In a move praised by sports investors, Major League Soccer will allow private equity financing to increase league capital that is suffering from the economic fallout of Covid-19, MLS Commissioner Don Garber told CNBC.
Garber, who appeared on "Closing Bell" Friday, announced the move saying the league is "pretty close to finalizing something" that will allow private equity financing that "could come into investing with our local teams," he said.
Allowing private equity financing could help unload some of the burden facing MLS owners suffering losses with no spectators planned to attend games this season. Garber admitted "not having day of game revenues have been really impactful for us," adding the MLS could suffer a $1 billion loss due to Covid-19.
Jared Bartie, co-chair of O'Melveny's sports industry group, said the drop in revenues is problematic because MLS clubs have debt from their venues that they need to service, among other costs.
"There is a rental fee; there is debt service; there are sponsorship and partner fulfillment," Bartie told CNBC. "[Game day] revenues are necessary to offset those costs. When there is declining revenue, those costs don't go away. They are still there."
Though most MLS clubs are struggling financially, owners also gain revenue through Soccer United Marketing, which oversees all the commercial rights to the MLS. SUM controls sponsorship, broadcasting, digital, and consumer product rights of the entities and handles the promotion of the Mexican Football Federation contests and CONCACAF's Gold Cup games in the U.S.
"We'll get through this," said Garber. "But it has had challenges for sure."
The private equity option will also allow MLS limited partners, like Brooklyn Nets star Kevin Durant and Houston Rockets star James Harden, to have more buyers if they decide to sell their stakes in the future.
Garber said MLS has been reluctant to allow private equity ownership in the past as the league wanted to "know who your owners are so that you understand how long they are for their vision for participating in the league."
With franchise values skyrocketing, the National Basketball Association and Major League Baseball created investment funds to lure minority buyers. New York firm Dyal Capital Partners will handle the NBA's fund. MLB commissioner Rob Manfred told CNBC last December he expects the MLB's investment fund to "be up and running" this year.
"It creates new opportunities for people who want to invest in sports, and maybe not in a purely financial way," NBA Commissioner Adam Silver told SportsPro Media. "Part of it is the amenities, and the cachet, and the desire to be directly involved with these leagues."
The MLS resumed its season Wednesday with its "MLS is Back Tournament" after suspending operations due to the pandemic on March 12.