Inside the fastest-growing sports private equity fund
The digital future of sports trading cards, Novak Djokovic’s detention, leadership change at Manchester United, and more.
Inside Arctos Sports fund — can an empire grow indefinitely?
At the height of the early pandemic, when virtually the entire world was in some form of lockdown, an unlikely pair of finance and sports executives declared their new private equity fund open for business.
Since its launch in April 2020, Arctos has become the fastest-growing collector of minority sports stakes, amassing passive investments in 16 professional teams across the US and Europe. Its first fund closed in October 2021 with more than $2.1bn raised, spurring a spending spree as Arctos took on investments in baseball’s Boston Red Sox, football’s Liverpool FC, basketball’s Golden State Warriors and Sacramento Kings, and a trio of National Hockey League clubs just last month.
The Arctos co-founders, former private equity executive Ian Charles and former Creative Artists Agency and Madison Square Garden chief Doc O’Connor, explain their philosophy behind the firm and their investment strategy in the FT, which is well worth a read here.
Perhaps the biggest question hovering over the group is what potential future exits from their holdings might look like. Typical private equity firms might hold from five years to a decade, When do their limited partners, who contributed the billions in funds to amass these sports stakes, hope to see returns?
Charles and O’Connor say any future exits will probably mirror those of other secondary private equity markets — Charles built his career at a series of funds building expertise on illiquid markets. Neither would give a timeline for approximately when, if ever, investors would want returns.
Rob Tilliss, founder of the advisory firm Inner Circle Sports, told Scoreboard that exits can take shape in a few ways: Arctos could sell if and when a control owner ever sold, or sell directly to their own investors, to name two. Other sports investors raise eyebrows at their fast-acquisitive streak — one said privately that Arctos “is like a vacuum, hoovering up every piece of lint they see”.
For now, private capital has a few distinct benefits: because most league rules insist institutional ownership be passive, more control flows to the majority owners. Minority stakeholders can turn to funds preapproved by professional leagues for quick sales — as was the case for basketball legend Shaquille O’Neal, who sold his small position in the Kings last year to Arctos, rather than go through a lengthy due diligence process to sell to an individual buyer.
Fanatics: the company spending $500m on trading cards
Accelerated by the pandemic, New York-based digital sports retailer Fanatics has expanded from US sports to European football teams and Formula One, and was valued at $18bn in a fundraising backed by high-profile investors including SoftBank and SilverLake last August, making an even wealthier man out of founder Michael Rubin.
Now, Fanatics is accelerating its expansion by going . . . analogue. This week, it announced a $500m acquisition of Topps’ trading cards business, a brand synonymous with producing collectible Major League Baseball cards. The MLB itself was also an investor in last year’s $325m fundraising. But the deal does not include Topps’ candy and gift cards arm.
The takeover comes just months after a new venture set up by Fanatics won the exclusive rights to produce MLB cards, ending Topps’ longstanding MLB deal and a plan to go public via a special purpose acquisition deal at a valuation of $1.3bn.
So why buy now? For one, interest in baseball cards boomed during the pandemic, and the deal also means Fanatics can get started far earlier than 2026, when the earlier MLB deal was meant to kick in.
Furthermore, the acquisition comes with a back catalogue of cards and intellectual property going back 70 years, while also ensuring that Fanatics can continue to use Topps branding to appeal to traditionalist collectors.
But one person close to the company says the revolution could go beyond simply bringing techniques refined in digital retail to trading cards, with the company also eyeing opportunities in the fast-growing world of non-fungible tokens. NFTs, which run on blockchain technology similar to that underpinning bitcoin and other cryptocurrencies, grew into a $41bn market in 2021. Topps has already made a start with collectible baseball NFTs but the person said it was yet to take advantage of the historic catalogue.
The deal also shows that Fanatics — and Rubin — are unafraid of aggressive but shrewd moves to shake up the established order.
Fanatics’ next challenge is to live up to its rapidly rising valuation by realising its ambitions.