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https://www.institutionalinvestor.com/article/b18j9ztjt54f8z/small-brokers,-macro- research-among-the-early-losers-of-mifid-ii The NFL’s Next Billionaire Owner Won’t Be a Person Illustration by II Major sports franchises have turned profitable and valuations are soaring. Experts say private equity firms may soon take notice. By Dan Weil June 06, 2018 Owning a major-league sports team has long been a rich-guy status symbol — but it hasn’t always been a sound investment. Just seven to ten years ago, almost none of the teams in the four major pro sports leagues — the National Football League, Major League Baseball, the National Basketball Association, and the National Hockey League — generated positive cash flow, according to John Moag, chief executive officer of sports investment bank Moag & Co. in Baltimore. But these days pro sports franchises are bona fide profit engines. Now 87 percent of the teams in the four major leagues have positive operating income, including 100 percent in the NFL, according to Forbes. And teams have the soaring valuations to prove it. Hedge fund titan David Tepper, founder and president of Appaloosa Management, agreed last month to buy the Carolina Panthers for a reported $2.2 billion. That would match the record price paid for a U.S. sports franchise: Tilman Fertitta, CEO and owner of restaurant giant Landry’s, bought the Houston Rockets for $2.2 billion last year. Just five years ago, Forbes pegged only one NFL team’s value at $2 billion: the Dallas Cowboys. Now all but five football teams are worth at least that much. “America’s Team,” as the Cowboys are widely known, has a valuation of $4.8 billion, the highest of any sports franchise in the world, according to Forbes. And the upward trend will continue, experts agree. “Profits and valuations will rise because revenues will keep going up,” says Moag. “Some people look at sports and say this is ridiculous, but valuations follow revenues.” As price tags keep climbing, the barrier to entry becomes tougher, even for billionaires. That’s because leagues limit the amount of debt new owners can take on as part of their purchases. Enter private equity firms. “You can’t be worth just $1 billion to buy teams now,” Moag points out. “One person may be willing to put in $300 million to $500 million, but where will the remainder of the money come from? He will dial for dollars, but that’s still a huge amount of money. The opportunity for private equity is tremendous — if leagues let them play.” That may be a big if, experts say. Although private equity firms and major sports franchises may seem like a perfect match on paper, there are reasons such tie-ups aren’t more common. League rules almost guarantee that purchasers of teams will be individuals or groups of individuals. Every person or entity that acquires interest in a team has to be vetted and approved by the league. If it’s an entity, every owner within it has to complete application papers and submit them to the league for approval. That has tended to rule out private equity funds. “They have so many investors, and technically all investors would have to be vetted,” says Robert Caporale, chair of sports investment bank Game Plan in Miami Beach, Florida. “That becomes a procedural nightmare.” He and others can recall only one instance in which a private equity firm participated in a sports team purchase. In 2011, Tom Gores, CEO of private equity firm Platinum Equity, bought the Detroit Pistons along with one of his firm’s funds, Platinum Equity Capital Partners II. He took 51 percent of the team, and the fund received 49 percent. Then in 2015, Gores bought out the fund’s stake. Other individuals in the hedge fund and private equity sectors have purchased teams too, but without the participation of their firms. In addition to Appaloosa’s Tepper, the list includes Josh Harris, co-founder of private equity titan Apollo Capital Management, who is principal owner of the Philadelphia 76ers and the New Jersey Devils; Joseph Lacob, a partner at iconic venture capital firm Kleiner Perkins Caufield & Byers and majority owner of the Golden State Warriors; and the owners of the Milwaukee Bucks: distressed-debt maven and Avenue Capital Group co- founder Marc Lasry, Fortress Investment Group’s Wesley Edens, and York Capital Management’s Jamie Dinan. Tax considerations also have helped deter private equity funds, says Andrew Zimbalist, generally recognized as the dean of sports economists and a professor at Smith College. Individuals who own teams can amortize the value of their franchises, attributing 90 percent of value to intangible assets (or assets that are not physical) and goodwill (a premium paid for certain intangible assets during an acquisition). And if the team is owned by a partnership, or a corporation that is taxed like a partnership, that tax benefit carries over to the owners’ individual returns. But private equity fund managers already have the tax protection of carried interest, so there isn’t the same incentive for them to buy a team as there is for individuals, Zimbalist says. Still, the environment may be changing. Moag notes an encouraging precedent. From 1994 to 1998 the Ontario Teachers’ Pension Plan sank about $300 million into Maple Leaf Sports & Entertainment, owner of the Toronto Maple Leafs and the Toronto Raptors, and sold its 80 percent stake for $1.29 billion in 2011. “That was a long hold, but a huge win for investors,” Moag says. “I think in many ways that’s the future. This is where a lot of the equity needs to come from.” Caporale says the trend will develop once existing owners who decide to sell their teams discover they are unable to find individual buyers. “They will be the ones to start making arguments in the league that this needs to be allowed,” he predicts. At least one major league, which Caporale declined to name, had consultants looking into the issue, and one of those consultants recommends letting private equity funds into the ownership business, he says. “It’s unfortunate that they haven’t been allowed to participate over the last five to ten years, because they would have received great returns, probably better than some of the other companies they invested in,” Caporale notes. Sports teams represent long-term investments, which can fit well with the private equity model. Experts say private equity firms will be eager to invest. “It’s a high-growth industry, and the potential for solid returns on investment is high,” says Reena Aggarwal, a finance and business administration professor at Georgetown University’s McDonough School of Business. Teams would represent an attractive new asset class for private equity funds — and a natural spillover, given that some private equity titans themselves own teams as individuals, she says. Sports teams would especially make sense for the increasing number of private equity funds that are being established without fixed termination dates, notes Brent Lawrence, CEO of Accelerate Sports, a sports investment bank in Sacramento, California. Some private equity firms would do well to tie the purchase of a team to a real estate investment around the team’s stadium. “If a private equity firm has a real estate side of the house, I could see them enter a project where they can create a sports-anchored, mixed-use development,” he says. Caporale says that initially, team purchases involving private equity funds will probably be similar to the Gores–Platinum Equity deal to acquire the Pistons, with a fund backing an individual. “The funds need to be cognizant of managing the team, so they would want someone involved who’s responsible for operations,” he explains. Further down the road, he sees private equity funds acquiring teams by themselves. But not everyone thinks private equity firms will flock to buy teams. Some experts question whether teams’ cash flow is strong enough to appeal to private equity managers and investors. “The NFL has predictable profits, but in other leagues it can vary across teams and markets,” says Sean Clemens, senior vice president at Park Lane, a sports banking firm in Santa Monica, California. “If the owners can’t leverage media rights, there might not be a cash cushion year to year.” Phil de Picciotto, president of sports marketing agency Octagon, a Stamford, Connecticut–based subsidiary of advertising giant Interpublic Group of Cos., doubts teams’ ongoing profits would provide as income as attractive to private equity funds as other assets they hold, especially given the hefty sums the funds would have to pay for teams. Private equity firms would have to hold teams for a long period to enjoy bountiful returns, experts say. “But what private equity is typically good at is turning things around, creating added value and then selling,” de Picciotto says. What’s more, private equity firms and sports leagues may have a culture clash. “Leagues want consistency and owners who are in it for the love of sports, offering benefits to the community and supporting goals of the league,” he notes. “None of these are private equity qualities.” Buying sports teams won’t necessarily spark enthusiasm among fund investors either, says Steve Horowitz, a partner at sports investment bank Inner Circle Sports in New York City. “If it goes up, no one cares, and if it goes down, it gets you fired,” he says. “Everybody assumes it was a vanity play.” Institutional investors already own some of sports teams’ debt, and that makes more sense, according to Horowitz. Could the stock market become an option for team ownership? Several teams went public in the 1980s and 1990s, including the Boston Celtics and the Cleveland Indians.