League Approvals,Beneficial Owners and How Private Equity Funds Use Convertible Notes to Invest in Sports Franchises

The professional sports industry has entered a new era of institutional capital.

Over the last five years, leagues such as the NBA, MLB, NHL, and most recently the NFL have taken steps to modernize their ownership rules, allowing private equity funds and institutional investors to take minority stakes in teams.

This shift has opened the door for firms like Arctos Sports Partners, RedBird Capital, Ares Management, and Sixth Street Partners to build multi-billion-dollar portfolios across major league franchises. But these investments must still navigate a dense web of league rules designed to preserve integrity, control, and long-term commitment.

Among the most important constraints: league ownership transfers require formal approval, team equity cannot be pledged as collateral, and ownership rights must remain with vetted individuals or entities.

To address these hurdles, institutional investors have increasingly turned to convertible note structures—a quiet but powerful financial tool that allows them to gain economic exposure to a team while deferring actual equity ownership until the league gives its blessing.

League Approval: Process and Timeline

Each major league has a formal approval process for new owners—whether majority or minority. The process is designed to ensure that all owners meet the league’s standards for character, financial capability, and compliance.

General Process (All Leagues):

1. Disclosure

2. League Review

3. Committee Review

4. Approval Vote

League-Specific Timelines and Notes:

• MLB: 90–180 days – League mandates extensive disclosures and prohibits most indirect ownership structures.

• NBA: 60–120 days – Has been most proactive in institutional investment approvals.

• NHL: 60–120 days – Minority stakes must avoid control rights and often require escrow or delayed closing.

• NFL: 120–180+ days – Now allows funds to acquire up to 10% of a team via pre-approved vehicles.

Beneficial Ownership Limits

Most leagues place limits on the number of beneficial owners per team. Historically, the limit has been one or a few individuals. However, leagues have made exceptions for institutional funds, provided:

- There is a single control person (usually the General Partner),

- Limited Partners are passive and have no voting rights,

- LPs below a 5% threshold are not treated as “beneficial owners” for disclosure purposes.

For example, Arctos may invest $100 million into a team via a fund that has hundreds of LPs, but only Arctos GP LLC is the recognized “owner” under league rules.

What Is a Convertible Note in This Context?

In the sports ownership world, a convertible note is a form of bridge financing that helps bridge the process of approval and ownership requirements.

These convertible structures enable an investor to:

- Contribute capital today,

- Earn interest or other economic benefits in the interim,

- Convert that investment into equity ownership once league approval is granted.

Importantly, the convertible note is not issued by the team itself, but rather by an upstream holding company that owns the franchise—such as a Delaware LLC that holds 100% of the team entity.

The note may be unsecured or secured by non-equity assets (such as distributions), but never by the franchise equity itself, which would violate league rules.

Why Use a Convertible Note?

1. League Approval Timing

League approval can take anywhere from 60 to 180 days, depending on the league, the complexity of the transaction, and the profile of the investor. A convertible note allows the investment to close immediately, while deferring equity transfer until league clearance is secured.

2. Regulatory Compliance

Most leagues strictly prohibit the pledging of team equity, automatic transfers of control, or sale of interests without prior approval. A convertible note sidesteps this by creating a contingent, non-equity interest that becomes active only upon approval.

3. Valuation Lock-In

Convertible notes often allow the investor to lock in a fixed equity valuation—providing protection against future appreciation or external capital events. Some also include step-up provisions that enhance conversion rights if performance metrics are met.

4. Economic Participation

Even without equity, the fund can earn a preferred return or PIK interest, receive exit proceeds in the event of a sale, or secure non-voting economic distributions during the interim period.

Example: How It Works in Practice

Take the case of Arctos Sports Partners’ investment in the Golden State Warriors. Rather than purchasing equity in the franchise entity itself, Arctos invested via a convertible structure in GSW Sports LLC, the holding company that owns the Warriors.

Initially, Arctos received a non-voting, non-controlling economic instrument. The structure included the right to convert into an equity stake once the NBA’s Board of Governors approved the transfer.

Similarly, RedBird Capital’s investment in Fenway Sports Group—owner of the Boston Red Sox and Liverpool FC—was executed through a top-level holding entity. RedBird’s position gave it passive economic exposure while waiting for league clearance to convert into an equity stake.

League Approval: Process and Timeline

Each major league has a formal approval process for new owners—whether majority or minority. The process is designed to ensure that all owners meet the league’s standards for character, financial capability, and compliance.

General Process (All Leagues):

1. Disclosure

2. League Review

3. Committee Review

4. Approval Vote

League-Specific Timelines and Notes:

MLB: 90–180 days – League mandates extensive disclosures and prohibits most indirect ownership structures.

NBA: 60–120 days – Has been most proactive in institutional investment approvals.

NHL: 60–120 days – Minority stakes must avoid control rights and often require escrow or delayed closing.

NFL: 120–180+ days – Now allows funds to acquire up to 10% of a team via pre-approved vehicles.

Beneficial Ownership Limits

Most leagues place limits on the number of beneficial owners per team. Historically, the limit has been one or a few individuals. However, leagues have made exceptions for institutional funds, provided:

- There is a single control person (usually the General Partner),

- Limited Partners are passive and have no voting rights,

- LPs below a 5% threshold are not treated as “beneficial owners” for disclosure purposes.

For example, Arctos may invest $100 million into a team via a fund that has hundreds of LPs, but only Arctos GP LLC is the recognized “owner” under league rules.

Conclusion

Convertible notes have become a key structuring tool in the evolving landscape of sports franchise ownership. They provide the flexibility to navigate league regulations while aligning the interests of capital providers and ownership groups.

As leagues continue to open up to institutional investment, we can expect these instruments to remain central to private equity’s growing role in the business of sports.