private equity – GAME OF THE PEOPLE

FOOTBALL’s investor base has diversified in recent years and the market has seen a new type of club owner – one that demands some sort of return on investment. Past benefactors have poured money into clubs and asked for very little back, but with the arrival of private equity firms in football, the dynamic is changing.

Private equity’s role in football club ownership is certainly different than a sovereign wealth fund or state-owned entity from the middle east. While the middle eastern owner is not over-concerned with profit-making by a club, the private equity owner expects a return and also will have an exit plan built into the transaction. Furthermore, they invariably rely on debt to fund an acquisition, which can make them very unpopular with the support base.

While investment by a P/E firm can be seen as big capitalism moving in, there are some positives that can benefit a club, such as innovative ideas, cost controls and a penchant for data analysis. There is also a focus on new revenue generation. In short, a P/E outfit can transform a club and become its saviour, but if the fundamentals are wrong, it can also break and destroy a club.

What is so attractive for these firms? Obviously, TV monies and spiralling broadcasting deals have made football a cash-rich industry at the very top, but the imbalances are huge and probably always will be. It’s also a global game and its popularity shows little sign of waning.

For the big clubs, very lucrative revenue streams are virtually guaranteed and their brand has little trouble attracting big sponsors and commercial partners. Clubs are also quite accessible and there are few intermediaries, unlike leaders in other sectors. It is relatively easy to have c-suite discussions with football clubs as most are desperate for cash as the pandemic was brutal for many football clubs. Even in the elite bracket, wages are too high and transfer fees are out of hand.

All around Europe, Private Equity has been busy with companies like CVC, Clearlake, Red bird, Apollo and Fortress all taking stakes in major clubs. Some, like 777 Partners, have a taste for football investments and have built up a multi-club portfolio that includes Genoa, Standard Liege, Hertha Berlin, Paris Red Star, Sevilla and Vasco Da Gama. CVC have decided to invest in leagues and have had dialogue with Serie A, Ligue 1, La Liga and the Bundesliga, with varying degrees of success and no small amount of resistance from fan groups. CVC managed to invest around US$ 3 billion in part of La Liga’s commercial business.

The worldwide appeal of Premier League football has made English clubs sought after assets, but the ongoing debate over the sale of Manchester United does hint that pricing is an issue. While figures have been thrown around valuing United at £ 4 billion and higher, Tom Markham, a football finance expert has calculated the club’s true value is more likely less than £ 1 billion. It is well known that Qatar, who were favourites to win the bid for the club, insist they will not overpay just to land a prestige prize. P/E may yet buy United but other clubs have come under the microscope of the sector, such as Liverpool and Tottenham Hotspur.

But it has to be noted and underlined that Private Equity companies are not sugar daddies and are not avuncular patrons. They are all about making money and in order to do that, they will slash costs, including peripheral activities like community initiatives, and insist on some level of prudence in the transfer market. They may not throw money around on a carefree basis, but they will try to run a club properly so that when they do choose to exit, their asset will be attractive. For a club like Chelsea, who were taken over by a consortium that included a P/E firm, they are at the start of a very different era than that funded by Roman Abramovich.

In the football landscape of the future, Private Equity will have its place, but with interest rates rising, a nervous banking crisis possibly unfolding and continued geo-political concerns, there is a level of uncertainty that could deter even the most cavalier investor. It is unlikely that football will avoid the next period of major economic upheaval.

THE CHALLENGES facing top-level football continue to escalate, ranging from macro-economic to political and social concerns on a global scale. The finances of clubs and leagues are coming under considerable pressure. Just as banks, nation states and corporates sought alternative sources of support during the financial crisis of 2008-10, football is now turning to different and less traditional avenues of financing. The recent aborted discussions around a takeover of Bradford City by a group of investors aiming to harness the potential of Non Fungible Tokens (NFTs) demonstrated that change is coming.

Increasingly, hedge funds, private equity firms and family offices are getting involved in football, offering investment where historic lenders may no longer be prepared to tread with comfort. The reputation of alternative investors has always been a sector with a short-term perspective, one that pursues quick returns and has a limited attention span. Given football is an industry that has hordes of stakeholders, the dynamic between supporters and professional investors from London, New York, Asia and the Middle East, is not necessarily comfortable. Invariably, Wall Street and the Square Mile are mistrusted by football fans.

But sport and private equity are not such unnatural bed fellows, in fact, firms have been dipping their toes in the water for some years. The pandemic has arguably accelerated their involvement. While the reception to private equity has not always been positive, but as more people understand the intention of such companies, the fears have subsided. In fact some of the deals being talked of at present have much longer timeframes than those usually associated with the sector.

The growth in American ownership such as the Fenway Sports Group at Liverpool, the Glazers at Manchester United and Stan Kroenke at Arsenal has experienced mixed relationships with fans. Initially, there was resistance, but ultimately, if a club is successful, the mood shifts substantially. It is not inconceivable that private equity will no longer be looked as a two-horned devil in the near future.

Spain’s La Liga has just announced their deal with CVC has now been approved by 37 of its 42 clubs. There was an attempt to head the transaction off by Real Madrid, Barcelona and Athletic Bilbao with a bank-backed consortium, but the € 2 billion package will give CVC an 8.25% stake in La Liga’s media rights for 50 years. Spanish clubs will be able to spend 70% of the proceeds on infrastructure, 15% on servicing debts and 15% in the transfer market. The three clubs are now challenging the deal, so the story could run for a considerable period.

Likewise, there was resistance in Italy when a group of private equity firms were in talks with Italian league Serie A. This transaction involved the provision of a credit line of € 1.2 billion for a 10% stake in the league. Three of Italy’s most influential clubs, Juventus, Inter Milan and Lazio, blocked the deal, so CVC turned its attention to Spain. However, there is still a possibility that one of the firms may resurrect the proposal.

The Bundesliga also flirted with the idea, but the clubs were mostly very opposed to any private equity investment. KKR, Bridgepoint and CVC were all part of discussions with the aim of a 25% stake in the league’s overseas broadcasting rights. In May 2021, the clubs broke off talks, but interestingly the caveat was, “for now”.

While the possibility of a league transaction is not universally welcomed, clubs have been bought – and sold – by private equity companies. Clubs such as AC Milan, Genoa, Bordeaux, Burnley, Nancy and Toulouse all benefitted from some sort of private equity investment.

It would appear that while banks largely steer clear of football that alternative finance will continue to grow among major clubs. In addition to requiring security for any lending, banks are also reluctant to get into a situation where they have to force a club to fold. If, as promised, the game becomes better regulated, some of those concerns may diminish, but in the meantime, clubs are tapping markets that are willing to provide much-needed funds. How this can be aligned with the emotional aspects of football remains to be seen.