As the football industry defies the global recession, new investment funds look to fast-track smaller clubs and untapped talent into the lucrative top European leagues.
The spectacle of this summer’s World Cup is still fresh in the memory for the estimated 700 million people worldwide who watched Spain beat Holland in the final. Six weeks earlier, Cardiff v Blackpool at Wembley, London didn’t quite have the same glamour, or viewing figures. But with promotion to the English Premier League (EPL) —and an estimated £90 Million in additional revenues—at stake, it was officially the richest game in world football.
It is this type of giant windfall that new football investment fund, London Nominees, hopes will encourage institutions and wealthy individuals to invest in the beautiful game. Launched at the beginning of this year, London Nominees plans to fast-track a club from the Championship— the second tier of English football—into the EPL.
The fund joins other recent ventures, including the Emirates NBD-owned Hero Global Football Fund, looking to capture a share of the money that circulates in the game. Their popularity has increased as traditional asset classes were beaten down during the global economic crisis.
As an alternative investment, the financial lure in football is obvious: according to business advisory firm, Deloitte, the top twenty clubs earned over €3.9 Billion in the 2008/2009 season (the latest data available), with Real Madrid becoming the first team in any sport to earn revenues above €400 Million in a single year.
Seven English football clubs were on the top twenty list, underlining the Premier League (EPL)’s commercial pedigree and attracting the new funds. Just last year, the EPL negotiated a record £1.8 Billion TV deal with British broadcasters covering 2010-2013. An additional £1.4 Billion is expected from overseas broadcasters, taking the annual income stream above £1 Billion per season. And that’s before sponsorship, merchandising and ticket sales.
According to Ryan Knight, Editor - F.C. Business, these revenue streams are driving up the value of football-related assets, making it increasingly difficult for individual investors or businesses to buy into a club. And then there are the running costs, augmented by sky-high wages for players. “It’s not like you’re buying a profitable business,” says Mr. Knight, speaking to Alternative Latin Investor, “so you’re going to have to have the cash to a) service the debt and b) make investments.”
With only a select few individuals able to invest that kind of money up front, Mr. Knight thinks football funds like London Nominees will become more and more common in the future. Investors need US $25,000 to buy into London Nominees, which aims to raise US $100 Million for its initial capital outlays. Aside from buying into a carefully chosen Championship club, the fund will also finance the development of players brought over from developing countries, particularly in Asia.
Andrew Leppard, CEO of London Nominees, explained the strategy to CNBC: “the fund will concentrate on talent which is at a low cost. We’ll look at developing raw and untapped talent that is maybe going to cost US $100,000 in total to bring that guy to fruition, and then sell him for hundreds of thousands and sometimes millions of pounds.”
The method sounds broadly similar to a common strategy in the real estate market – buying ‘distressed’ assets and ‘flipping’ them for a profit. But Mr. Knight warns against comparisons with other industries. “Football is a beast of its own, where emotion, paranoia and ego are kings, and the realities of your financial results are dependent on 11 men going out and performing. Without the players’ performance it’s very difficult to keep your other revenue streams alive and kicking.”
Taking On The Sceptics
The fund will also need to overcome a great deal of scepticism regarding third-party ownership of players, at least in the English league. Critics argue that it undermines the integrity of the sport, or point to the ethical issues with what they describe as a trade in human beings.
There are also legal restrictions to contend with. The high profile transfer of Argentine internationals Carlos Tevez and Javier Mascherano from Brazilian club Corinthians to West Ham United in 2006 caused an uproar when it was discovered that the players were ‘owned’ by Media Sports Investment Ltd, and not the club.
This type of third party ownership is common in South America, which is a traditional seedbed for football talent. However, it is rare in Europe, and the deal became a scandal when it was revealed that those investors could force the London club to sell them on if an offer came in at a stipulated price. The ability of an outsider to influence club decisions was already outlawed (West Ham was subsequently fined by the English Football Association), but following the incident, the EPL ruled that only the club would own its player’s registration and economic rights.
That would only affect plans to make a profit from player’s transfers. However, an increase in the presence of funds in the football league could prompt further regulatory changes. Currently, the EPL conducts a ‘fit and proper person’ test to ensure that the owner of a football club has the right character and financial clout to manage a club responsibly. With a fund that’s not always possible: London Nominees, for example, plans to cap individual contributions at US $1 Million, giving no one investor a dominant stake.
Despite these risks and potential pitfalls, London Nominees targets 8-10% annual growth in the first two years, and double digit returns after that. If it can deliver on this promise, the fund’s investors probably won’t care too much about moral dilemmas or legal obstacles. And even the most sceptical fans will change their attitude if their club reaches the EPL on the back of football fund investments. As Mr. Knight points out, “if you can prove that you are going to buy that striker, or you’re going to give the manager a big transfer kitty, it’s interesting how quick the fans come round.”
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