This article was originally posted for Red94.net on December 28th, 2018.
In September 2017, Leslie Alexander sold the Houston Rockets to Tilman Fertitta for $2.2 billion. Les had owned the Rockets for 24 years, fortuitously purchasing them from Charlie Thomas for $85mm in 1993. Doing the quick math, Mr. Alexander was able to make a return of 25 times on his original investment at an annual compounded rate of 14.5%. This return may be greater as it is (a) unknown what distributions Les made to himself throughout his ownership tenure and (b) unclear what kind of leverage was used by Les at the time of acquisition (Mr. Alexander does come from a bond trading background, after all). Still, this is the type of return a hedge fund manager dreams of – the Dow Jones Industrial Average comparatively appreciated 7.6% annually in that time frame.
Fertitta purchased the Rockets for an EBITDA multiple of 35x. That is a staggeringly high price to pay for any investment, but the idea is that one is paying a premium for future growth potential.
Les’ timing proved impeccable and followed the old adage of buying low and selling high. Having acquired the Rockets with a championship contender already in place, Mr. Alexander was able to reap the future increase in value associated with the 1994 and 1995 championship seasons, which dramatically grew the Rockets’ fan base overnight. Further, with the drafting of Yao Ming in 2002, Les oversaw the team’s expansion into the most populous country in the world. The Rockets remain the most popular team in China, and Zhou Qi’s short presence on the current roster was, perhaps, more of a business decision to continue that trend. Finally, Les maximized his ROI through the hiring of Daryl Morey in 2007. The general manager’s value investor philosophy kept the Rockets below the salary cap, competitive and never below .500 for 10 years straight.