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Institutional capital, including private equity, pension funds and sovereign wealth funds, are currently prohibited from ownership stakes in National Football League teams. But now, the NFL is pondering whether to allow institutional investors to buy in. The league has been considering this issue for some time, including studying the NBA, NHL and MLB, all of which allow some form of private equity investment in teams.
But what are the learnings from institutional players such as private equity firms investing in business-format franchising (e.g. restaurants, fitness centers, auto services, home repair, and 300+ other categories)? How might those lessons translate to the NFL?
Why is the NFL considering this?
A recent ESPN article by Michael Rothstein provides an excellent summary on this question. The article notes that allowing NFL owners to sell minority stakes to institutional investors could free up cash to redeploy in other projects, such as stadium renovations. It would also represent a cultural shift, since traditionally most NFL teams have been family enterprises. The question also came up at the recent Qatar Economic Forum. A panel discussion noted that, as team valuations have increased, a shrinking pool of wealthy individuals can write meaningful equity checks. Allowing institutional capital into the NFL (albeit only minority investments – up to 30 percent) ensures the financial health of the league while allowing owners to diversify into other investments and projects.
Business-format franchising and private capital
PE came into business-format franchising (e.g. licensing an operating process and trademark, such a restaurant) in the 1990s and has profoundly transformed that sector. As outlined in Big Money in Franchising, more than 700 brands have received private equity investment either at the unit level, brand level, or both across more than 400 institutional investors. The flurry of activity has created compelling liquidity opportunities for franchisees, founders, and prior investors.
In our sector, professional investors have strongly preferred making majority control investments at both the brand and unit level. But over time, new investors entered who are comfortable making non-control investments. This has provided important exit options for founders and retiring franchisees, strengthened company balance sheets, accelerated expansion, and funded remodels and various growth initiatives.
There are relevant learnings applicable to the NFL situation.
Cross-investing
In business-format franchising, franchisors consider potential conflicts of interest and competitive issues when allowing private capital into the system. It is very common for PE-backed, large operators to be franchisees of multiple brands. For example, Flynn Group, the largest US franchisee, operates Wendy’s, Applebee’s, Panera, Arby’s, Taco Bell, Pizza Hut, and Planet Fitness units. But there are usually franchisor-stipulations on what types of brands may be owned. For example, most franchisors don’t allow franchisees to operate two pizza concepts or two burger concepts.
The NFL will have to sort through possible conflicts and investing scope. For example, can institutional investors hold equity in both NFL teams and sports gambling companies? How big is “too big” in terms of the presence of a single institutional investor across different NFL teams?
Re-Trading
Once brands and franchisee operating groups take their first institutional capital, equity re-trades at a predictable cadence as prior investors look to return capital to their limited partners and new investors enter. Often investors bring different skillsets relevant at particular inflection points in the business. This re-trading continues until the business has enough scale to go public, is bought out by the parent, or is acquired by a long-hold investor.
Since re-trading is common and equity sales are distracting for owners, the NFL should consider imposing minimum hold periods. In business-format franchising, some PE firms don’t invest at the franchisee level, but there are still plenty of investors willing to invest even when there are franchisor-imposed restrictions designed to reduce churn. It is possible to both protect the system and open liquidity options.
Related: After Months of Scrutiny, Roark Capital Finalizes $9.6 Billion Subway Acquisition
Change management & alignment
Professional investors backing franchisees are not operators. But they have a fiduciary duty to their limited partners to speak up if they believe the franchisor is making bad decisions. Even minority investors can effectively agitate for change. Systems that find a way to engage constructively with both franchisees and the investors backing them are stronger and more likely to grow. Feedback improves the business and isn’t seen as a threat to management. But it takes an open-minded franchisor and strong alignment. An example can be seen in the success of Yum! Brands, which has numerous PE-backed as well as publicly traded franchisees and continues to rapidly expand, adding more than 8,300 restaurants since 2020.
Even if the league allows institutional investors, are ownership groups ready to bring on opinionated professional investors as partners? Will only passive investors be allowed? The choice will impact valuations. But if NFL owners and league management can embrace institutional investor feedback, not just their money, they can find valuable strategic thought partners.
Relevant experience
In business-format franchising, most franchisors who allow institutional investment at the franchisee level strongly prefer investors with prior franchise operating experience, often within that same vertical.
Will the NFL prefer institutional capital with experience in other sports investments, or related industries such as media, entertainment, and hospitality? Those connections could ultimately strengthen the league, but owners would need to be open to receiving feedback from active investors, albeit minority investors, to benefit from that knowledge.
The importance of culture
The entrance of institutional capital, at both the brand and franchisee level, has fundamentally changed the culture within many business-format franchise systems. Smart systems figure out how to tap this capital resource in a positive way while proactively nurturing their unique organizational culture. Even when equity stakes or whole businesses re-trade, a strong culture ensures continuity and team engagement. The same will be true if the NFL allows private capital to own minority stakes in teams if each ownership group nurtures their own winning cultures and only accepts money from aligned investors.
The NFL may allow some institutional investment for all the previously mentioned reasons. But given the potential influence of professional investors, even minority stakeholders, the league is to be commended for taking such a thoughtful approach to this question and not rushing to a decision.
