Is Private Equity the Next Big Thing in College Sports?

• Florida State University is pursuing the potential of private equity investments in its athletics program.
• Massive media contracts and NIL deals make college sports attractive to private investors.
• Abandoning their nonprofit status would have numerous implications for university athletics programs.
• Universities already have business deals with sports marketing companies that realize a percentage of revenues.

This year, Florida State University will earn roughly $40 million thanks to the Atlantic Coast Conference's (ACC) media deal. That's evidently not enough.

Leaders at the university believe they're leaving money on the table. Teams in the Southeastern Conference and Big Ten stand to make as much as $30 million more than their ACC counterparts. So the Seminoles might seek greener pastures, perhaps in the Big Ten.

To do so, Florida State would have to buy its way out of the ACC's current media contract, which would cost the university upwards of $300 million. Not to worry, though. Florida State has a plan.

It hopes to raise money from private investors and has enlisted JPMorgan Chase & Co. to explore opportunities.

"There are a lot of people who would definitely be interested," one athletic director told Sportico. "College sports, if it's done as an actual business in the future, could make even more money."

But how might that work? Can a traditional private equity model function within a nonprofit structure? Is "Florida State Athletics Inc." even possible? What about NCAA regulations? And could such a move pave the way for a flood of private capital into collegiate sports?

The Relentless Pursuit of Revenue

Florida State's aspirations might smack of greed, but that's just par for the course in today's college athletics landscape. In a world where amateur student-athletes play at educational institutions conceived to produce and transmit knowledge, it's still all about the Benjamins.

The pursuit of revenue certainly continues to drive conference realignment.

Last summer, the Universities of Washington and Oregon announced they were joining the Big Ten, reuniting with fellow Pac-12 deserters the University of Southern California (USC) and the University of California, Los Angeles (UCLA). The Big Ten's new seven-year media rights agreement with Fox, CBS, and NBC is worth $7 billion, and each school could realize up to $100 million annually.

Meanwhile, the Universities of Arizona and Utah, along with Arizona State University, declared they would be departing for the Big 12, following the University of Colorado's similar decision.

And in September, Florida State's ACC announced it was inviting Stanford University, the University of California, Berkeley (Cal), and Southern Methodist University to join next year.

Losing Stanford and Cal was perhaps the final death blow for the Pac-12, which bids adieu to 108 years of tradition as teams scamper to secure more lucrative alliances.

It's not just schools and conferences involved in money grabs. Thanks to name, image, and likeness (NIL) opportunities, players now have a financial stake in the game. The transfer portal has enabled athletes to switch teams without penalty in search of bigger and better NIL deals. Some players stand to make millions.

But again, that's not enough. Ultimately, it seems players will be paid directly as employees.

Last spring, the National Labor Relations Board filed a complaint against USC, the Pac-12, and the NCAA claiming players should be classified as employees, not student-athletes. Around the same time, the NCAA asked a federal appeals court in Pennsylvania to reject a similar effort to secure employee status for athletes.

Even within the Ivy League, famous for its emphasis on the "student" side of student-athlete, the pursuit of employee status has gained traction, as Dartmouth College's basketball players seek to unionize.

But where would the money come from? Only a relative handful of schools realize a profit after meeting all the expenses involved in running an intercollegiate sports program. Coaches aren't about to give up their seven-figure salaries.

Could players get a cut of ever-growing media contracts, especially since their appearance on networks constitutes a form of NIL usage? That's certainly possible considering the revised College Football Playoff format promises to yield a media deal worth as much as $2 billion.

Perhaps private equity is the answer after all.

"It's all about revenue," B. David Ridpath, a professor of sports business at Ohio University and former college athletics executive, told BestColleges. "It's about winning. It's about being successful. And that's how it is with capitalism. So why wouldn't private equity work?"

Imagining a For-Profit Collegiate Sports Enterprise

That's the key question: Why wouldn't it work?

For starters, universities operate as nonprofits, meaning they exist to provide a public benefit, not to turn a profit. Although they might realize net assets, they don't distribute dividends to shareholders and investors.

Some auxiliary functions, however, such as the bookstore and dining services, can be outsourced to for-profit companies. But most university operations, including athletics, fall under the nonprofit umbrella.

Private equity, of course, functions to generate profits for investors. Firms invest in privately held companies with the goal of making companies more profitable.

So something has to give.

In Florida State's case, the exact nature of the relationship between the university, its athletics department, and private investors remains undetermined. But Sportico reported the university may consider a structure whereby commercial rights are rolled into a new company in which private equity funds are invested. The return on that investment would come from future media and sponsorship revenue.

That "new company" would have to operate as a for-profit enterprise that's somehow related to the university and its athletics department yet separate. Despite the arms-length arrangement, such a move would send clear signals about where college sports are headed.

"I always try to assess whether a proposal would likely move a department, conference, or organization closer to being an educational entity or a commercial entity," Welch Suggs, an associate professor of journalism at the University of Georgia and a former associate director for the Knight Commission on Intercollegiate Athletics, told BestColleges in an email. "It seems pretty clear that [venture capital] taking an equity position in athletics would be a move toward commercialization.

"That raises a whole host of concerns," Suggs continued, "the most important of which is whether athletes are employees of that business."

Another concern, depending on the nature of the university's relationship with a for-profit sports enterprise, is taxes. A major benefit nonprofits enjoy is freedom from income and property taxes. Unlike professional sports franchises, universities don't pay taxes on the income generated from their teams, including media contracts.

Consider the potential property taxes on a massive stadium such as Ohio State's. If the university's athletics department — or, say, just its football program — became for-profit, it theoretically would have to pay property taxes on that footprint.

Ridpath suggested an alternative scheme that assumes the university maintains ownership of the stadium and essentially leases it to the athletics department.

"My guess is that if Ohio State becomes an athletic corporation as an auxiliary of the university, they would pay the university for the use of those facilities," he said. "They would pay quite a hefty fee, I would imagine, probably in the millions. That certainly could be used to support other sports."

Income taxes could be another matter. Depending on state laws, for-profit athletic organizations may have to pay income tax on revenue. Naturally, that would cut into potential profits.

Florida doesn't impose an income tax, making Florida State that much more attractive to private investors.

Some argue revenue generated by athletics departments as they currently exist, given their commercial purpose, should be deemed unrelated business income and, therefore, be taxable.

"If the 'student-athlete' and 'educational purpose' requirements do not hold up as originally intended when the regulations were written, lawmakers should consider modifying the laws to tax educational institutions on revenue earned by their athletic programs," wrote Mitchell Franklin and Ronald Zullo in Tax Notes.

"The newly commercialized traits of athletic programs combined with NIL recruitment efforts show that the [unrelated business taxable income] rules may be a better fit for schools than not-for-profit status."

Philanthropy could also become a concern. Donors derive tax benefits from their contributions because of the university's tax-exempt status. Ohio State's athletic division raked in almost $63 million last year in private donations. A for-profit sports program wouldn't offer that same tax benefit.

Instead, universities perhaps would maintain separate institutionally related foundations, such as Ohio State's, to promote philanthropy, raise funds, and manage donor contributions. Certainly, universities risk alienating donors who might no longer support a for-profit enterprise even under this sort of arrangement, but they might discover even greater financial potential through private investments as the trade-off.

And there's the matter of the investors themselves. Certain groups or individuals might spark controversy, especially considering more than 80% of Power 5 universities are public entities. The recent public backlash against Saudi investors in LIV Golf, a private corporation, serves as a cautionary tale.

"I can see a whole host of problems when the public finds out who is in those private equity groups," Karen Weaver, academic director of the Collegiate Athletics Certificate Program at the University of Pennsylvania Graduate School of Education and a former college athletics administrator, told BestColleges. "I could see a real interest in a Power 5 football program for Saudi investors. And what kind of backlash might that create on campus? Is it worth it to accept this money?"

Finally, what about the NCAA? Would a for-profit athletics organization be allowed to compete for championships under NCAA rules? Would these entities still be subject to recruiting guidelines and regulations such as Title IX? Who governs sports programs with investors presumably having a say in how these businesses are run?

Existing Models of For-Profit Partnerships

Partnerships between university athletics departments and for-profit entities already exist, of course, so the notion of people profiting off college athletics is hardly new.

Full-service marketing companies such as Learfield and Playfly Sports broker media opportunities for athletics departments, managing everything from ticket sales to merchandise licensing and multimedia rights. For their services, they take a cut of the revenue.

Firms such as Opendorse, which bills itself as "the world's leading athlete influencer platform," are cashing in on the burgeoning NIL market, connecting student-athletes with brands through social media and appearances.

The company also works with NIL "collectives," which fund and coordinate NIL opportunities for athletes. Some collectives are for-profit, not just rabid boosters hoping to attract star athletes to their schools.

"They're getting a cut somewhere," Ridpath said of the collectives. "If they're facilitating deals, they're going to take some off the top."

Florida State's proposed arrangement takes these partnerships to the next level, offering investors a stake in the organization, though how the university might navigate its financial obligations to companies like Learfield, which counts Florida State among its clients, remains unclear.

Should Florida State succeed, it would be the first, though it's not the first to try. In 2019, the Pac-12 conference, through the Raine Group, an investment bank, explored the potential of recruiting investors to provide upwards of $500 million with the promise of returns on media rights deals. Nothing materialized, however.

Considering the recent directions of intercollegiate athletics — with multibillion-dollar media contracts, the commercialization of student-athletes through NIL, and the strong potential of athletes being paid as employees through collective bargaining — it's not difficult to imagine an environment in which private equity infiltrates this lucrative market.

As it is, investors are only two degrees of separation removed. The investment firm Sixth Street holds a majority interest in Legends, a brand management company working with universities such as Ohio State and Notre Dame, as well as professional teams.

In almost every conceivable way, college athletics, particularly football, is a business, just one currently enjoying the benefits of nonprofit status. Becoming bona fide for-profit corporations, complete with employees, constitutes the next plausible, perhaps inexorable, step.

Ridpath certainly entertains the possibility, believing college athletics companies could one day be publicly traded on the stock market.

"The one thing I know about the business of college athletics is that they will tap into anything if it makes them money," Ridpath said. "And so private equity, I think, is a logical place to look."