Explained: IndyCar’s charter system, and what it means for the business of racing

What is a charter?

To understand charters, it can help to understand how ownership structures work in other sports.

In Major League Baseball or the National Football League, these sports leagues are formed out of franchise owners that all get together to operate under the same set of rules. Major League Soccer was formed when a group of team operators invested in one central business.

But in sports like IndyCar or NASCAR, the series is generally owned by one person, family, or corporation. In the case of IndyCar, it’s Roger Penske and his company, Penske Entertainment. That means there’s one corporation in charge of doing everything from distributing prize funds to setting rules.

It also means that the teams that compete in IndyCar have no additional stake in the series beyond simply participating; their value, then, lies exclusively in their physical assets.

A charter, then, creates value for the teams by providing them an intangible asset to barter, sell, or use in negotiations with investors and sponsors. At its base, a charter is the right to compete full-time in the IndyCar series. The value of the charter, then, will largely correlate to the value of competing in the series — but it primarily means that teams have something beyond their physical assets to sell off should they no longer want to compete in the series.

But before we dig into the business sense there, let’s dig into the specifics.

More context on IndyCar’s charters and payouts:

???? IndyCar charters: What we know about the document delivered to teams at Gateway

???? Leaders Circle: The IndyCar championship you may not know about

IndyCar charters: The details

The charter deal used in IndyCar is an agreement among 10 teams. Those 10 teams are guaranteed a total of 25 cars distributed amongst those teams, with a cap of three chartered cars per team.

The charter gives that car the guarantee that it will have a starting slot in every race aside from the Indy 500. It also gives those cars a shot at competing for one of the 22 Leaders’ Circle prizes at the end of the year.

The 10 teams that earned charters were “grandfathered” them; effectively, that means that Penske Entertainment awarded charters to the 10 teams that competed full-time in the IndyCar Series in 2023. It also means that incoming teams like Prema Racing will not be given a charter; if Prema wants one in the future, it will have to buy one from a team.

While IndyCar has not released the details of how much the charters are worth, it’s estimated that they’ll be worth $1 million each.

In effect, that means that the value of competing in IndyCar full-time is worth $1 million.

What’s the business sense behind the charters?

As mentioned above, charters provide IndyCar teams with value that exists outside of its physical assets.

Right now, when an IndyCar team folds, it will at best be able to auction off its physical assets (like the cars, the race shop itself, equipment, etc), and there is no way that a team will actually recoup its investment in the sport that way. For example, one team may have spent $5 million fielding one specific chassis over the course of 10 years — but a 10-year-old chassis isn’t worth $5 million.

The charter’s value is more intangible; the worth of a charter is equivalent to the worth of competing in the series. So, a folding team can auction off its assets, yes, but can also sell off the right to compete in every IndyCar race in a season (aside from the Indy 500).

But how will the charter work in a team format, and how does the charter accrue value?

Having a charter will provide a team with leverage when it comes to negotiating business deals. Teams can approach a potential sponsor and show them that the mere act of racing in IndyCar is worth, say, $5 million — and that can attract a sponsor, because the sponsor knows there’s actual value behind putting its name on a race car.

Teams can sell their entire charter; for example, a three-car team may decide it’s better served to operate as a two-car team. It can sell its third charter on the open market to a new team, or to an existing team that wants to expand its operation.

But teams can also sell parts of their charter.

Think of the charter like a stock. Investors can purchase shares of a company on the stock market, pumping up the valuation of the company beyond its physical assets. An investor can also purchase a share of a charter.

This gives the team actual, physical cash that it can use to pour into its racing operations. With the additional cash, it stands to reason that the team would improve on the track, thus making the charter more valuable. The investor therefore earns money as the charter accrues value, and the team itself can leverage its better performances for more sponsors or more charter investors.

What does IndyCar gain from the charter system?

While teams are expected to benefit from the charter system, it can be more difficult to understand where IndyCar benefits — but there is a benefit for the series.

At its base, the charter system is designed to get investors spending money on IndyCar teams — which means that IndyCar itself can also go to investors, sponsors, race tracks, or broadcasters to say, “Hey, the mere act of competing in our sport is worth a certain amount of money, which means IndyCar is a valuable investment opportunity. Spend your money with us to help us keep growing.”

Right now, there really is no value in competing in IndyCar, and that has resulted in stagnation. IndyCar fields a 12-year-old chassis, it hasn’t expanded beyond two engine suppliers, it hasn’t negotiated an international event, and it has struggled to find series-wide sponsors to pump up revenue.

While the charters don’t provide a literal injection of cash into the series, the charter system does show that IndyCar as a whole is committed to innovating. The series is taking a huge risk in making this whole thing work, with the hope that it pays off in the future with better cars, more financially stable teams, and more interest from the money men.

What happens if the charter system fails?

The charter system is designed to assign value to the act of competing in IndyCar, and the goal is for the charter to accrue in value as the series continues to evolve.

But can the charter system fail? What happens if it does? And what happens if, instead of accruing value, charters lose value?

Simply put, in that case, IndyCar would likely be discontinued.

The charter system is an agreement between the teams and the series that there’s an expectation of operating in a particular way. It behooves the teams to perform well on the track, but it also incentivizes the series to provide those teams with better opportunities to compete..

Charters will likely only lose value if IndyCar itself loses value. It’s in the series’ best interest to continue growing and evolving, to push boundaries, and to take risks. If IndyCar refuses to do so, the teams will become unhappy because it means they’ll be losing value. It also means that the teams may withdraw from IndyCar, or that the series itself will have no choice but to implode.

Introducing charters is like opening a can of worms that you just won’t be able to stuff back in. In doing so, IndyCar has made a promise to its teams that it will give them a race series worth competing in; the teams will then promise in turn to be the best competitors they can be.

But if IndyCar reneges on that promise, it devalues the sport as a whole. It communicates that IndyCar is not worth competing in, and it serves as a slap in the face to the teams who have committed time and money to racing there, and to the sponsors/investors who determined that the sport was worth spending money on.

There’s no way the sport could effectively continue after that, which means IndyCar must work as hard to make the charters valuable as its teams will be doing.