U.S. Private Equity: Where Football Is Beyond 90 Minutes!
November 23, 2021
By: Nevil Thakkar
If you are a fan of European soccer (football), you may have noticed the considerable impact of private equity firms on the playing field. The increased quality and public profile of the players on the field is directly proportional to the ever-growing financial backing from investors in such clubs. Gone are the days when football clubs were only owned by local businessmen. Beginning in the late 1990s, many clubs started to see money pouring in from Russian oligarchs, Gulf petrodollars and Chinese billionaires; recently, there has been a considerable injection of capital from U.S. private equity firms.
During September 2021, when AC Milan hosted Atletico de Madrid in a Champions League match, a football fan might think of this as a clash between Italy’s most successful team and last year’s Spanish title winner. However, in an alternative investment world, it was also a matchup on one side between a hedge fund based in New York managed by Elliott Management Corp. and a credit fund managed by Ares Management, headquartered in Los Angeles. Elliott Management Corp. took control of AC Milan in 2018; on the other side, Ares Management Corporation’s private equity funds own a 34% stake in Atletico de Madrid. Also, in September, Miami-based 777 Partners purchased Italian Serie A club Genoa.
Back in 2005 when the Glazer Family, who own the National Football League’s (NFL’s) Tampa Bay Buccaneers, purchased a controlling interest in Manchester United, many eyebrows were raised. Previously, investments in Silicon Valley technology start-ups, health care companies and life sciences ventures had been the darling investment targets of private equity. So how did European soccer gain the interest of private equity investors?
Why are European soccer and American private equity firms a good match?
The launch of the Premier League in England in 1992 was a landmark moment in European soccer teams and leagues beginning their journey toward the current era of teams maximizing revenues and profits and unlocking their full valuation potential. The founders of the Premier League in the early 1990s looked enviously across the pond to North America at the vast difference between the way U.S. sports franchises were operated as serious businesses and the almost total lack of investment occurring at home. This presented an obvious enormous potential opportunity to create value on a never-before seen scale in the U.K. and European soccer industry in markets that still had a relatively low cost to entry. Particularly in England, teams had been woefully neglected from a capital infrastructure investment perspective for many years. European soccer has always had a fervent never-shrinking demand and a hugely loyal customer base who can’t seem to consume enough of it. This provided the realization that when it comes to the potential for growth in the industry, the sky was the limit.
The major problem in Europe, including England, was that the local market was tiny compared to the enormous U.S. market. To be truly maximized, growth had to become a worldwide strategy, including expanding the customer base to all continents and seeking capital outside of Europe. This caused a simultaneous explosion in the growth of the wider European soccer market and set off a financial arms race in all the major European soccer leagues including Spain and Italy, which now had no choice but to join in the all-out financial competition. These leagues may be in different countries, but they were all chasing the exact same pool of global top talent players, which were now being sold at an exponentially increasing price tag. For example, Stan Collymore was the most expensive player purchased in England in 1995 when he was sold to Liverpool for $12 million. Then, 18 years later, Gareth Bale was sold by Tottenham, another Premier League side, to Real Madrid of Spain’s La Liga for more than $120 million. This growth in demand has caused the financial resources required to be the best in the sport to move to a level far beyond the wealth of many then current owners and the conventional sources of capital available.
Historically, a team became significantly more successful and increased its financial resources by being bought by a wealthy individual, such as Roman Abramovich, who made a vast fortune in Russia and then bought Chelsea Football Club. Such individual benefactors are obviously very few and far between on a global scale. Unfortunately, some of these wealthy individual “saviors” were a double-edged sword and posed a huge risk to the financial health of their team (as well as providing a huge opportunity for it). They could either transform the club (like Chelsea) or they could cripple it financially and then cut their losses and walk away. This have been a number of times over recent years when teams went into or risked liquidation, such as FC Barcelona, or were just saved from liquidation at the last moment having bankrupted themselves through an overspending owner who had become bored after a lack of immediate success.
Partly for this reason, many teams began to search for a more strategic partnership to raise capital and obtain help from a partner who possessed strong relevant business expertise, and didn’t immediately require the club to be sold outright to new owners. Such expertise invariably came from the United States, where there was a strong cultural and technical overlap between pro sports as it existed in the States, and pro sports as it hoped to exist in Europe. This included importing cutting edge ideas including statistical analysis into front office operations, enhancing medical staff and practices, and protecting and nurturing playing staff from a young age. This made private equity a compelling idea for European soccer clubs, especially those that weren’t owned in a multi-membership format like Barcelona or Real Madrid. From the private equity perspective, soccer is a very attractive opportunity, not least as the most popular sport in the world with the biggest potential entertainment market (which provides enormous potential for growth) but also because there is no franchise concept in soccer (unlike U.S. leagues). Therefore, through the promotion and relegation format of the leagues, it is possible to take a stake in a team cheaply in the 4th tier of a country’s league hierarchy, improve its playing staff, build a world class infrastructure, increase its ability to compete and maximize its revenue and profits by ultimately taking the team into the top league (i.e., Premier League or La Liga) or even improving an existing top-league team’s position in the standings, these efforts could increase the club’s enterprise value by 10x or more.
As an example, Crystal Palace entered the Premier League in 2013 with an approximate valuation of $100 million. Josh Harris and David Blitzer, who own the New Jersey Devils NHL team and the NBA’s Philadelphia 76ers, acquired a stake in the club for $130 million in 2015. Extrapolating the price paid recently for a stake in the club by an investor who came on board earlier this season, the team is potentially now worth around $700 million.
The combination of all these factors along with the sheer competitive nature of the league and the prestige and high-profile nature of the sport globally makes private equity an attractive marriage proposition both from the perspective of football clubs and their fans, and also for the private equity firm backers.
Revenue Generating Clubs
There have been significant changes in the revenue dynamics in soccer mainly due to massive increases in TV deals, stadium ticket prices, and jersey and corporate sponsorships, all of which have transformed many clubs into attractive, profitable ventures. In response to several clubs collapsing financially, the Union of European Football Associations (UEFA) Financial Fair Play Policy (FPP) Regulations were introduced a few years ago, which, broadly, do not allow football clubs to spend more than they earn. This was viewed by many as a positive control on the club’s profit and loss statement. However, it intensified the need to find sources of investment capital. In 2015, the English Premier League recorded a second straight year of positive net profits for the first time since 1999; returns are just beginning to increase at a rate comparable to more conventional entertainment sectors. The growing popularity of European football across Africa and Asian countries is also adding revenue to the game at an amount never seen before.
During July 2021, venture capital firm Orkila Capital injected approximately $58 million into Belgian team Club Brugge. Brugge was attractive because it regularly qualifies for the UEFA Champions League competition and has a pipeline of players it can sell on to bigger European clubs (which is always a major revenue stream for such a club).
Varied Investment Structure
U.S. investment firms have not only made equity investments, but have also loaned money to European clubs, while a few have purchased media rights. CVC Capital Partners ventured into La Liga in late September 2021 by injecting a $3 billion private equity investment into the club, ultimately taking a 10% stake in its commercial business. In May, Oaktree Capital Management, one of the largest distressed fund managers, entered into a deal of approximately $366 million to buy a stake in Italian mega club Inter Milan to keep it financially afloat. Oaktree Capital is already investing in French Ligue 2 club Caen and English Championship club Swansea City.
What drives the attention of the private equity investor is that football in Europe is not intermediated by investment banks and it is easy to have direct conversations with sellers on a one-off proprietary basis. That generally means one can find more attractive deals. Also, when you consider that among the highest leagues in England, Spain, Italy, France, Germany and Portugal, there are 116 teams to choose from, all of which could qualify for the UEFA Champions League (and a European Super League if that concept ever raises its head again), the possibilities for a lucrative deal are many.
Private Equity Capital and COVID-19
European football has always been desperate for cash, but this became even more severe due to the pandemic which forced crowds away from stadiums and left some of the continent’s biggest and most successful clubs with massive debts. However, many football enthusiasts with financial acumen deem these businesses to be recession proof, in the sense that consumption of these services is not elastic to fluctuations in the price of attendance or the general economic conditions of a nation. From the summer of 2021, as stadiums across Europe reopened to fans, there has been overwhelming attendance despite existing COVID-19 concerns. Currently, Miami-based Kapital Football Group is seeking to acquire multiple stakes in European and American soccer clubs.
With football unlikely to be beaten as the most viewed sport in the world any time soon and given the remaining untapped revenue generation potential especially for the European elite clubs, including e-sports and other virtual/digital service offerings, it is likely we will see even more private equity groups regarding soccer clubs as a viable investment opportunity.