Sports investor Arctos in final innings with $2.5bn Fund II

Though early in its track record, Fund I is so far performing strongly. As of September, it was generating a net multiple of 1.51x and a net IRR of 86.7%.

Arctos Sports Partners, a prolific investor in the world of professional sports, is fast approaching the close of its second offering.

Arctos Sports Partners Fund II, launched in late 2021 with a $2.5 billion target, is expected to wrap up in the second quarter of this year, materials published by Kentucky Public Pensions Authority said. The hardcap is to be determined.

Investing in the sports industry has surged of late, ushering in a new global strategy. An emerging category of funds is doing deals at a rapid clip, buying stakes in teams, leagues, assets (e.g., media rights) and multi-asset holding companies.

Over 2021-2022, unprecedented billions of dollars went into franchises, especially European soccer teams like AC Milan and Chelsea Football Club.

Not long ago, the link between private equity and sports was almost non-existent. The reason: ownership has long been the preserve of the super-rich. For years, owners had little-to-no need for institutional capital and therefore had no incentive to reduce barriers to entry by adjusting league ownership rules.

A key development in sports ownership took place over 2019-2021. Four North American leagues – Major League Baseball, Major League Soccer, the National Basketball Association and the National Hockey League – changed their rules to allow certain funds to buy minority interests in one or more teams.

Arctos, founded in 2019 and led by Ian Charles, a former Landmark Partners executive, and David O’Connor, ex-CEO of Madison Square Garden Company, was a major beneficiary of these events. That is because it is the only firm approved for investing in all four leagues.

Growth plus liquidity

Arctos’ strategy is to acquire long-dated, passive minority stakes in sports franchises, providing both growth capital and liquidity solutions to owners.

“Control owners are in many circumstances looking for growth, and they’re cash-constrained by these syndicates they’ve built,” O’Connor told Buyouts last year. “You have this very inefficient landscape that is filled with liquidity traps, especially for minority owners.”

Arctos closed its inaugural fund in 2021, raising $2.9 billion. The vehicle has made 25 investments, KPPA documents said, a volume that attests to Arctos’ first-mover advantage in North American leagues as well as its pursuit of select opportunities aboard.

How Arctos invests is seen in a handful of disclosed deals. In 2021, for example, it invested in the Sacramento Kings to help liquidate the minority holding of retired star basketball player Shaquille O’Neal. In the same year, a deal with the Golden State Warriors supplied pandemic-related operating capital and financed a mixed-use real estate project.

The firm also invests in multi-asset holding companies. They include Fenway Sports Group, anchored by the Boston Red Sox and Liverpool Football Club, and Harris Blitzer Sports & Entertainment, anchored by the Philadelphia 76ers and New Jersey Devils.

With Fund II, Arctos appears to be planning for fewer but larger deals, compared with its predecessor. The vehicle is targeting 15 to 20 investments, KPPA materials said, of $50 million to $500 million. The prior range was $20 million to $400 million.

Though early in its track record, Arctos Sports Partners Fund I is so far performing strongly, according to KPPA documents. As of September, it was generating a net multiple of 1.51x and a net IRR of 86.7 percent.

Charles and O’Connor lead a Dallas-based team of 34 professionals. Senior members include two more founding partners: Joseph Nasr, previously with Stellus Capital, and Jordan Solomon, previously with MSG Sports. Two other partners, Chad Hutchinson and Robyn Slutzky, came from Sixth Street and JPMorgan, respectively.