A family with a passion for horses buys a stable. Someone fascinated by gemology buys a mine. Families whose interests run to sports buy a minor league baseball or soccer team, or an e-sports business.
These are just a few examples of investments families hope will make money — but also help unite the family around a shared interest.
For the family of Nancy P. Bruns, this shared interest was a local investment focus.
“At a recent family meeting, someone asked what we were doing to support small business growth in West Virginia. While our family foundation continues to generously address community needs across the state, this question opened the door to a different kind of impact,” says Bruns, who is chairman of the board of the Dickinson Group. “We discovered a group of organized investors focused on venture capital for emerging businesses in West Virginia and decided to explore it further.”
Bruns formed a small family committee to study the group’s approach and vet potential opportunities.
“It’s been both exciting and rewarding to learn about the entrepreneurs building businesses in our state,” she says. “Along the way, we’ve found meaningful opportunities to support, and I’ve also used this process to identify and encourage the next generation of family leadership.”
This type of investment — which joins financial returns with intangible ones — is “essentially limited only by the stuff your family members are into,” says Nathan Imfeld, a partner at Foley & Lardner. The firm has seen families make investments as diverse as pickleball facilities, wineries or racehorses.
“These investments have some of the characteristics that you would more typically associate with philanthropy: You’re searching for family alignment around something that everyone can get excited about,” Imfeld says. “These kinds of alternatives tend to have a non-financial dynamic: The family are all wine lovers, and they’re really excited about owning a winery. Or the family are all interested in a particular sport and they want to have a sports team that plays that.”
For the family of Joe Tracy, CEO of Dot Family Holdings, this has meant investing in a vacation spot at Lake of the Ozarks in Missouri.
“Our family has been having our family reunion there since 1960, so having a place where we can all go and spend time with each other helps build family relationships and family harmony,” Tracy says. “We also give free days to long-term employees as anniversary gifts and allow our managers to book meetings there as well.”
The appeal of sports teams
Nicholas A. Chamis, senior counsel in the tax, benefits and estate planning practice at Foley & Lardner, says his firm is seeing a trend toward sports investments outside of the big four professional leagues.
“There’s only 120-some-odd big four professional sports teams, and that number is not growing in the same way that family offices are growing,” Chamis says. “But people still like sports, and it’s something that generations can be part of together.”
Justin Papadakis works with family offices who invest in teams in his capacity as deputy CEO and chief real estate officer of the United Soccer League. He says these investments offer both financial and nonfinancial returns.
“It’s hard to think of an asset class or a sector that has a higher proportion of family offices as ownership than professional sports. From a financial perspective, family offices have seen a very strong track record in the return profile of professional sports,” Papadakis says. “There’s a common misconception that professional sports teams are kind of like yachts or toys that wealthy people have. But the results speak for themselves: I think professional sports as an asset class has outperformed.”
Sports franchises can offer benefits beyond the financial returns. They allow family offices to “invest in a community asset that can have an amplifier effect on their community,” Papadakis says.
“We call our stadiums our ‘community living rooms’ because it’s really the one place that the entire community can come together week in and week out as one community to support their team,” Papadakis says. “That is what is compelling. There are a lot of other ways to invest money. But a lot of our families really care about their communities, and they’re putting their investment dollars behind an investment vehicle that has a unique place within those communities.”
The ideal scenario, of course, is to achieve both financial and non-financial gains.
“The successes are where they hit both goals: giving the family a passionate, fun thing to own together that they’re proud of, and continuing to make money,” Chamis says. “In some cases, the value is intrinsic: the ownership could unite the passion of G1, G2 and G3. It serves as a family event they get together every couple of weeks for. And they have that, but at the same time, it’s turned a profit.”
Understanding the risks
Sports teams are meant to be profit-making endeavors and can have a high upside, but there are risks to them from an investment perspective.
“Running off and buying a sports franchise potentially relates to NextGen engagement or to family togetherness, but it also can be a risky alternative investment,” Imfeld says.
One issue is the lack of liquidity.
“All these are highly illiquid private investments that have a very, very high risk of not performing the same as more typical liquid investments,” Imfeld says. “You want to be really sure that you’re going to get the alignment and engagement that you expect, because you’re paying for it by taking the risk of lower investment performance.
These issues are not unique to sports teams.
“You have a lot of concentrated downside risk. It’s just like investing in any single business or being exposed to one market or one industry,” Imfeld says. “You could imagine the same scenario with a winery. Wine’s very exciting and interesting and growing at the time that you buy the winery, and then all of a sudden, tastes change, and everybody wants to go drink seltzers, and the value of the investment declines.”
Another risk to investing in sports teams: If families own a minority share, they need to understand that they will be passive investors.
“Maybe the fun that they thought they were going to have in terms of control isn’t there. So it’s also important to make sure they understand what the true role of their investment is and are thinking of themselves more as a shareholder than a controlling owner,” Chamis says.
The need for alignment
The key to avoiding these risks is to make sure everyone in the family understands the goals of the investment.
“There are risks associated with using an investment like this in non-investment ways,” Imfeld says. “Because if you don’t have family alignment around why the money is getting invested in this particular thing, and things don’t go as planned, you can end up with big problems.”
If some family members are interested in an investment because it aligns with a hobby or passion, but others view it in purely financial terms, that can lead to conflict if the financial returns don’t meet expectations.
“You have to be really cautious about ensuring that you’re having the right conversations before you’re thinking about an investment like this,” Imfeld says.
The right governance structures can help.
“If you’re going to be engaged in direct investment, and particularly where the motivation is not purely financial, I would always have an investment committee,” Imfeld says. “You need a committee to vet the investment opportunities. I would include family members and non-family members.”
That committee should be working from an investment policy statement that includes the reasons — and a process — for considering investments whose goals go beyond financial returns.
“At the highest level, there needs to be a clear plan ahead of time for how you’re going to look at investments, why you are looking at investments that have non-financial components to what you’re investing, what those are and what, kind of, the collective risk tolerance is – and how to assess that,” Imfeld says. “It’s a structure that’s intended to prompt you to have the right conversations, so that there’s not misalignment that turns into a conflict later if the investment underperforms.”