According to KPMG’s ‘The European Elite 2019’ report, published in May, the combined enterprise value of the 32 most prominent European football clubs increased nine per cent in 2018, and has grown 35 per cent over the past three years.
This growth rate contrasts with the fortunes of European stocks in the same period – notably the STOXX Europe 50 Index, whose value fell 13 per cent in 2018, the report notes. It says this demonstrates “the different pace at which the football industry is evolving.
Charles Baker, co-chair of New York-based O’Melveny’s sports industry group, which advises on a broad array of transactions, including M&A, tells SportBusiness that “an investment into a football club currently offers investors the potential for significant return on their initial investment, as the CAGR for sports team ownership is better than almost every other asset class over the last five, 10 and 20 years”.
He adds: “Given the current levels of growth in the sports market, an investment in a football club may be a smart portfolio choice. A lot of investors see this asset class as the new frontier for sports investment, especially when compared to the NFL and MLB, which are seen as more mature properties.”
Baker also notes that due to financial fair play regulations and other factors such as stable sponsorship revenues driven by global appeal, the profitability of European clubs is growing.
Stephen Duval, co-founder of London-based 23 Capital, which provides finance to the sports and entertainment sectors, tells SportBusiness that a new wave of investors has entered football and is changing the landscape.
“Football clubs are definitely being seen far less as trophy assets for rich people,” he says.
“They are now run like proper businesses. Even Manchester City – you may say Abu Dhabi are throwing money at it, but they’ve turned it into a business.”
His co-founder at 23 Capital, Jason Traub adds: “We are seeing more institutional financial interest in football now.”
Examples of US private equity investors buying into European clubs include Jason Levien and Steve Kaplan (Swansea City), John Henry (Liverpool), Harris Blitzer Sports & Entertainment (Crystal Palace), The Tornante Company (Portsmouth), Joe DaGrosa (Bordeaux), and James Pallotta (AS Roma).
Challenges for clubs
Baker says that the influx of private equity “cannot be understated because it significantly increases competition for clubs, driving up prices”.
He adds: “I think we will also see more clubs changing hands, due to the focus on short-term returns and exits, which could create instability at certain clubs. These short-term turnarounds could lead clubs to take actions that are riskier from a regulation or operational perspective, and that a long-term investor would not otherwise take.”
However, he adds: “Private equity firms can be savvy financial investors focused on buying underappreciated assets and making certain operational and financial changes to unlock value.”
Duval notes that “there are a lot of principles to private equity, so the rules about getting out in a managed timeframe are less relevant”. Such principles include alignment of interest, governance and transparency. “Particularly in the Premier League a lot of these principles of private equity are getting involved.”
Comparing the influx of private equity to previous waves of owners, Traub adds: “I think the financial community coming in is potentially a healthier one. Most private equity investors come with a challenging mindset, a smart mindset.
“A lot of them will have a financial driver but what is clear from the Premier League, for example, is that an individual investor will learn quickly how to balance financial performance with stakeholder interest – and by that I mean the fans and the local community.”
Attracting PE investment
Baker stresses that a club “must be appropriately priced to provide an acceptable risk/return from a capital cost perspective. Without that, all of the operational changes will not provide much upside”.
He explains that investors are more wary of buying stakes in European clubs, especially in the Premier League, because of the risk of relegation and its effect on club value.
“There is definitely an increased sense of caution when buying a Premier League club,” he says.
To overcome some of that risk his group recommends structured deals with a contingency, with a certain portion of the purchase price – typically 20-to-30 per cent – held back and provided only if the club meets certain “relegation/promotion metrics”.
Last year’s sale of Aston Villa was an example of such a deal. The NSWE group purchased a controlling 55-per-cent stake in the club, which won promotion back to the Premier League in May, triggering the remainder of the purchase price to be paid. “This type of structure in a deal is becoming increasingly common,” says Baker.
Challenges for investors
At the FT Business of Football Summit, held in London on May 31, Goldman Sachs managing director Gregory Carey said it is still extremely challenging for investors in English clubs outside of the elite to grow the value of their investments.
“There is a lot of competition for very few spots,” he said. “Some teams that you think should be playing in the Premier League have been relegated, so it’s very tough. People think they understand the space, but they are realising how hard it is.”
Carey pointed to the example of Swansea City, who were relegated from the Premier League in 2017-18 after seven consecutive seasons in the top flight. A consortium of American businessmen had acquired a controlling 68-per-cent stake in the club in July 2016.
“It’s a lot easier to buy a mid-level club in Italy than an English Championship club because you have a much better chance of staying up,” Carey said.
However, Traub observes that other challenges exist in Italy and elsewhere in Europe, and points to the chronic delays in the building of AS Roma’s new stadium as a prime example.
James Pallotta, Roma’s American owner and president, presented plans for the new ground in March 2014 and targeted the 2016-17 season for its opening. Construction has still not started, with the project suffering a number of setbacks including the arrest of nine people linked to the building of the stadium.
Traub said that owners of Premier League clubs are likely to find fewer obstacles to driving growth and will “feel like the destiny is in their own hands”.
Traub adds that multiple ownership of clubs is a way for additional value can be unlocked, with the City Football Group, which along with Manchester City owns parts of clubs in the US, Australia, Japan, Spain, Uruguay and China, leading the way.
Traub notes that City are formalising the multiple ownership of clubs done already elsewhere, for instance by the Pozzo family. “Manchester City have a thesis to institutionalise football ownership under one umbrella,” he explains.
Other similar developments are likely to emerge soon. “We are seeing a much healthier want by new investors to look at consolidating a number of clubs,” Traub reveals. “We know of three or four parties that are looking to drive that same thesis.”
Ebru Köksal, senior advisor at investment management firm J. Stern & Co. and former chief executive at the Galatasaray Group, says that women’s football also represents a valuable opportunity for clubs, pointing to Lyon, whose women’s side has won six Uefa Women’s Champions League titles, including the last four in a row. Lyon is owned by French businessman Jean-Michel Aulas, and Köksal says the club’s women’s side “has been one of the best investments of his life”.
Köksal adds: “If I had €10m I would definitely go for a women’s club because the growth potential there is tremendous. Also, there is less competition and it’s easier as you are starting with a blank page.”