Wednesday, January 26 2022

Major League Soccer’s new rules around private equity ownership include restrictions on how much equity a fund can buy, how many clubs it can back, how many board seats it can hold, and how big the fund has to be.

MLS briefed clubs on the guidelines, put together by the league and its finance committee, in a recent league presentation, portions of which were viewed by Sportico. A league spokesman declined to comment.

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MLS owners voted last year to allow private equity ownership, joining the NBA and MLB in entering a new era in sports investment. Faced with soaring valuations and COVID-related financial challenges, the leagues are hoping to make minority sales easier, allowing owners to access capital.

“There’s so much money in the marketplace right now, and to be able to get some of the really smart people in the business to invest without a path to control, without anything other than capturing the appreciation—and there’s been a lot of appreciation, particularly in Major League Soccer—makes sense,” MLS commissioner Don Garber said in an interview during Sportico’s MLS Valuations 2021 event in July. “I’m a big fan of it. I love the guys that are talking to us, and I think it will be good for our clubs.”

The MLS guidelines cover four main areas: specifics for what constitutes a “qualified fund,” rules around the investments themselves, governance restrictions and different deal types.

On the fund side, groups looking to buy stakes in MLS clubs must have at least $500 million raised. The league is requiring diversified backers, so a qualified fund cannot have more than 25% owned by a single investor, according to the presentation. It’s also requiring a diversified portfolio; no more than 10% of a fund can be invested in one club, and MLS clubs can’t make up more than 25% of a fund overall.

MLS has told its clubs it will create a short list of pre-qualified funds. It’s unclear if that list has been completed.

For the deals themselves, any PE investment must be more than $20 million but cannot exceed 20% of the club’s equity, according to the presentation. No team can have more than 30% of its equity owned by funds, and no fund can own stakes in more than four teams.

The final two buckets of MLS guidelines cover the types of approved deals. Funds aren’t allowed to have a board seat, be the controlling owner, or have voting rights beyond what’s required by law. The club’s controlling owner must also have first negotiation rights should a fund chose to sell its stake, and the right to compel a sale of the fund’s interest in the event of a controlling stake sale (called drag-along rights). Funds can purchase either common equity, or senior equity instruments that don’t have debt features.

The MLS guidelines are one league’s attempt to allow new forms of investment while also insulating clubs from the potential long-term concerns of mixing institutional investors and traditional sports ownership. Some of the MLS rules are similar to ones the NBA put in place last year. Like in MLS, a fund can buy up to 20% of an NBA team, and teams can sell up to 30% total. Funds can own up to five NBA teams, unlike four in MLS.

There has so far been at least one MLS private equity deal. When Inter Miami owners David Beckham and Jorge and Jose Mas bought out partners Marcelo Claure and Masayoshi Son in September, Ares Management Corp. came on as an investor. Ares closed a $150 million preferred equity investment into Inter Miami; the group’s global portfolio has more than $262 billion in assets under management.

While it is new for MLS clubs, institutional money is already fairly common in other parts of the soccer world. Many European clubs have private equity backers, and top domestic leagues like Italy’s Serie A and Germany’s Bundesliga have considered selling off equity in their media rights to groups like CVC or KKR.

Back in 2012, MLS sold a 25% stake in Soccer United Marketing, its media and marketing arm, to PE firm Providence Equity Partners. Five years later, it bought that stake back.

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