers, and limits on contractual rights to liquidity events. Yet, from what has been observed in the market, these restrictions have not proven to be a significant deterrent, as large institutional funds investing in professional sports teams seem to realize that franchise values tend to appreciate as new national television and streaming deals are struck and new stadium and real estate opportunities are developed—catalysts that unfold over years, not months. Despite the requirement that institutional investors must observe these league-imposed transfer restrictions, institutional investors investing in professional sports teams typically make paths to liquidity a key deal point in the negotiation with team ownership.
7. College Athletics Presents Opportunity—but the Model Remains Unproven. As college athletics undergoes its own transformation, the need for outside capital has grown with the introduction of name, image and likeness opportunities for student athletes and increased competition among universities to attract top talent, such as through facilities upgrades. Universities and conferences have explored spinning out their commercial activities, such as sponsorship deals and media rights, into distinct legal entities to protect the nonprofit status of the institution while attracting outside capital. Early reports suggest a mixed reception. Some conference-level ventures have drawn investor interest, while others have reportedly faced opposition from member institutions or otherwise failed to gain traction. Whether a workable and sustainable model for institutional investment in college athletics will emerge is one of the more interesting open questions in the space.
8. The Professional Sports Model Is Working, and Adjacent Opportunities Offer Additional Pathways for Investment. Institutional investment in U.S. professional sports appears to be functioning well. The league rules that some initially viewed as overly restrictive have created a framework that has mitigated the concerns some raised about private equity’s influence on team operations. At the same time, institutional investors seeking sports exposure without triggering league ownership rules and approval processes have sought out investment in sports-adjacent opportunities, such as technology platforms, media ventures, and real estate, as alternative entry points. However, investors should be aware that the combination of holding an equity stake in a team and an interest in certain sports-adjacent businesses, such as investing in, or lending to, sports agencies, other teams or their home venues, or media, gaming or real estate ventures, can introduce additional legal complexity that requires careful navigation of league rules that prohibit certain investments and lending activity. Additionally, investment funds interested in investing in a professional sports team should consider establishing procedures to monitor their limited partners’ involvement in the aforementioned sports-adjacent activities that could raise concerns under applicable league rules.
Looking Ahead
The institutional investment era in professional sports is still in its early chapters. As valuations continue to rise, the pool of individuals capable of a material investment in U.S. professional sports teams will likely continue to shrink, making institutional capital increasingly essential to the ecosystem. Moreover, the frameworks that leagues have put in place for such investments are evolving in real time. For investors, teams, leagues, and their counsel, staying ahead of these developments demands both creativity and a deep understanding of the unique regulatory environment in which professional sports operate.
