October 17, 2022
Houston, TX – October 17, 2022
In recent years, institutional multiteam ownership has been among the industry’s most closely watched trends. The nation’s top leagues long prohibited the practice, but those walls have begun to come down as rising team values have priced out many potential buyers, leaving a dire need for liquidity.
While the space remains in its infancy, several early entrants are testing the waters. Dyal Capital’s HomeCourt Partners was the first fund to receive approval to invest across multiple NBA teams in 2019 and has since taken single-digit percentage stakes in the Atlanta Hawks, Phoenix Suns and Sacramento Kings. Dynasty, from PJT Partners’ Don Cornwell and Providence Equity Partners founder Jonathan Nelson, is raising over $1 billion to invest in pro teams. And the clear market leader to date is Arctos Sports Partners. The firm, led by managing partners Ian Charles and Doc O’Connor, has taken stakes in more than a dozen teams across MLB, MLS, the NBA, NHL and European soccer; its MLB investments alone include the Chicago Cubs, Houston Astros, Los Angeles Dodgers, San Francisco Giants and San Diego Padres, as well as the Boston Red Sox through an investment with Fenway Sports Group. Earlier this year it reported $3.94 billion in assets under management and is now in the process of raising a second fund with a target of $2.5 billion.
One of Arctos’ bigger shareholders is CAZ Investments, the Houston-based firm that, until recently, had not been a player in sports. CAZ founder, chairman and chief investment officer Christopher Zook declined to go into detail about how much CAZ has invested with Arctos, but he acknowledged his firm has taken a significant position: “We are truly a strategic partner of theirs, a multifund co-investor and one of their larger sources of capital.”
Arctos declined to comment, but a source with knowledge of the firm said CAZ is likely in the top 15 of Arctos’ nearly 100 or so investors.
Zook launched CAZ in 2001, initially with the backing of several families in Texas and eventually with the support of a global network of co-investors who get access to deals they ordinarily wouldn’t see. The firm has around $4 billion in assets under management, including some $600 million of its own money from its 30 shareholders, with investments across the likes of Dyal Capital Partners, Platinum Equity, Sequoia and Silver Lake. Zook lays out a simple strategy for the firm:
“We’ll invest in everything, anywhere, anytime,” he said. “Public markets, private markets, currency markets, commodity markets; if we can make money in it, we’ll do it.”
And yet CAZ didn’t touch sports until just a few years ago with a first foray into esports, and earlier this year it finally took the dive on pro sports team ownership with the Arctos investment following 18 months of due diligence on the industry. Zook said the research revealed team ownership offered a direct means to profit from two “irreversible trends” — cord cutting and the expansion of sports gambling. Team values have also proven to be resilient in recessionary environments, and Zook sees similar protection against inflationary pressures, because costs such as facility capital expenditures have already been paid while inflation drives up the price of tickets and concessions.
One of the major early hurdles for CAZ was answering a question many observers have been asking of private equity’s team ownership plans: How do you get your money back? After all, the very reason leagues began allowing PE firms to own stakes across multiple teams is that there is not a sufficient number of potential buyers in the market; in turn that lack of buyers reduces the opportunities for an investment firm to exit its position.
Zook sees multiple pathways to liquidity. The first and most obvious is exiting as part of a control transaction, which he expects will be the exit strategy for the vast majority of CAZ’s team investments. “We expect to own these assets in many cases for a long, long time,” said Zook. “We specifically look at the investment as a multi-decade asset, but the reality is we won’t end up owning them that long. When we buy a position in one of these teams, we expect we’re going to own it for 10 to 20 years. What ends up happening is many of these positions trade a lot more frequently than maybe the world appreciates.”
Another avenue to liquidity is recapitalizations, a page taken straight from the private equity playbook. “The league puts restrictions on how much borrowing can occur on these teams’ balance sheets, but that doesn’t mean you can’t do a recap with a partner buyback or a distribution to get people some cash,” said Zook.
CAZ may also be able to exit through sales to other strategic buyers interested in acquiring a full slate of team stakes all at once.
Looking ahead, Zook sees far more sports investment opportunities for CAZ both within and outside of Arctos. CAZ already has a multibillion-dollar position with Dyal, and Zook says he has a close eye on HomeCourt, though the firm has yet to invest. He points to the minor leagues and to major league team deals that are too small for Arctos to pursue. And Zook believes there will soon be tremendous opportunity in the NFL, the last major holdout for allowing institutional team ownership.
“The NFL has made it very clear that they are going to be the last to act,” said Zook. “They want to see how it works with everyone else and move slower, but I believe strongly that, within a reasonable period of time, and it could be soon, that the NFL could open itself up to the same type of covered fund concept that’s happened [in other leagues]. I’d be shocked if it doesn’t happen by the end of 2023.”