The Let Kids Play Act is the first attempt by federal lawmakers to address growing issues and concerns around the $40 billion-plus U.S. youth sports ecosystem. As demand for youth sports has risen dramatically since the COVID-19 pandemic, affordability, access, consolidation and potentially anticompetitive conduct in youth sports have drawn increased scrutiny from both parents and Congress.
However, the recently proposed bill would restrict a wide swath of private investment in youth sports while imposing heavy penalties and liability on investors who fail to clear proposed regulatory hurdles. Unfortunately, the bill attempts to address these concerns by broadly restricting certain sources and forms of private investment rather than targeting the conduct giving rise to them.
We’ve been following this bill closely for professional and personal reasons: We are transactional lawyers who guide private equity clients through significant deals and fundraising, and we are each the parent of three children who are competitive student-athletes.
If enacted, the Let Kids Play Act would be the very definition of a game-changer for youth sports. So how did we get here?
In the years following the pandemic, consumer demand for youth sports grew rapidly, often outpacing the availability of public and nonprofit community-based sports and creating a need that has attracted private and public investors. The youth sports segment of the market has grown as much as 10 percent per year post-pandemic, with the average sports family in the U.S. spending almost 50 percent more on youth sports now than in 2019. And it’s not slowing down. The global youth sports market is projected to reach well above $100 billion in the next decade.
This rapid growth has provided much more steady revenue for clubs, private leagues and tournaments, camps and coaching than in past decades, and that has attracted private equity and other forms of private investment.
Greater Scrutiny and Criticism
The rise in costs coupled with greater profitability has resulted in increased scrutiny and criticism. A few months ago, USA Today reported on its investigation of investment firm Black Bear Sports Group. Among other hockey-related investments, Black Bear has acquired close to 50 local ice rinks across the country. One of those rinks is in Pittsburgh, the district of U.S. Rep. Chris Deluzio of Pennsylvania, a co-sponsor of the Let Kids Play Act. According to USA Today, the rink was home to the Pittsburgh Vipers, a non-profit youth hockey association. After acquiring the rink, Black Bear offered to buy the association’s teams for $1. When the Vipers’ parent-run board refused, Black Bear removed most of the teams from the rink, USA Today reported. The Vipers, which had run a hockey program for 60 years, folded, and Black Bear was broadly criticized.
In addition to the scrutiny Black Bear faced, many parents have become increasingly critical of the pay-to-play youth sports model, which in some cases involves a single private company controlling multiple facets of a youth sport. For example, a club may acquire a competition facility, expand into tournaments and camps and eventually extend into apparel and equipment, potentially leaving parents with fewer or no alternatives. In other cases, a competition facility that hosts tournaments will require parents and athletes who travel to stay at member hotels or purchase a minimum number of rooms in order to participate. In both cases, parents cite concerns over rising costs and loss of options.
As their constituents became more vocal, legislators started looking for solutions, and certain members of Congress introduced the Let Kids Play Act. This legislation regulates investment in three ways: It prohibits any “vulture investor” from investing in youth sports; it prohibits any “covered firm” from engaging in “vulture practices” with respect to an investment in a youth sports entity; and it establishes a presumptive designation regime under which private equity funds with existing youth sports investments are automatically classified as “vulture investors” unless they obtain certification from the Federal Trade Commission.
‘Vulture Investors’
Most of us familiar with standard deal-making practices in M&A would deem the term “vulture” misleading if it were used to describe many of these practices. In the Let Kids Play Act, a “vulture investor” is any “covered firm” that “(A) engages, or has previously engaged, in vulture practices with respect to an entity that was an acquired entity at the time of such engagement; or (B) has had two or more acquired entities become financially insolvent or enter bankruptcy proceedings within five years of acquisition.” “Vulture practices” include — among other customary M&A practices used by both privately and publicly held businesses — financing an acquisition with debt, employing a roll-up strategy or imposing operational costs (such as management fees) on an entity.
The bill also uses “private equity fund” more broadly than that term is commonly understood in the dealmaking community. In the legislation, a “covered firm” is a “private equity fund” or a company owned or controlled by a “private equity fund,” and a “private equity fund” is any person that would be an investment company under the Investment Company Act of 1940 but for paragraphs (1) or (7) of Section 3(c) of that Act. Sections 3(c)(1) and 3(c)(7) are the exemptions typically relied upon by traditional private equity funds but also by many other types of funds, including growth equity funds, venture capital funds, activist hedge funds and pooled investment vehicles.
Because the bill includes customary M&A practices — such as the use of debt to finance an acquisition among its defined “vulture practices” — its prohibition appears capable of reaching beyond bad actors, rather than merely targeting practices traditionally associated with distressed or predatory investing. Finally, the bill goes a step further to explicitly ensure that any covered firm not deemed a vulture investor remains barred from investing in youth sports if at any time it engages in “vulture practices” and many other common business practices with respect to youth sports.
Presumptive Designation and Strict Liability Risks
Further, the bill would establish a presumptive designation framework that would apply immediately to any covered firm with existing youth sports investments. Upon enactment, such firms would be automatically designated as so-called vulture investors after 91 days unless certified as not a “vulture investor” by the FTC, with certification being the sole mechanism to rebut such designation. To rebut the designation, the covered firm must submit a sworn certification, executed under penalty of perjury and subject to strict liability for any material misstatement or omission. False certification would carry a civil penalty of not less than $1 million per certification, impose joint and several liability on the firm and each executing individual without right of indemnification or insurance, and carry potential criminal liability of up to one year in prison. Any designated “vulture investors” would face mandatory divestiture of the investment.
It’s also worth noting that the bill’s definition of “youth sports” extends to investments across the sports ecosystem, merely requiring association with sports for individuals under age 18. This could include adult facilities also serving youth, apparel makers, fitness apps and many other types of companies with both adult and youth customers.
Given the breadth of these restrictions, a more fundamental question remains: Is private equity really the problem? Although private equity’s presence in youth sports is growing rapidly — particularly among larger clubs, tournament operators, facilities and technology platforms — the industry remains highly fragmented. And there is little evidence that private equity controls more than a fraction of the broader youth sports ecosystem.
Potential Market Distortions
Our concern is that, while the experiences involving certain private equity investors are important — particularly those suggesting anticompetitive conduct — the increased costs borne by parents are more likely attributable to a combination of rising consumer prices, increased demand and, in some cases, anticompetitive or profit-driven behavior by numerous types of founders, investors and companies.
We also acknowledge that affordability and access issues are real. Consolidation of clubs, facilities and tournament operators reduces parents’ choices, and business practices that leverage control of scarce facilities to disadvantage competing programs deserve scrutiny. The harder question is whether regulating the source of ownership capital is a sensible proxy for addressing those issues.
Should the “Let Kids Play Act” become law, we anticipate at least three significant, potentially harmful effects on youth sports:
1. New investment could decline. The combination of certification risk, personal liability and restrictions on ordinary investment structures increases underwriting uncertainty and may cause investors to exclude youth sports investments entirely.
2. Existing investors may be pushed toward divestiture. For existing investments, the asymmetric risk associated with certification may make divestiture more attractive than seeking FTC approval.
3. Ownership may shift without solving the underlying problem. The withdrawal of private equity doesn’t automatically revert commercial youth sports to nonprofits and community-led organizations. Assets could instead migrate to strategic buyers, founder-backed operators or other capital sources that fall outside the bill’s definition of a “covered firm” — without necessarily eliminating the conduct Congress seeks to address.
Alternative Approaches
We urge private equity investors and other investors to closely monitor the Let Kids Play Act and related legislation. In May, members of Congress introduced the STRONG Kids Act, which reflects a different policy approach: allocating tax revenue from sports wagering to benefit community youth sports organizations. Other approaches could more directly target conduct that has generated criticism, including exclusionary facility arrangements, pay-to-play practices or other potentially anticompetitive behavior. We may therefore see additional state or federal scrutiny of particular business practices in youth sports regardless of the fate of the Let Kids Play Act.
Affordability and access to youth sports are concerns worth addressing. As parents, we understand the frustration. But as deal lawyers, we question whether broadly regulating the source of investment capital is the right tool. A law intended to protect families and expand opportunities for young athletes could instead leave leagues, clubs and facilities with less capital and fewer options without eliminating the conduct that prompted congressional concern in the first place.
For now, we believe it is premature for investment firms to make unilateral decisions to avoid — or divest from — youth sports. But investors should closely monitor the Let Kids Play Act and related legislative and enforcement developments. If enacted, the legislation could have significant implications well beyond traditional private equity and well beyond businesses focused exclusively on youth sports.
Garrett Johnston is managing partner of the Houston office of international law firm O’Melveny & Myers LLP. O’Melveny partner Tracie Ingrasin chairs O’Melveny’s Asset Management Practice.