In late August, it emerged that a consortium led by state-controlled financial services company China Everbright and private equity firm PCP Capital Partners had lined up an £800 million bid for Liverpool FC, one of the England’s most high-profile clubs.
Chicago-based private equity firm Peak6 Investments owns a 25% stake in Bournemouth FC, a team enjoying its second season in the Premier League. And billionaire investor Joshua Harris, a co-founder of buyout giant Apollo Global Management, owns a controlling stake in another Premier League club, Crystal Palace.
The world of football is increasingly attractive to buyout firms. Rob Wilson, a football finance expert at Sheffield Hallam University, said: “I definitely think we’ll see a greater emergence of private equity moving into football to start with, and maybe other sports, and I say that for two reasons. The first reason for that is we are seeing football clubs becoming more business-like – the return on investment is clear. The second is that they are also becoming increasingly unaffordable for other investors. Your local ‘businessman done good’ is not going to be able to afford a Premier League football team.”
Wilson attributed the surge in interest in English football clubs from private equity houses to the £5.2 billion deal the Premier League signed with Sky and BT to broadcast its games, with clubs in the league guaranteed a huge slice of the money.
He said: “The reality now is that these private equity firms have started to notice that if you’re going to look at turning a business around in the next five years, even without kicking a football, Premier League clubs are going to generate £130 million and gain massive global exposure.”
Helped by the broadcast rights money, Deloitte’s 25th Annual Review of Football Finance estimates that the aggregate revenue of the 20 Premier League clubs is likely to exceed £4 billion for the first time in 2016/2017, up 65% on just five years ago.
Liverpool experienced the biggest rise in revenues of the 17 clubs that were in the division for two consecutive seasons.
Profits have risen even more than revenues. In 2015, 17 out of the 20 clubs in the Premier League generated profits totalling €718 million, according to Deloitte’s report. The total profitability was over seven times higher than the €96 million clubs in the Premier League made in 2012/2013.
Not all of this came from the TV deal. In 2015, commercial revenues – the second largest income generator for clubs behind TV rights – grew by 10% across the Premier League’s 20 clubs, boosting total revenue to €4.4 billion, according to Deloitte’s report.
The new financial regulations announced by the Premier League in 2013 played a big part in this. The regulations meant that clubs could not post a financial loss of more than £105 million or use more than a certain proportion of money gained from TV rights to pay players’ wages.
Michael Timmins, a partner at Ernst and Young, said: “The impact of that [the cost controls] is creating organisations which actually make a profit, which funnily enough is a key factor when people are trying to invest money on a professional basis. That’s really been the shift.”
He added that the restriction on how much additional media income could be spent on salaries had “handcuffed” some clubs, halving wage to turnover rates at those that had been paying up to 120% to 130% of turnover on wages.
Timmins said of the rule changes: “Now you’ve got some middle-of-the-road Premier League clubs without the fan base or commercial operations which are now looking at being very profitable – before this it would have only been seven or eight clubs in the whole of Europe.”
While Premier League clubs are increasingly attractive investment propositions, it’s not the first time buyout firms have looked at investing in football clubs – and there are several drawbacks.
Mangrove Capital Partners, a venture capital firm that was an early investor in Skype, announced in July 2012 that it was setting up a fund to invest in football clubs and related businesses. It was said to have €500 million to invest and was looking at owning a number of clubs across Europe – exploiting popularity in Asia by improving the marketing strategies of clubs in the region. The firm even hired Barcelona FC’s former vice-president Marc Ingla.
Yet from a look at the firm’s website, the idea never took off. Mangrove’s current portfolio includes more typical venture-style investments, including property rental site Nestpick. The firm declined to comment.
Timmins was negative about the prospect of private equity firms owning clubs. He said: “In my view, there are still a lot of fundamentals that don’t make sense. If you’re a private equity investor coming in you’ll be thinking ‘What’s the equity story? What’s my management team? What’s my certainty around investment?’, and even before you invest, private equity will think about its exit strategy.”
At the heart of the problem is the uncertainty of the club’s revenue stream, which is closely tied to its performances on the pitch.
This is anything but predictable. Last season’s Premier League saw 5,000-1 outsiders Leicester City emerge as champions, while two of English football’s best known clubs, Aston Villa and Newcastle, were relegated.
As Timmins noted: “Some of the clubs will have a budget which says ‘we’ll finish in the top half but then will get relegated’. The lack of control over your major underlying asset, the football players themselves, and the lack of control you have and the impact that volatility has on your top and bottom line creates a lot of nervousness.”
And the potential backlash from fans upset at seeing their clubs used as cash cows might provide another reason not to invest.
The Glazer family’s highly leveraged buyout of Manchester United made it one of the first investors to look at football clubs as a purely financial play, something that did not sit well with supporters of the club. The leverage the investors used to purchase Manchester United and the dividends the Glazers have taken out of the club – two tactics commonly used by private equity houses – have come in for particularly vocal criticism.
Wilson said: “This magnifies the issues of treating these football clubs as cash cows and trying to take as much from the investment as possible. What we do know about football fans is that they want stability and the five-year plans most of the investors go for is difficult to square off for a fan. They’ll think ‘Where will this leave us in five years?’ And it also says that the PE firms will probably look to take as much as they can out of the club to maximise returns for investors.”
Investments could instead take the form of buying up debt in football clubs and boosting their balance sheets, according to Tom Evans, a partner at law firm Latham & Watkins.
Evans said the appeal of this approach was that a debt investment was less exposed to poor performance on the pitch.
He added that one of the reasons for football being a debt investment was that the revenue streams of the most commercially successful clubs like Manchester United and Real Madrid were still heavily driven by broadcasting rights and performance.
The fact that Manchester United posted the biggest fall in revenue of any Premier League team after failing to qualify for the Champions League in 2014/2015 demonstrates this.
Evans said: “The new deal with Sky and BT combined with the tighter cost controls meant that there was more buffer between poor performance and covenant breach under a piece of debt.”
And now a fledgling fund is being raised purely to provide debt to football clubs in the UK, according to one person familiar with the matter.
The fund, set up by former bankers and investment executives, will look to provide financing to clubs which would syndicate future earnings to receive cash up front to spend on the club.
Buyout giant KKR has already struck one such deal. The firm acquired a 9.7% minority share for around €60 million in German club Hertha Berlin in January 2014, in a move that Michael Preetz, managing director at Hertha Berlin, described in a statement released at the time as a “quantum leap for the economic situation of our club.”
Under the terms of the agreement, Hertha Berlin reduced the leverage on its balance sheet and was able to repurchase some of its marketing rights it had previously sold.