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Houston-based CAZ Investments began putting capital into sports teams early this year to capture two trends: the growing “pricing power” of live events as consumers continue to shift from cable and broadcast TV to streaming, and the rise of sports betting.
As CAZ sees it, most sports teams are high-quality performing assets, largely because they are legalized monopolies in their host cities with loyal customers, says Christopher Zook, the firm’s chairman and CIO.
“There won’t be a second basketball team in Sacramento at the major league level,” says Zook, whose firm has an ownership piece in the National Basketball Association’s Sacramento Kings together with Arctos Sports Partners, a Dallas private-equity firm specializing in sports investing.
Also, investing in a single NBA team such as the Kings gives investors access to 1/30th of the cash flow generated through merchandising and media rights from the NBA, which are shared by the league’s 30 teams, Zook says. That stake buffers investors should a team have a losing season.
“That’s a big reason why you get such attractive positioning for these assets,” Zook says.
Private investing in sports teams is booming now that most U.S. sports leagues have loosened requirements for who can own teams, although any new minority owners must still be approved by the controlling owner and a majority of owners across the league, according to CAZ.
As Barron’s recently reported, Ares Management (ticker: ARES) recently created a fund focused on sports, leagues, and franchises, in addition to other media and entertainment companies. Firms such as Silver Lake, CVC Capital Partners, and Clearlake Capital Group also are sports investors. Citing data from Pitchbook, Barron’s said through early September, private-equity firms have made 221 investments in sports teams valued at US$31 billion; last year there were 440 deals valued at US$58.4 billion.
Together with Arctos, CAZ has investment stakes today in the Boston Red Sox, the Chicago Cubs, the Houston Astros, the Los Angeles Dodgers, the San Diego Padres, and the San Francisco Giants, Zook says.
And that’s just baseball. It also has stakes in “multiple” NBA teams, including the 2022 champion Golden State Warriors along with the Kings, and in multiple teams in the National Hockey League (NHL) and professional soccer. It also owns a piece of the new Premier Lacrosse League.
Penta recently spoke with Zook about his firm’s approach to investing and why it moved into sports.
“My Money Is Always First”
CAZ Investments, with about US$4 billion in assets under management, has 30 shareholders who own a piece of the firm, and who have invested about US$600 million of personal capital in various investment vehicles. When analyzing deals, “we decide where we are going to put my money because my money is always first,” says Zook, who founded the firm in 2001.
In addition to its shareholders, the firm provides opportunities for global co-investment for advisors, single and multi-family offices, and institutions. According to the firm, through these co-investments, it can provide access to vehicles at dollar amounts that are “generally unavailable to families with less than US$500 million [to] US$1 billion of investable assets.”
Before investing in professional sports, CAZ spent nearly 16 months researching the sector before deciding to invest. “Then we created a custom solution for our investors to be able to partner with Arctos,” Zook says.
Arctos closed its flagship fund with US$2.1 billion in October 2021. Including co-investors and “parallel affiliated vehicles,” the firm said at the time that it had US$3 billion in regulatory assets under management.
Zook won’t provide specific details of its investments with Arctos, but he did say sports investments should return a multiple of two-and-a-half times the initial investment with an internal-rate of return in the low-20% range. He won’t put his personal capital into anything that won’t deliver “at least a 2-times [equity] multiple and a 15% internal-rate-of-return (IRR),” he says. “Why would I give up liquidity without getting those kinds of returns?”
Sports investments should return a multiple of 2.5 times the initial investments, with an IRR “in the low 20s on a net basis,” he adds. “Otherwise, it’s not going to be interesting to us.”
A Live Event Play
For CAZ, investing in sports teams is really a way to benefit from live events, which Zook believes will continue to generate profits if inflation continues to rise, even if there’s a recession. Season-ticket prices may go up, but fans are “sticky” consumers—multi-generational fanatics for their home teams.
“They may not buy five beers when they come, but they won’t give up tickets or not go at all,” he says. “It’s an experience for their family instead of going on a trip or buying a new car or refrigerator.”
Live events are interesting as one of the few ways in an era of cord-cutting to reach big audiences all at once. That gives businesses producing live events—which are predominately professional sports teams—more pricing power.
The rise of sports betting is another factor. At least 30 states now allow for sports betting, which drives engagement, advertising revenue, and a desire to buy naming rights at stadiums, Zook says. Sports organizations “won’t own the betting, but they will benefit from it,” he says. The Chicago Cubs, for instance, collect rent from a betting site in a structure they own next to the stadium. “They are able to monetize their own brand in a different way,” Zook says.
Arctos and CAZ aren’t just investing in teams. The stake in the Red Sox is through Fenway Sports Group, which owns the team in addition to Boston’s Fenway Park, the U.K. Premier League’s Liverpool Football Club, and the NHL’s Pittsburgh Penguins.
“You build a big enough platform that is centered around live events, then you have the ability to own your market and generate good returns,” Zook says.
The Sacramento Kings is another example. It’s an NBA team, but it just bought a majority stake in the Sacramento River Cats, a triple-A minor-league baseball affiliate of the San Francisco Giants, reportedly along with Arctos Sports Partners. The deal included Sutter Health Park in West Sacramento, where the team plays.
Owning stakes in so many teams has meant that Zook is paying attention to sports more than ever. In a three-week period this spring, three of CAZ’s teams—the NHL’s Tampa Bay Lightning, the Golden States Warriors, and the Liverpool F.C. were in the finals.
“That was cool,” he says. “If we have two teams that are competing against each other, we like the fact we are getting paid in both situations.” As a Houston resident, though, “I have to root for the Astros if they are playing against someone else we own.”