Can the discipline required to invest in distressed assets be applied to purchasing the ultimate trophy asset – a professional sports franchise? Marc Lasry and Jamie Dinan found that it can, but only to a point, when they bought the NBA’s worst team.
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Lasry and Dinan spoke at the Leaders Sports Business Summit NYC 2018 on May 22. Both are described by Forbes as self-made billionaires and feature on a list of the top 25 highest-earning hedge fund managers.
Lasry is the CEO and co-founder of Avenue Capital Group and he has a background in law. Prior to founding Avenue, he was the co-founder of Amroc Investments.
Dinan is the CEO and founder of York Capital Management. He has a degree in economics from Wharton and an MBA from the Harvard Business School.
The two are among the most successful asset managers in the country and they both specialize in distressed debt investments.
I will explain what these Wall Street veterans were surprised to learn from buying an NBA franchise, but first let’s look at how they came to own the Milwaukee Bucks.
Buying the Bucks
In 2014, Lasry and Dinan joined a growing list of Wall Street financiers who have bought a professional sports team. They sought to turn around the struggling franchise, as their investment firms had done repeatedly with debt and equity investments.
The acquisition was a record amount paid for an NBA team. “At the time, the team was making about $10 million a year,” according to Lasry. They bought the Bucks for $550 million, more than 50-times the team’s income.
The massive purchase was remarkable given that the Bucks have only had two conference finals appearances on record, and in 1971 won the only championship in the team’s history.
“At the time when we bought the team, it was the worst team in the NBA,” Lasry said.
“People thought it was a negative, but we thought it was a real positive.” Lasry explained that being at the bottom of the league allowed the Bucks to get a high draft pick, which would allow the team to acquire a star around whom they could build. He also saw the business potential value of building a new arena in Milwaukee and growing the team’s fan base.
Since 2014, the value of the Bucks has grown dramatically. Here are four surprising lessons these financiers learned when they invested in the NBA.
Four investment lessons from buying the Bucks
- You have to invest in long-term value, not short-term profits
When Lasry and Dinan first considered buying an NBA franchise, they analyzed the opportunity using practices from their asset management careers. They considered avenues for revenue generation and calculated estimates for risk-adjusted returns.
“The projections were that we were going to make $10-15 million a year,” Lasry said. He thought was a “pretty good” opportunity, where he would start to recognize significant returns following the initial investment.
But Lasry soon realized his previous asset management approach wouldn’t serve him well for this kind of investment.
“What you forget is that the minute you buy a team, you’re not focused on making money, you’re focused on winning,” according to Lasry. “So all your projections go out the window,” he said, “and you constantly find yourself at break-even or losing a little money.”
However, he and Dinan explained that the value of the Bucks has already doubled or tripled since they acquired the franchise.
As Lasry entered the world of NBA team ownership, he assumed that the way to increase the value of the asset would be by winning more. “Everybody wants to buy a team that’s doing very well,” he said. It’s more fun to own a team that competes in the playoffs, he explained. “I think what people who own these teams want is to also have that psyche enjoyment of winning.”
With that valuation approach dominating the way sports investors define success, Lasry and Dinan set out to establish a long-term goal that is aspirational. “We want to own a championship team,” they said.
Read the full article here by Marianne Brunet, Advisor Perspectives
