Capital Allocators – Inside the Institutional Investment Industry
Episode Summary: [REPLAY] Ian Charles & Doc O’Connor – Investing in Sports Teams at Arctos Sports Partners (EP.225)
Release Date: February 10, 2025
Host: Ted Seides

Introduction

In Episode 225 of Capital Allocators, host Ted Seides sits down with Ian Charles and Doc O’Connor, the co-founders and managing partners of Arctos Sports Partners. Arctos is a pioneering private equity firm specializing in acquiring minority stakes in professional sports franchises across North America. Since its inception two years ago, Arctos has swiftly positioned itself as a market leader, raising a substantial first-time fund, facilitating SPAC transactions alongside notable executives like Theo Epstein, and securing stakes in prominent Major League Baseball and NBA teams including the Boston Red Sox, Golden State Warriors, and Sacramento Kings.

Guest Backgrounds

Doc O’Connor:

Doc O’Connor brings over three decades of experience from the entertainment industry. He spent 32 years at Creative Artist Agency (CAA), where he played a pivotal role in building the agency's sports division from the ground up. Under his leadership, the sports division became the most profitable segment of CAA, attracting significant investment from firms like TPG. After nearly three years as CEO of Madison Square Garden (MSG), Doc sought new challenges, leading him to co-found Arctos Sports Partners.

Notable Quote:
“At Creative Artist Agency, we started to think about adjacencies and the most logical and biggest adjacency was sports. We built out a real diversified sports platform which became the growth engine for CAA.”
— Doc O’Connor (05:11)

Ian Charles:

Ian Charles began his career in the private equity space at a fund of funds, where he identified inefficiencies in the secondary market. This insight led him and a colleague to establish Cogent Partners, the world's first secondary advisory platform, now recognized as Greenhills Secondary Advisory Practice. After expanding Cogent Partners into a robust team across major global financial hubs, Ian transitioned to Landmark Partners, where he spearheaded the creation of the first data science business in private equity. His innovative approach to data-driven investment strategies laid the groundwork for his role in founding Arctos.

Notable Quote:
“We built the first data science business in private equity, creating software and tools that help LPs and GPs understand their programs better.”
— Ian Charles (07:17)

Formation of Arctos Sports Partners

The synergy between Doc and Ian was sparked in 2011 when Ian was exploring exotic investment strategies at Landmark Partners. The idea of investing in minority stakes of professional sports franchises intrigued him due to the asset's unique attributes—lack of correlation with traditional markets and a blend of infrastructure, real estate, and growth equity characteristics. Recognizing the necessity of having a partner with deep expertise in sports, Ian reached out to Doc through a mutual connection, Sam Kennedy, CEO of the Boston Red Sox. Despite initial reservations, their complementary backgrounds and shared vision led to the creation of Arctos Sports Partners eight years later.

Notable Quote:
“When you buy into one of these businesses, you are buying into the IP and the content, but you're buying into so much more in each of those three layers. It really is a believable asset because you get this portfolio effect.”
— Ian Charles (25:19)

Investment Opportunity in Sports Franchises

Arctos targets minority stakes in professional sports franchises across the five major North American leagues: MLB, NBA, NFL, MLS, and NHL. The total addressable market is estimated at around $400 billion. Arctos focuses on three primary types of transactions:

1. Liquidity Events: Providing liquidity to minority and control owners.
2. Growth Capital: Supplying operating capital to help franchises achieve growth targets.
3. Acquisition Financing: Facilitating the acquisition of additional assets to create platform synergies.

This multifaceted approach allows Arctos to offer institutional investors diversified, uncorrelated returns with low leverage exposure, distinguishing it from traditional private equity investments.

Notable Quote:
“Our fund is the very first fund designed to provide institutional investors with diversified exposure to each of those leagues... an uncorrelated low leverage private equity return in an asset class that today has very little if any institutional competition.”
— Ian Charles (18:38)

Asset Investment Process and Growth Strategy

Sourcing Opportunities:

Arctos employs a proactive origination strategy through Arctos Insights, a business unit dedicated to building relationships with over 1,200 limited partners in the pro sports space. This unit provides valuable content, tools, and resources to decision-makers within sports franchises, positioning Arctos as the partner of choice for potential investments.

Notable Quote:
“We have this proactive origination campaign to put our team, our firm and the insights that it has to offer... in front of the control owners and the executives of these platforms.”
— Ian Charles (44:02)

Due Diligence:

The due diligence process involves a comprehensive analysis of league economics, franchise-level performance, ownership groups, and local market dynamics. Arctos leverages a network of 17 senior advisors with expertise in areas such as sponsorship, ticketing, media rights, and real estate to evaluate potential investments thoroughly.

Notable Quote:
“We have a huge roster of senior advisors... who specialize in deep operational experience and leadership around the areas that impact revenue and value creation.”
— Ian Charles (47:00)

Growth Areas:

Arctos identifies multiple avenues for growth within sports franchises, including:

• Sports Betting: Enhancing fan engagement and creating new revenue streams.
• Media Expansion: Transitioning to direct-to-consumer and streaming platforms.
• International Expansion: Growing the global footprint of North American leagues.
• Venue Technology: Investing in next-generation venues with advanced technologies.
• Real Estate and Hospitality: Developing ancillary properties around arenas to maximize asset value.
• Digital Assets and NFTs: Leveraging intellectual property for digital innovations.

Notable Quote:
“Sports betting enhances the whole sports value chain... data business, which has created all sorts of investment and equity opportunities for leagues and teams.”
— Doc O’Connor (56:43)

Risks to the Strategy

While the sports franchise asset class offers robust returns, Arctos acknowledges unique risks:

1. Long-Term Media Contracts: Although risks have been mitigated by recent renegotiations, future contract structures could impact revenue stability.
2. Venue Safety and Global Events: Unforeseen events like pandemics pose operational risks, though historical resilience of leagues provides some assurance.
3. Collective Bargaining Agreements: Negotiations with players' unions can influence operational flexibility and cost structures.

Notable Quote:
“Our favorite risks are long-term league-level media contracts, venue safety, and collective bargaining agreements with the players.”
— Ian Charles (60:12)

Future Plans for Arctos

Looking ahead, Arctos aims to scale its operations by continuing to build its intellectual property advantage in the sports investment vertical. Potential expansions include:

• Real Estate Solutions: Anchoring sports assets into the credit market.
• Credit Markets: Providing innovative financing solutions linked to live entertainment and sports assets.

Their strategic focus remains on being the first mover in this niche market, leveraging data-driven insights and strong industry relationships to maintain a competitive edge.

Notable Quote:
“We intend to continue to scale and grow the business of partnering with owners of premier sports assets... broaden out the definition of partner for those owners.”
— Ian Charles (62:41)

Personal Insights from Guests

Doc O’Connor:
An avid outdoorsman, Doc enjoys fly fishing and snowboarding. He emphasizes the importance of being present and cherishing life’s moments.

Notable Quote:
"Walking my dogs reminds me to be present. It reminds me how fragile and precious life is."
— Doc O’Connor (64:42)

Ian Charles:
Ian is passionate about daily exercise, which he uses as a time for reflection and mental clarity.

Notable Quote:
"I get to spend time with my family outside of work by hitting the gym every day."
— Ian Charles (64:16)

Conclusion

Ian Charles and Doc O’Connor's venture, Arctos Sports Partners, represents a novel approach to institutional investment by targeting minority stakes in professional sports franchises. Their combined expertise in private equity and sports management positions Arctos to capitalize on a unique and growing asset class, offering institutional investors diversified, uncorrelated returns with significant growth potential. Through meticulous sourcing, rigorous due diligence, and a clear growth strategy, Arctos is poised to redefine investment opportunities within the sports industry.

For more insights into institutional investment strategies and capital allocation processes, visit capitalallocators.com.