How a Pair of Hedge Fund Billionaires Bought the NBA’s Worst Team
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.
Lasry and Dinan spoke at the Leaders Sport 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
1. 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.
2. Your short-term goals have to align with your long-term aspirations
With 30 teams in the NBA and only one which can place first in the league in a given year, winning a championship is a difficult feat.
A big realization that struck Lasry and Dinan only after they acquired the franchise was that winning an NBA championship is largely dependent on luck. Things have to fall into place.
“The real way you win it is put together a team with some stars and some great players,” Dinan said. “What you try to do constantly is to go to the finals,” Dinan explained, “that’s what increases the value a lot.”
“Make it to the conference finals enough times, things can fall your way and you can win an NBA championship,” according to the Bucks owners.
But how do they manage the team so they can accomplish this?
Dinan explained that every year they set short-term goals, which need to be realistic and aspirational, during training camp. Based on the assets the team has for that given season, they come up with annual objectives when players, coaches and management come together.
For instance, Dinan explained, they will set a goal for the number of games the team hopes to win that season. Last year the Bucks aimed win between 45-50 games, and they ended the season just shy of 45.
They also set out to make it to the second round of the NBA playoffs, a notable goal since the Bucks have only made it past the first round once since 1989. “We lost to the Boston Celtics in seven games and almost made it,” he said, “we grew a lot as a team.”
3. Invest with a disciplined long-term outlook
Not only did the pair have to pay a high price to acquire an asset that has yet to generate returns, they also had to invest significantly to increase the team’s value.
With a long-term mindset, they allocated substantial funds to make improvements that will enable the franchise to succeed for years to come.
For instance, the Bucks will begin playing in a new modern arena in October of this year. An expensive project initiated shortly after the team was acquired, the new venue cost $524 million to build.
The owners have also had to bear enormous costs to grow the team’s roster. Most notably, to lock up the 23-year old “Greek Freak,” Giannis Antetokounmpo, for a contract extension, the Bucks had to pay $100 million. The Bucks also announced the signing of a new head coach a few weeks ago, Mike Budenholzer.
The new owners made it a priority to assemble a strong management team, applying hiring practices from their investment management experiences. “I think of my own investment firm, where we have a culture of people who are highly ethical,” Dinan said, “good people on a personal level who are very driven and work hard.”
“They have a sense that the firm is more important than the individual,” he added.
4. Don’t become an emotional investor
Sports are emotional for fans. Since most NBA franchise investors are also fans, they can lose sight of asset management fundamentals, Lasry and Dinan cautioned.
“The worst thing you can do is become emotionally involved with an investment,” Dinan said. This can make it difficult to determine the right time to sell, according to the pair.
Lasry explained that a friend recently helped him realize this issue, which took him by surprise. His friend asked him if he would sell the Bucks right as they were in the NBA finals, “because that would be a good time.” Lasry answered no, but acknowledged that “it’s an interesting way to look at it.”
What the hedge fund managers didn’t realize until they acquired the Bucks was that they aren’t truly owning the franchise, they said. Ultimately, when you buy a team, you are just owning them for a given period of time. “The real owners end up being the fans,” Lasry explained, “and you never would have thought that” when you buy a team.
Marianne Brunet is a financial markets analyst at Advisor Perspectives.