Arctos Sports Partners / Sports Private Equity
Came across a few press releases on this group and surprised there was no buzz on WSO. I know there are a few threads on sports IB / PE but found this group to be particularly interesting as it looks like one of the few platforms exclusively dedicated to investing in sports franchises. From their website:
Arctos Sports Partners is a private equity platform dedicated to the professional sports industry and sports franchise owners.
Our mission is to partner with owners and leagues to increase liquidity and financial flexibility for ownership groups using a collaborative, thought partner approach.
Arctos Sports Partners acquires passive minority stakes in professional sports franchises and provides customized liquidity and passive growth capital solutions to sports franchise control owners and governors.
Our team is uniquely positioned to execute this strategy on behalf of institutional investors and to act as a collaborative partner for sports ownership groups and leagues.
I guess my question to the group is: what am I missing? I feel like the economics of sports franchises don't make the investment opportunity particularly attractive. Obviously there are some high profile transactions with financial buyers historically (SLP, Elliott), but it's not like these firms are exclusively looking at the sports space. Arctos seems to have raised $400mm+ for their debut fund which seems crazy to me. Is the thesis that sports franchises typically have always risen in valuation? What do exit opportunities look like? I would imagine this is a longer duration fund but even then, how frequently are franchises even trading? Clearly there is an interesting angle here given the ability to raise institutional capital and put together what looks like a pretty solid team. Either way, just thought it would be interesting to forum.
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Just this week Dyal got a league approval from the NBA to create an institutional vehicle to acquire minority franchise interests.
Here's the problem with owning a franchise. These fuckers have exploded in valuation so quickly that there's a liquidity problem for half the ownership base. There's been such a meteoric rise in prices paid lately thanks to new money (tech, hedge fund founders primarily - Fertitta is a rare exception) that the buyer universe for the minority stakes sized at 15-30% that exist for two-thirds of the Big Four leagues has shrunk dramatically.
Back when a franchise was worth $600m, you were getting into your 80s, and you wanted to leave liquid assets for your three kids and eight grandchildren, there are a lot of people who can buy your 15% stake at $90m. When things tripled in a decade, you can see how out of reach that purchase price is, even for a demibillionaire.
Cuban paid $280m for a majority stake in the Mavs. Let's say that was a 70% interest. That hypothetical 70% is worth $1.68b (0.7 * $2.4b) in two decades flat.
You have a whole pocket of people who would love to take their money off the table but can't because there's few or no willing buyers at the market price.
Buying a sports team is the ultimate personal indulgence. It's an intensely personal decision. Some guys do it for the validation - so they're okay buying a franchise in a place they have zero connection to, but who cares, you get bragging rights and the ability to invite anyone you want to one of the hottest events conceivable (courtside or box seats when Lebron is in town, all-star weekend, the finals). Some guys don't want it if it isn't their hometown/childhood team. An example of what I'm saying is that when John Bowlen wanted to sell his Broncos minority interest stake, it wasn't easy - he ultimately had to sell it back to the team (i.e. to his brother Pat).
Add these two facts together and you can see why a league would value being able to offer its owners a controlled, credible sale option. Especially when that option is an 'owner' that's entirely malleable and controllable for the future. Guarantee you these sales will come with all kinds of restrictions that favor the league office.
If anything, Arctos is undercapitalized relative to the opportunity.
Sports franchises are great investments. They tend to offload their largest fixed expense to municipalities: pay for the stadium or we'll move. Broadcasting deal values continue to soar. More and more of the world consumes the content. You could only watch Michael Jordan on live TV or on tape delay. Now you can watch on TV, streaming, or a connected device like a gaming console or even in VR. The kid in Nigeria who idolizes Giannis can stream it live if he stays up at 3:00am. He can also consume unlimited more content than his peer 25 years ago could - there's so much more there.
E-sports are also turning into an daisy-chained operation. Look up how many pro franchise owners have invested in the space with personal assets or through their franchise holding company.
I find it fascinating. I have spoken to owners in two leagues and one guy who explored the route but never got there. There are a couple bankers who really know the minutia behind this shit inside and out. If anyone ever earned their fee, I think it's there.
The reason you don't see much buzz on here is because the vast majority of this site's users are workers. They're trying to build a resume. The safest thing for your resume usually isn't the most interesting. You can for sure get into business school coming out of megafund private equity. It's way harder to know if you can get in coming from a niche strategy like sports private equity.
Look at all the threads recently on whether microboutiques like M. Klein, Robey Warshaw, or DBO are worth working at. Like Jesus, you're not sure if working as one of a dozen people under a former division head of one of the biggest banks in the world is an attractive career option?
It makes sense intuitively. People de-risk things. The most well-trod path looks best because it's easiest to follow.
APAE thanks for the thoughtful reply. Taking the blinds off my user (OP), and tagging you instead of replying since the reply button isn't working for me.
Pretty fascinating that Dyal got the nod to raise that fund, especially since it sounds like their deal is on an exclusive basis (at least based on the Bloomberg article I read). I guess this would prevent Arctos from taking minority stakes in this particular league (or maybe they just invest as an LP into Dyal's vehicle)? Wouldn't giving Dyal exclusivity sort of dilute the upside of trying to make ownership more liquid by preventing other financial buyers into the mix? Also, I guess Silver Lake is either grandfathered in or working around the exclusivity agreement by owning the MSG company/topco rather than the franchises (Knicks / Rangers) themselves.
I see your point that there is a liquidity problem given that valuations have blown through the stratosphere over the last 10 years. A lot of the articles addressing Dyal's agreement with the NBA echo your points that the market for these minority stakes is shrinking despite how many minority owners would like to take their money off the table.
You also make a lot of great points in your great investments paragraph but I guess one question for you regarding unloading fixed expense: what are the primary fixed expenses that are being unloaded? Utilities? I seem to recall Mark Cuban saying in an interview that the Mavs weren't cash flow positive until only recently (several years after their championship no less). This would lead me to believe that owners or their holding companies are actually eating a lot of the fixed costs. (This is only one example though so could be availability bias here).
Regarding the handful of bankers who understand these transactions: I'm assuming this is like a handful of Raine or Allen bankers, right? Pretty wild you have spoken to some owners by the way lol.
To your last point on taking the safest path: I completely agree with everything here. In fact, before making the leap to PE, I tried to land interviews with the likes of M. Klein and Dyal but with little success / traction. I know the bullpens at these platforms are sweatshops, but I can't imagine being able to have direct access to some of the bankers at the top. Pretty crazy shit.
BillBradleyBaby Hm, the reply function seems broken right now.
The most well-regarded bankers are a narrow circle. They often show up on opposite sides of the same deal.
I'm not sure how it would work if Arctos wanted to pursue the NBA. If both firms were willing and creative in structure, it could follow some kind of joint venture or co-management arrangement. It would probably not look too much like a vanilla LP structure. If you're a GP, your LPs don't want to see that. One, the double fee layer is tough to swallow. Two, the idea is that they're paying you to find stuff that's worthwhile.
Why would the league grant Dyal exclusivity? Because Silver or someone who has his ear really knows, likes, or trusts someone key at Dyal. Like I said, the control is the most critical component in this thing. Given the illiquidity (any new minority investor is going to be there for awhile), you really want to minimize the chance of friction within the broader ownership set. Given the heightened visibility of our modern era (think how many more Jerry Richardson or Donald Sterling type stories would have come to light if social media existed decades ago), you really want to minimize reputational risk.
The fixed expense I mentioned was pretty explicit. Franchises are notorious for pawning off all or a huge portion of the cost of building or renovating a stadium on the city. There's a huge recurring expense from servicing and/or paying down the debt. Cities issue bonds. They cover things with special tax revenues.
You're right it's cool to work with a real hitter. I had a somewhat pejorative view of bankers born out of being jaded from my own experience as a junior. On a recent transaction (one of my largest) one of the 'micro elites' named here was engaged - I am a convert.
Wow this is fascinating – I just finished reading more than I care to admit on the bankers you outlined. Talk about an idiosyncratic bunch! To your point on these guys sitting across from each other on any given deal – this became abundantly clear as I browsed through articles / team pages. On any given publishing / profile for one of these bankers that highlights their work experience, you end up seeing the same transactions over and over despite never operating under the same banner (aka sitting on the same side of the table). This seemed to be true not just in the sports world but for the broader media and entertainment verticals as well. I have a bad habit of checking CIQ when an M&A deal in these spaces becomes public / hits the press to see who the advisors were, but I guess I didn’t realize until now what a small world it actually is. Funny you mention Galatioto – I’ve seen their name online and on WSO so I was familiar with their advisory practice, however a friend told me that he recently received a book from them marketing a new vehicle (something to the tune of $500mm) to invest in minority stakes in the MLB (at least I think it was baseball). Evolution looks interesting too – they seem to be to CAA what Raine is to Endeavor (but with less publicity / notoriety). Don Cornwell at PJT – I feel like I read about PJT advising on a KC Royals deal recently, so I’m assuming he had a hand in that as well. He has a pretty remarkable background / career arc, although I think the dos equis award here goes to SG at Allen.
Fair points on wanting to minimize headline risk. I suppose the more cooks in the kitchen, the greater the likelihood of a Donald Sterling event coming to the surface. Also, great perspective on my ask about Arctos and the NBA (esp. double fees – this alone is a no-go I think).
On the fixed expenses, I think was latching too much onto the MC soundbite re: Mavs not being cash flow positive until recently. You make a great point on using munis to cover renovations / new builds. It certainly seems like any major franchise can unload their major expenses to the city / state. Now that you mention this, I seem to recall a conversation I had with someone in pubfin who said they were the underwriter for when my hometown basketball team moved to a new stadium.
Thanks for talking through this (and, just in general, for all the great content you post here. I can’t imagine how many young professionals have been positively impacted by your activity here, myself included – and not just for the one-off on sports finance of course). This completely changed my perspective on sports as an investment opportunity for financial buyers. Are you currently focused on the TMT space (I guess more specifically the M space – including each of sports, media and entertainment)? Not trying to dox you, so feel free to ignore this question, but would be interesting to know if you started your career in a product group / industry generalist group (or maybe a completely unrelated industry like HC or IND) and later moved into this vertical. I would love to shift my focus to one of the aforementioned verticals post-MBA but don’t really have the pre-MBA experience (mmib > mmpe / generalist) to tell that story. If you don’t feel comfortable answering that, here’s another one to wrap things up: if you were personally capitalized enough to buy a sports franchise, would you do it? How much liquidity would you want to have before pulling the trigger (another way to think about this is what % of your net worth would you be comfortable sinking into a team)? Thanks again! Cheers.
PS – apologies if this same or a similar comment was posted twice. I typed all of this up once and I received an error message, so I don’t think it actually uploaded. Trying to respond again with this post so fingers crossed it goes through.
I'm sorry it took me so long to get to this. I go through my notifications chronologically. With that 'Then and Now' thread you can imagine how jammed my inbox is.
Yeah, the increasing concentration of content-creators has made it such that the few senior advisors who have the trust of the principals at the top of the various mountains really run the land. This is the entire phenomenon Allen & Co. was built around. You see it now with Goldman (won't name who specifically) repping Disney on Lucasfilm, Pixar, and Marvel. An even better example is Aryeh Bourkoff doing a quarter-trillion of M&A in half a decade. My point was not to say it couldn't happen, it was that if it did, it wouldn't look like a plain-Jane Limited Partnership Agreement.It very well could happen. It would just be on some kind of bespoke structure. It's very analogous to the compression very common in the fund-of-funds world. They want their own LPs to only see a blended 2-and-20, so they exert pricing pressure on the managers they allocate to to come down to 1.5-and-15. In this case, if Arctos wanted to put up nine figures towards a transaction and Dyal owns the keys, they'd probably quite happily work out something fairly down the middle.
That's really kind of you. You're welcome. I like what I do. I dislike many of the people who do what I do, so the majority of people I spend time with offline have nothing to do with the industry. I guess this is one way to geek out over the thing I like while removing the personal interaction component. I am most broadly focused on technology. This is why so much of my writing discusses venture.Even the things I do outside of technology tend to have a lens based on it. If I'm doing something elsewhere, it's because I have an idea of how to improve it meaningfully with technology. So the things in media and entertainment are born out of an understanding of how technology is rewriting those spaces.
I did multiple summer analyst roles before graduating, so across the sum of my pre-graduation and post-graduation positions, I have been in both product and industry groups at both bulge and boutique banks. Thankfully they were some of the best firms in the game, so I met some smart people and a few cool people early on.
I don't think that's a much of a hindrance as you seem to. If anything, you have a blank slate that you can paint any story with. Make a few angel investments in emerging companies in e-gaming, sports hardware, or media infrastructure. You can go as low as $5k on Angellist. Talk about them in your interviews. Go meet the founders and get them to introduce you to other companies in the space. Email the biggest VCs in the deal and mention your investment, meet them, ask for introductions or where they recommend you dig deeper to learn more.If you pour your time into a thing for a few years, your passion plus your general body of latent knowledge will make it pretty easy to shine when a moment presents itself. That moment may look really different than you could have anticipated. Maybe it's a family office role for a franchise owner. Maybe it's a role on the strategic investment arm of one of the leagues (they all have one now). Maybe it's at Redbird. Maybe it's at one of these funds or firms we've been discussing.
This is why franchise turnover is so low today. Realistically no one wants to put more than a quarter of their net worth into a single investment. With franchises all at a multibillion-dollar valuation, how many people have $500m+ liquid? Each league has different rules around the level of debt involved in an acquisition. It's one thing to be Cuban and put a couple hundred million into owning a team. There's a really, really narrow group of people who can plunk a couple billion down a la Ballmer or Tepper.Any word on comp for Arctos?
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What can returns actually look like in this industry? I listened to Arctos interview on the Capital Allocators podcast, and they sort of dodged this question. The founders indicated that sports franchises are not allowed to be highly levered and something about how the leagues still won't allow for controlling ownership to reside with an institutional fund. Sports teams are at best what 15-20% EBITDA margin businesses? Overlay those qualities with the illiquidity that exists, the fact that everyone will know these funds will have finite investment horizons, I'm failing to see how these can be compelling PE returns.
As enjoyable it was to read this thread, these are some great points. I don't think sports/entertainment companies for the most part garner above average PE returns. Very cool companies to read about but I'd imagine tough to operate. Seems brutally competitive and exclusive.
RedBird Capital is another PE firm that does very cool work too. Gerry Cardinale definitely has some interesting opinions about the value chain of a sports fan.
Part of what Arctos is doing is trying to target teams where there's a likely change of control during the fund term so that they aren't going to be forced sellers. I believe they also are exploring various ways of taking whatever stakes they have left in the portfolio public in a single vehicle at the end of the fund term so that retail investors could in theory own a basket that contains minority stakes in a bunch of teams.
for anyone interested, the co-founders of arctos have sat for some recent podcasts. really interesting listen
does anyone know if they use a HH or how their associate recruiting process works?
As an associate in a premier sports FO / PE offices, I can say there is not official headhunting process that I know of. I joined my group in January 2020, and was recruited out of a MM IB in my 3rd analyst year. The outreach was a simple Linkedin message from the hiring manager inviting me to the process. The process itself was thorough, 5 total rounds that included a technical phone screen, in-depth case study, and super day. Happy to expand upon the role / process more if interested.
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