- In 2010, Prokhorov bought 80% in the club plus 45% in the arena for $ 223 million equity and took over the club’s debt for $ 180 million. In addition, Onexim pledged $ 100 million for the construction of the arena.
- In 2015, the investor bought 20% of the team and 55% for $ 630 million ($ 175 million and $ 455 million, respectively).
- From 2010 to 2016, Prokhorov was forced to cover the club’s losses in proportion to his share, and by 2017 the club reached operating profit. Cost estimate – $ 250–275 million (based on data from American Forbes and author estimates).
- The exit from the asset took place in two stages: 49% of the club was sold to Joe Tsai for $ 1.0 billion in 2018 and 51% for 1.35 billion along with a 100% arena for $ 1.1 billion in August 2019.
- Total: the amount of investments for the period 2010-2019 is $ 1.5 billion, the amount of income is approximately $ 3.7 billion, taking into account the value of the assets remaining with Prokhorov.
Possible inaccuracies in the data are the actual costs of building the arena, the club’s net losses (only operating profit data is open). But even taking into account inaccuracies, we can responsibly declare that the transaction was successful.
- The cash-on cash multiplier was approximately 2.5x (3.7 / 1.5), which for a deal of such a huge scale is an excellent return.
- Investor capital grew by more than $ 2 billion.
- The annual return on investment (IRR) was about 20%.
It should be noted that the deal with Brooklyn Nets was not typical of the global private equity or venture capital industry for the following reasons:
In terms of profitability, the deal met expectations. A typical venture capital fund, say, $ 150 million, aims at a yield of 25-30% for IRR transactions and a return on investment of the entire 3x portfolio over 10 years. Thus, one deal with Brooklyn Nets made it possible to obtain a target return for ten venture funds at once.
- Too much – among financial investors, only KKR / Blackstone / TPG, as well as selected Family offices, make transactions of this magnitude.
- Specific Market: NBA / International Basketball Industry Experience Required.
- Difficulty of exit: the market of sports clubs (in particular, NBA) is illiquid, especially for foreign investors.
- Management risks: the project envisaged large-scale construction and relocation of the team to a neighboring state, creation of a brand and implementation of a marketing strategy.
What factors influenced the growth of the asset value?
In general, an increase in the value of an asset is affected by a) growth of the target market, b) management decisions (reflected in growth above or below average, profitability) and c) investment cycle (change in the valuation multiplier). In the analysis, I use the data from the American Forbes project, The Business of Basketball.
1. The NBA market. The growing popularity of basketball in the USA and the world set a positive trend for most teams in the 2010s. Revenues from 2010 to 2018 increased by an average of 2.2 times, operating profitability from symbolic 2% to 22%. The largest revenue growth came in 2014–2015, when the league updated its broadcast agreement with TNT, ESPN, and ABC. Against the backdrop of the rapidly growing popularity of video streaming services (Youtube, Netflix, HBO), sports broadcasts have become an even more important type of content for TV because of the live broadcast that keeps the viewer on the screen and allows you to receive advertising revenue. Also, revenue from ticket sales and basketball paraphernalia is growing rapidly.
2. Management decisions. As a result of strategic decisions to move the team from New Jersey to Brooklyn and build a new arena, the team’s revenue grew 1.5 times faster than the league average. In terms of revenue growth, Brooklyn Nets became the second in the league after the Golden State Warriors, who shot at the expense of unique sports performance (5 consecutive finals and 3 NBA championships) and Silicon Valley wealth. Against the backdrop of the moderate successes of Brooklyn Nets in basketball, the main drivers of the club's income were the expansion of the target market and successful work with the target audience. In particular, moving to rich Brooklyn made it possible to significantly increase prices for annual subscriptions and single tickets, sign more profitable contracts with sponsors (for example, the British bank Barclays, whose name was given to the new arena) and increase revenue from contracts with local television companies. The Barclays Center Arena also began to receive substantial income from concerts and other sky-ball events in downtown Brooklyn.
3. The investment cycle. As Prokhorov himself noted, the moment of entering the transaction was chosen successfully – the international financial crisis of 2008 and the need for investments in the team helped, which allowed to successfully structure the first transaction. And then the value of assets began to grow due to the growing interest of private investors in NBA teams. It is interesting that Mikhail Prokhorov became the first foreign owner of the NBA club, but, obviously, this deal fueled interest from other international investors. And inside the USA, the market warmed up: after Prokhorov, first Michael Jordan acquired Charlotte Hornets in 2010, and then several billionaires acquired clubs. As a result, another 10 teams changed owners. Moreover, in a number of cases, investors were technological entrepreneurs and financial tycoons, new wave billionaires, including:
- In 2011, David Blitzer, a top manager at Blackstone, and Joshua Harris, co-founder of Apollo Global Managemen, together with partners acquired the Philadelphia Sixers team.
- Robert J. Pera, a former Apple engineer and founder of Uniquiti Networks, a telecom company, bought Memphis Grizzlies in 2012.
- Vivec Ranadivey, founder of TIBCO Software, together with Qualcomm partners bought Sacramento Kings in 2013.
- Steve Ballmer, Microsoft's legendary CEO, bought the Los Angeles Clippers in 2014 for a record $ 2 billion.
- In 2015, another Apollo co-founder Anthony Rezzler acquired the Atlanta Hawks.
The increase in the value of teams overtook the growth of their revenue and profits largely due to the growing demand from billionaires who have earned fortunes in technology and finance and decided to get a trophy asset. As a result, the average valuation multiplier to revenue grew 2.4 times in 2010 (from 3 to 7 times).
As a result of a combination of factors, the value of Brooklyn Nets reached $ 2.35 billion by 2019, the team moved up from 28th to 6th place in the league in value.
If we talk about the contribution of each value driver, then, in my partly subjective assessment, of the $ 2 billion growth in the value of the Brooklyn Nets team, $ 500 million (25%) brought market growth, $ 600 million (30%) were the right decisions of the management and investor, and the remaining $ 900 million (45%) is an increase in the multiplier between the moments of entry and exit.
Simple luck or cold calculation?
Here, one could restrict oneself to personal opinion and speculation on the topic, but, fortunately, I have some facts confirming the great role of strategic calculation.
In May 2013, Christophe Charlier, then chairman of the Brooklyn Nets board of directors, shared with the students some details of the deal and investor expectations at the entrance to the Russian Economic School. At that moment, there were many unknowns in the deal: the arena had recently opened, the new brand had not yet gained an audience, the team was in the process of restructuring, and the value of the assets was close to the original. But the investor already had a clear strategy to increase the value of the asset.
The key investment idea is the opportunity to create a new strong brand for the Brooklyn large market (No. 4 in the USA) in partnership with American rapper Jay-Z and complete the construction of a comfortable modern arena in partnership with Bruce Ratner of Forest City. The international basketball market was understandable and familiar to Mikhail Prokhorov, who led CSKA to victories in the Euroleague in 2006 and 2008. In addition, the moment of entry after the crisis was not chosen by chance – this made it possible to achieve an attractive assessment.
But still an element of luck was present. First of all, this concerns the sharp increase in value multipliers and record transactions with other NBA teams. At the time of entry, it was difficult to calculate. As an alternative, in 2013, the first NBA IPO club was theoretically considered.
On the whole, Mikhail Prokhorov’s investment in Brooklyn Nets looks like a high-quality investment transaction that was well developed in terms of manageable risks and was also based on the investor’s intuition and experience, which made the investment so successful.
Thus, an investment in Brooklyn Nets is:
- An excellent international deal for a Russian investor is a reason for pride and an excellent case for studying in business schools;
- A large-scale transaction – like the entire Russian venture industry in 5 years. I would bet that the profitability of the transaction is above average among VC funds with Russian roots;
- Family office as a type of investor can be effective precisely in such non-standard transactions thanks to a flexible approach and a long investment horizon;
- It is interesting that the team’s sports results did not become a negative factor for the investment result.
The reasonable question remains whether it was worth selling the asset for a record amount in 2019, if its value continues to grow, and two star players have just come to the team. Suppose that a decision to sell (like a decision to purchase) was not made spontaneously and took into account the risks of financial and technological markets, which could potentially reduce it. How optimal was the decision to sell, we will find out only after a few years.
Note: In 2011–2015, the author worked for Onexim, but was not involved in the transaction and the management of basketball assets.