By: Murad Ali Khan & Hamzah Faris
Ever since soccer was first founded, the business model has been relatively simple; a local businessperson runs the local club with the main revenue streams being tickets sales to loyal fanbases and the prize money from winning illustrious competitions. Now fast forward to the modern-day: globalization and improved technology have paved new ways for clubs to get richer – through television and streaming deals, as well as a plethora of sponsors dying to have their names printed on jerseys worn by international superstars. Of course, where there is growth and money to be made, investors always find a way to get their piece of the pie. Enter: private equity firms.
Over the past 20 years, Gulf nations, Russian oligarchs and Chinese billionaires have commonly invested in soccer clubs. However, throughout the past several months a new trend has emerged: private equity firms have participated in the unorthodox strategy of investing in European soccer clubs. Notable investments include ALK Capital’s investment in English club Burnley through a leveraged buyout, Silver Lakes’ indirect ownership of Manchester City, and most recently the ongoing talks between CVC partners and the Italian soccer league to purchase television rights. This trend has been growing at a steady rate, but the COVID-19 pandemic added gasoline to a burning fire. So how exactly is a pandemic correlated to foreign investors competing for opportunities in soccer? Capital. With the recent shutdowns due to COVID-19, clubs were finding it hard to pay off their mounting debt levels as ticket sales became non-existent and the inflated wages became harder to cope with. This led to a need for cash, placing downward pressure on valuations. Every coin has two sides, and although the pandemic posed a serious threat to soccer clubs, it presented investors with opportunities to generate returns. Traditionally, the idea of investing in soccer clubs was concerning to investors as the business was deemed unprofitable. However, with the implementation of the financial fair play rules that prevented clubs from spending more than they make, teams were operating at a net profit – pre-pandemic, of course. Combine the new favorable laws with discounted club valuations, limitless wealth of broadcasting contracts, a surge in stay-at-home entertainment products demanded, and soccer clubs in desperate need of funding – you get the perfect recipe for private equity investments. To keep it simple, soccer clubs need money, and private equity firms can give it to them.
It seems like the perfect fit, right? Private equity investors get to realize returns over the long term and soccer clubs are bailed out of their distressed situations.... Wrong. The clubs and the investors forgot about a key stakeholder – the fans. The people have always been against foreign investors buying controlling stakes in their teams. It goes against the tradition of sport and is seen as a way of maximizing profit rather than helping the team become successful on the field. Just take the recent European Super League disaster as an example; A project spearheaded by J.P Morgan to help teams make money comparable to the NBA and NFL, was immediately shut down by protestors. Assuming the fans accept the recent influx of cash from these firms, the returns still are not guaranteed as soccer – unlike other sports that actively invite investors, such as the NBA, is riskier due to relegation; just look at Swansea, a soccer club that had zero debt when it was invested in by Oaktree Capital, who now finds itself in the second tier of English soccer – missing the top sponsorship and television deals. Soccer is not a traditional private equity investment due to the returns being based on the teams' performance on the pitch and not the business taking place outside of it. This tends to be tricky as no team is guaranteed to perform well, especially in the competitive European leagues.
Are these investments fruitful or poisoned fruit? Only time will tell. Until then soccer-lovers will continue bleeding the colors of their teams, and investors will continue reaping the benefits.