A private equity fund owns part of the Lightning. Who owns the fund?

It was news to Erik Largen that he owned a stake in the Tampa Bay Lightning.

Largen is the head hockey coach at the University of Alaska Fairbanks, and like most Alaskans, he’s vested in the Alaska Permanent Fund, a state-owned endowment that oversees billions in holdings from Alaska’s oil and gas reserves. The fund pays each resident an annual dividend; last year’s was $1,114.

A few months ago, the Alaska Permanent Fund invested $50 million with Arctos Sports Partners, a Dallas- and New York-based private equity firm that specializes in acquiring limited shares of professional sports teams. Alaska’s $50 million is a drop in the bucket of Arctos’ initial $3 billion investment fund, but it still counts. Alaska has skin in the game.

Which means that when Arctos bought a stake in the Lightning and two other NHL teams late last year, Largen, like most other Alaskans, could add the title of minority NHL partner to his resume.

“I had no idea that that would even be a possibility, or that Arctos was even doing something like that,” Largen said. “It’s pretty neat to be sitting in this chair, knowing that we’re making investments in a pro sports franchise.”

Alaska isn’t the only state that’s bought into Arctos. Pensions covering teachers and state employees in Texas, Oregon and New Mexico have committed an additional $225 million to the firm, according to public records. They’re among the institutional investors worldwide that have, through Arctos, pumped billions into franchises like the Boston Red Sox, Golden State Warriors, Liverpool FC and, yes, the Tampa Bay Lightning.

The investments have put Arctos at the forefront of a sea change in sports ownership, as skyrocketing franchise values have spurred leagues to permit investors flush with capital to spend some of it on their teams.

The Lightning are deep in their chase for a third straight Stanley Cup. But for the team’s new minority owner, it’s not about winning and losing. The investment itself is the game.

Who invests, and how

Arctos Sports Partners’ advisers and executives include powerful figures in the worlds of sports, entertainment and finance.

The founder and managing partner is Ian Charles, a former executive at investment firm Landmark Partners. His co-managing partner is David “Doc” O’Connor, former president and CEO of the Madison Square Garden Company — which owns the New York Knicks and Rangers and Radio City Music Hall — and onetime Hollywood agent to the likes of Bruce Willis and Lorne Michaels. Other directors and advisers include former baseball executive Theo Epstein, Arizona Coyotes president and CEO Xavier Gutierrez and former Ticketmaster president and chairperson Jared Smith.

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Arctos’ investment philosophy is simple: Pro sports teams tend to rise in value over time, all but guaranteeing a positive return. The Lightning, according to Forbes, is worth $670 million, up from $174 million in 2012. (Vinik has disputed Forbes’ valuation.)

Neither side has disclosed the size of Arctos’ non-controlling stake in the Lightning, but the cost was no doubt significant. In December, Arctos also bought 10% of the Minnesota Wild, which, using Forbes’ valuation, would translate to around $67.5 million. Private capital research firm PitchBook estimates Arctos’ investments include $275 million in the Warriors, $396 million in the Sacramento Kings and $420 million in Real Salt Lake.

For the most part, Charles and O’Connor’s partners don’t have to be publicly identified. They are known to the U.S. government, and in the Lightning’s case, both Vinik and the NHL know who they are. PitchBook lists Goldman Sachs and Dallas’ Garson Private Capital as limited partners. Beyond that, even Arctos’ other shareholders may not know. Like many companies, Arctos is registered in Delaware and the Cayman Islands, two jurisdictions friendly to the interests of private partnerships. (Arctos and the NHL did not answer questions this week about the Lightning.)

So who are they?

Federal filings shed more legalese than light. Offers to invest in Arctos are “privately placed to qualified investors … people or organizations who meet certain net worth, income and/or financial sophistication requirements,” according to one U.S. Securities and Exchange Commission filing. That generally means a starting buy-in of at least $5 million. And each investor is expected to be “able to withstand a total loss of its investment in a fund,” as the risk of investing in pro sports is “greater … than investments in publicly traded companies.”

Arctos has two investment funds. The first, which bought into the Lightning, closed with $3 billion in assets in October (by December, the firm reported $3.9 billion in total assets under management). The second, launched in March, has raised $1.1 billion of its $2.5 billion target, sports business news website Sportico reported this month.

Arctos advises at least 11 other private equity fund partners whose assets, as of December, were worth a combined $4.7 billion, according to a March filing. A number of those investors hail from outside the United States. Where outside the United States? That, too, is hard to say. Banks from the United Kingdom to Bahrain have shared information about Arctos with clients. Canadian investment firm Rogue Insight Capital is a limited partner. The largest single investment disclosed thus far appears to be $186.7 million from a partner in Canada, according to the Autorité des marches financiers, which regulates financial markets in Quebec.

The team’s contract with Arctos limits what it can say about the transaction. But a Vinik Sports Group spokesperson said Arctos’ limited partners have been vetted by both the Lightning and NHL to insure they aren’t what the league calls “prohibited investors,” such as other teams’ players or owners (including Vinik himself).

The Lightning have hosted members of the Arctos team at games, and are looking at ways its network of advisers can benefit the franchise off the rink.

“We have thoroughly enjoyed our partnership with Arctos,” Vinik said in a statement. “Ian, Doc, and the Arctos team are a pleasure to work with. We are very happy with how the partnership has grown since the investment and have found them to be a great resource; they have a passion for hockey and for winning.”

Arctos has not publicly said how its partners will see a return on their investments. The firm acknowledged in federal filings that it can be more difficult for minority shareholders to liquidate stakes in teams, especially when leagues and majority owners “can impose stand-still periods and/or otherwise impose restrictions” on selling. Vinik’s controlling stake may include veto power over whatever buyer might want Arctos’ share, or first rights to buy it back.

Private equity firms like Arctos share some financial details with their institutional partners, although little of that trickles down to individual members.

“They will be required to provide a quarterly statement that says, ‘OK, your $100 million that you committed to this is now worth X,’” said Steve Neel, deputy chief investment officer with the New Mexico Educational Retirement Board, which last April committed $40 million to Arctos. “They may not give you detail on how that is broken down. They may not have detail on, ‘Tampa Bay was 3% of that.’ … Some of the real high-quality venture funds literally provide you next to nothing. There’s huge trepidation. They feel like it compromises their position in the market. And to some degree, there could be some truth to that.”

Even public investment groups — like Arctos’ partners in Alaska, New Mexico, Texas (a $35 million commitment) and Oregon ($150 million) — tend to exempt private equity discussions from public records law, as they involve proprietary information.

At least 1.4 million citizens, employees and retirees in those four states have stakes in the $3 billion fund behind the Lightning purchase. But they’re not the only states with money tied up in pro sports. Like Arctos, larger and more established private equity firms have recognized the market’s potential, giving even more investors worldwide a passive but real financial stake in the sports world.

Take the Florida Retirement System, which covers 2.6 million members and has $17.3 billion tied up in private equity. In 2020, the system committed $222.5 million to a fund managed by CVC Capital Partners, which specializes in “growth-oriented technology companies,” according to a federal disclosure.

Late last year, CVC invested $2 billion into Spanish soccer league LaLiga, home to global powerhouses Barcelona and Real Madrid, to be used “for technology, innovation, internationalization and sporting growth initiatives,” according to a CVC announcement. That gives Florida state employees and retirees an interest in the former home of Cristiano Ronaldo and Lionel Messi.

Among the materials Florida shields from public view regarding its CVC investment: Contracts, prospectuses, financial statements, auditor reports, state investment meeting documents and details about how CVC manages that fund’s portfolio.

For advocates of public investment transparency, the darkness surrounding private equity can be concerning.

“The thing about the industry is that you can capitalize on the opacity that is there, and the general partners have done that,” said Sheridan Porter, co-founder of FEV Analytics, which has pushed for more transparency in public equity compliance. “The value of their contribution to the actual performance of this asset should be examinable. And it’s not.”

Porter said the private equity industry should be subject to uniform reporting standards, similar to those required of public companies or banks by the US Securities and Exchange Commission or Federal Deposit Insurance Corporation. That would help investors better study and track a fund’s performance.

“You don’t really have a metric that captures how the fund operates,” she said. “It’s a series of metrics that actually makes it so they can’t compare the performance of the managers or their underlying assets.”

Last year, the New Mexico chapter of the American Federation of Teachers campaigned for a seat on the New Mexico Educational Retirement Board “in an attempt to make it more representative and responsive to its members,” said John Drycz, a political organizer with the union.

“The culture previously in ERB investment decisions has sort of been a ‘just trust us’ attitude,’” Drycz said in an email. “That was not acceptable.”

The union successfully pressured the board to divest from private prison investments. If teachers were to decide they have a problem with pro sports investments, “a similar action may be taken,” Drycz said.

Institutional investors have done their own internal due diligence on Arctos, even if much of it is not public. The New Mexico Educational Retirement Board consulted with outside firms like investment titan BlackRock about whether Arctos was a smart buy.

At a December committee meeting, one adviser told the board that sports leagues decided to allow private equity firms like Arctos to pursue ownership stakes because “they’ve run out of billionaires” to buy teams, according to draft minutes from that meeting acquired via a public records request. That Arctos was the first to do so in the NHL gave it “a running head start” over other firms, but it also exposed them to the risk of the unknown.

“In a downturn, if omicron means no one can go to a live sporting event for two years, Arctos is going to feel that,” the minutes stated.

The organization decided the $40 million investment was worth the risk. Getting a foot in the door in pro sports wasn’t a factor.

“As much as I’d like to be able to say, ‘Oh, this is a cool little shiny toy,’ that doesn’t enter into the equation,” said Neel, the board’s investment officer. “When it comes down to it, it’s all about, is the strategy that they’re employing going to meet our return on investment?”

Ownership in Tampa Bay

For fans who care only about the Lightning winning another Stanley Cup, does it matter who owns a fraction of the team?

With so much money at stake, there’s always potential for conflict to bubble into the public. Last year, a group of minority partners in the Tampa Bay Rays sued majority owner Stuart Sternberg, alleging that he’d been squeezing other partners out of their profits. Hearings on the case are scheduled for September.

How the Lightning perform on the ice — or more precisely, how the Lightning organization is managed — could have an impact on the team’s valuation.

“Everybody’s got a fiduciary duty to act in the best interest of the company,” said Richard Bruner, a business transaction attorney with Trenam Law in Tampa. “There’s always going to be some interests and situations where maybe if you didn’t do a good job with your minority protections, you get some greedy owners who are mismanaging or taking too much money, and violating their fiduciary duties in general — at which point we see lawsuits arise.”

Porter said it’s likely that both Vinik and Arctos saw a path for their partnership to raise the Lightning’s value, even without Arctos involved day to day. Whether it enhances the fan experience is not necessarily Arctos’ concern. In federal filings, the firm has said it will evaluate “the correlation between team performance and financial performance.”

“Your concern as a fan and as a Tampa Bay resident is one that is felt by every individual when they find out that their employer, or the staple employer in their town, has just been acquired by private equity: ‘Oh, they’re going to seek to maximize their return, and that may cost me,’” Porter said. “Interests are aligned between (Vinik) and Arctos, but the question is, are they aligned between the Bolts and the locals? Unfortunately, this is still a private company, and that’s something they’re holding close to their chest.”

Largen, the coach of the University of Alaska Fairbanks Nanooks, had no idea his future income was tied to pro hockey. But like most residents, he does care about the Alaska Permanent Fund. It tends to be a hot political topic, as elected officials debate how best to spend and save the fund’s billions.

“The Alaska citizens — what are we in the fund?” said Largen, 35. “Is it something that we’re entitled to forever? Is it something that we can use it to fund other parts of our government?”

Largen is a father of three kids under 5, each of whom also draws an Alaska Permanent Fund dividend. He is, he said, “just getting old enough to where that stuff actually matters to me now.” While the state adding the Lightning to its portfolio makes for “an interesting story to tell around coffee or beer,” he wonders how it’ll turn a profit.

“It’s interesting to me where we’re putting our money, and where those funds are going, just because they are so important to the future of Alaska,” he said. “If you know about something like that, you’d always be wondering about if the team’s generating a profit, or the franchise value’s going up.”

Alaskans might not know for years. Until then, Largen will focus on the fortunes of his own hockey team, rather than the Lightning. He’s a Pittsburgh Penguins fan, anyway.

Arctos, as it happens, owns a stake in them, too.