Posted by John Vrooman on Tuesday, December 26, 2017 in National Football League.

Interview with Charlotte Observer.

I am looking at the limited partners who are part of the ownership group with Jerry Richardson and explaining how these partnerships can work. My understanding is that Jerry clearly runs the show, although these partners still own a significant stake. I was wondering if you might have thoughts on how these groups can work.

Limited partnerships create a classic principle-agent problem where the general partner has an incentive to maximize his own interest very often at the expense of the financial interest of his limited partners (who are often silent). This effect is especially applicable to the LP ownership of pro sports franchises, and I have previously called this agency effect the Steinbrenner effect after NYY GP owner George (who held 55 percent share in the mid to late 1990s).

https://cdn.vanderbilt.edu/vu-my/wp-content/uploads/sites/2119/2019/04/14134808/unified.pdf

As a result of this agency effect, the Panthers’ GP (Jerry Richardson) can typically be more aggressive in his pursuit of winning because he is bearing only a portion of the cost (Richardson’s 49 percent ownership share) and effectively passing on the rest of the cost of winning to his relatively silent LPs (Belk, Levine, Wordsworth).

The GP is effectively buying wins at a discount equal to the remaining LP share (51 percent in this case). So the agency effect is actually good for the GP, great for the players and fans, but not so much for the LPs because they are effectively paying for the potential excesses of the GP, who gets all of the cred at half the price.

The Steinbrenner agency effect is financially inefficient because the excessive costs lead to an undervaluation of the franchise. This is also why sports GPs will usually cut payroll right before they sell a club to maximize franchise value and get the highest auction price.

The agency effects of LPs in sports ownership can also adversely affect the price of talent faced by the other owners. This is why the NFL has rules against corporate ownership and rules requiring minimum ownership shares for the GP and/or his/her family (currently 30 percent). This is because the smaller the GP share, the greater the agency effect on the rest of the League.

Finally, to complicate matters even more, sports franchises are systematically overvalued by 20 percent to 25 percent when they are sold in a monopoly auction. The Panthers are currently worth about $2.3 billion to $2.5 billion but the final selling price would probably be in the $2.8 billion to $3 billion range because the winning bid price is the highest price, rather than the true-value price.

V