Written by Umberto Pelà (13.04.2024)
The past year has been a rather challenging year across global M&A markets. The tough macroeconomic climate that has characterized countries’ economies following the pandemic has continued to affect the way deals are structured and the rate at which they are closed. Inflation, hikes in interest rates, and slowdown in economic growth for many countries are all factors that have played a role in contributing to this picture.
Within the realm of sports, however, the market has shown promising resilience, where football has prevailed as the major sport receiving these investments — a testimony to the promising space that has been developing over the past couple of years. In fact, as Deloitte points out in their insightful 2024 Sports Investment Outlook, out of all investment activity across sports, football represented 52% of all deals. Let’s zoom in on that.
Who was investing? 57% of these investors in football were North American investors. Where were they investing in? English football clubs, for example, represented almost a third (29%) of the investment pool. What I found interesting though, was the relatively smaller investment in the NAM market: only 18% of the investment pool was allocated to North American clubs in the MLS and the NWSL. While that was a more significant percentage than any other big 5 European markets (excluding England), I find that a new, general trend could be upon us.
The sports investment markets in North America (NAM) compared to Europe (EUR) is almost triple the size — approximately $80bn compared to $30bn. North American investors already have access to their market: one that is full of avid consumers ready to cheer and support their franchises/clubs. Yet NAM investors are choosing to look elsewhere.
Out of greed? Potentially. Out of desire for growth? Likely. Out of sense for great opportunities? Definitely.
To me, the fact that 29% of all of these football-related investments have been targeted towards England and the greatest European football market isn’t a coincidence — this has been brewing for a couple of years now. Think about the NBA. Arguably one of – if not the – the greatest sports league in the world. So proud to be owned by American owners for most of its existence, why would they now allow institutional investors (Private Equity, Hedge funds, pension funds, sovereign wealth funds…) to chip into franchises? I truly believe this is due to a shift in approach and mentality that is occurring within the NAM sports investment scene. Within the football world, recent examples such as Burnley F.C. in the Premier League being acquired (84% stake for £170 million) by NAM investment company ALK Capital is a great example of NAM investors putting their (perhaps) patriotic ego to the side, expanding their horizons, and recognizing the value of looking across the ocean for opportunities.
The development of this space in the next couple of years is nothing short of exciting. Yet, with this thought in mind, I also wonder how the case studies we have at our disposal prove or challenge that excitement.
The greatest example that comes to mind when considering how promising this space can be for NAM investors, is AC Milan. Elliot Management, US-based Private Equity Fund, took control of the Rossoneri in July of 2018 after previous owner Yonghong Li defaulted on a loan of €32m. With no prior experience within the sports realm and the help of key figures such as Frederic Massara and club legend Paolo Maldini, Elliot Management restructured the roster and ended a 10-year-drought by winning the Serie A and increasing the value of the club exponentially. What started as a €300m loan to Yonghong Li, eventually became a gold mine for the American investment management firm.
After 4 years in charge, the PE firm had invested a total of €710M — which includes the defaulted loan from Yonghong Li turned to equity. In 2022, they sold the club for €1.2bn. Not bad for a 4-year-tenure, especially considering PE firm’s timelines which usually range more around the 10-15 year mark. Funnily enough, and further emphasizing my claim, the club was sold to another American investment management firm owned by Gerry Cardinale: RedBird Capital. This case study is particularly interesting because it presents two different philosophies in leading the club. Elliot Management, a “vulture fund” (tends to lend money to failing companies or businesses) led the club in an almost frugal way, cutting costs drastically and putting most of its eggs into player scouting. RedBird capital, on the other hand, has taken more of a “moneyball” approach, relying on statistical analysis to provide the ideal candidates to bolster the roster — without being afraid to spend. Only this summer, AC Milan brought in – amongst others – the likes of Samuel Chukwueze, Christian Pulisic and Tijjani Reijnders for a total of 120M in one summer. While this season hasn’t been a failure, it is tough to argue that all of these investments have proven the owners 100% right — especially after Monday, where rivals Inter Milan won the league away at AC Milan right in front of their eyes.
To this last point, some may ask: “are NAM investors fully confident about what they’re doing in the realm of football? Especially in Europe?”.
Great question. Let me unpack that.
The underlying assumption is that, yes, these investors know exactly what they’re doing. If they’re getting involved in transactions for sports teams worth hundreds of millions of dollars, you’d expect them to have done their due diligence — and rest assured they will have done that. Further, when taking over a club, the personnel doesn’t always change drastically. In fact, we often see these investment firms hand the keys over to individuals with significant experience in the field. While Paolo Maldini left the club in sour fashion, RedBird has kept around individuals with numerous years of valuable experience. Franco Baresi, historic club captain and legend of the game, for example, is the Honorary Vice President. Giorgio Furlani, CEO since RedBird capital took over, was already a part of the club through Elliot’s takeover and undoubtedly holds immense value in being able to compare and contrast leadership styles. Geoffrey Moncada, former head of scouting, is now technical director — again, another figure who has proven his success (crucial in scouting players like Rafael Leão) within the club prior to the acquisition. Frankly, a firm like RedBird Capital with over approximately $10bn in assets under management (AUM) and investments in other European sports giants such as Liverpool FC has a clear strategy; they know what they’re doing.
With all of this in mind, however, the devil’s advocate in me questions whether – due to the novelty of these sports deals within the world of football – these investments will prove to be as smooth as they might think in New York City.
In particular, I would love to hear how RedBird Capital (and other NAM sports investors) plan to tackle two specific hurdles.
The first one? The fans. Having experienced both NAM sporting events and European sporting events, it is easy to see there is a clear difference. Passion, attachment, and perhaps even civility stand out immediately. What I’m trying to say is that fans for sports teams in Europe have, ultimately, a deeper-lying sense of love towards their clubs. On the surface, this comparatively more extreme love for their clubs primarily comes from the historic background that so many of these teams have: AC Milan was born more than 100 years ago. Nashville SC in the MLS was formed 4 years ago.
To me, however, the subtle factor that makes this even more visible is the franchise structure that NAM sports leagues have. How are you going to expect fans to be fully involved if there’s a risk their team might be relocated within a few years? Fans in Europe don’t have that issue, which makes them more involved than they perhaps should even be. In Italy, for example, there is no hiding the fact that football is a religion. Often, and rather despicably, we read about fights, injuries, and even deaths as fans fight out to prove points which aren’t exactly clear — all in an attempt to show love towards their teams. As a result, it is hidden in plain sight that these same extreme fans have some power in terms of decision-making within the clubs. An example of this that pops to mind takes me back to 2014. Inter are about to swap fan-favorite Fredy Guarin to Juventus for an aging Mirko Vučinić — easy to say that the deal collapsed simply because of the outrage that the deal was causing. Even I, as a naive 11 year old, realized how complicated it must be to manage a football club in Italy.
Now, wouldn’t it be interesting to step into a RedBird capital meeting and observe how they tackle this issue? How much priority do they give to it? What their considerations might be? I’m not sure about you, but to me, it sounds like a fascinating discussion I’d love to get involved in.
A second hurdle that should be considered – from a slightly more institutional lens – is UEFA’s regulation system around multi-club ownership (MCO).
MCO is a type of investment which has gained traction over the past couple of years, generating a lot of noise in terms of how fairness within the game has been affected. City Football Group, for example, now owns clubs all around the world: Manchester City (England), New York City FC (USA), Melbourne City (Australia), Girona FC (Spain), Montevideo City Torque (Uruguay), Palermo (Italy), Yokohama F. Marinos (Japan). This is a crucial factor to consider, because it allows for the clubs to be creative with how they manage their books and their strategies.
It enables growth under so many different segments; technical and managerial above all. Imagine you develop a player within one of your clubs that has lower stakes in terms of competitions and he is now worth $40M. One of your more competitive clubs is now interested and in need of that player. Why would you ever sell him for that high of a price to one of your own clubs? Both parties negotiating at the table are indirectly part of the same team. In contrast, if in need of displaying capital gains in the income statement, you might want to bump up that price and allow one of the clubs – which is part of the same ownership group – to see unreasonably impressive capital gains within their books, just for the money to re-circulate back in another future transaction. This phenomena, fair player evaluation, has caused a lot of discussion in terms of Financial Fair Play rules, as clubs who aren’t even part of the same ownership group wink to each other to make their revenues and costs match by inflating these prices on both sides (an example of that is the Arthur Melo—Pjanić swap deal between Juventus and Barcelona). Furthermore, isn’t it easy to see how much greater your access to talent is? Having clubs around the world extensively develops your reach in terms of scouting for a fraction of the cost (especially in the long-run, when you find talents and sell them for capital gains).
Well, who’s unhappy with this? Simple, everyone who isn’t part of an ownership group.
The MCO model undoubtedly turns football into a form of betting. Ownership groups make their bets more safe as they limit the damage on the ultimate risk (and failure) for a club: relegation. On top of that, they increase their chances of success by giving themselves more chances for promotion.
UEFA isn’t happy about this because there’s some clear concerns in terms of fairness. Not everyone is part of an MCO, and only some are benefitting from it. What the rules specify, for now, is that clubs under common ownership or influence must not: “Hold or deal in the securities or shares of any other club participating in a UEFA competition. Have members simultaneously involved in the management, administration, or sporting performance of more than one club in a UEFA competition. Exercise control or decisive influence over more than one club in the same competition.” Yet these hurdles are easily overcome by ownership groups as they diversify their investments in terms of prestige. All clubs within the City Football Group have extremely strong ties and play extremely similar football. The philosophy that runs within one club is similar to that of its brother clubs. The transfer of players between these teams has been fluent, and will continue to be such.
In essence, everybody in the picture is winning. This is especially the case because their teams don’t even play in the same competitions — thus ensuring that no logistical and legal concern arises. City Football Group have managed to set strategies and aspirations of each club marvelously, ensuring that they all compete in their own spaces. Manchester City is clearly at the top of their ladder, with Girona and Palermo lower, in separate ranks. They all feed to each other — or better, feed to the top club.
Now take another perspective. Let’s step down from the organizational ladder, and take a look from the fans’ point of view. Isn’t it easy to see how some fans may not be happy about this? Why would they care about benefiting other clubs? How would you, life-long fan, feel about becoming a feeder club? Your aspirations as a team are to simply develop talent for an older brother, who takes all the limelight and success. Not great, right? This has been exactly the concern of many clubs involved with MCO as of recently. For example, Strasbourg, owned by Chelsea FC’s owner Todde Boehly, has seen its fans visibly unhappy with MCO, displaying banners expressing their disapproval at a game against Ligue 1 side Toulouse last August.
On a different note, what happens if the feeder clubs eventually do become great, and end up playing in the same competitions? Girona, currently (and unexpectedly) are third in La Liga, which would grant them access to next season’s UEFA Champions League. Not ideal for City Football Group, who could be possibly forced to sell majority stake in the club in order to fit with the organizer’s regulations. Alternatively, the club could reject the opportunity to participate in the competition — I could not wish something so absurd to any fan in the world.
So can investment firms find a middle ground in considering fans as part of their decision-making process? Is there a world where profit maximization and enterprise value aren’t the center of it all?
I’m not sure and I highly doubt that such a world exists — but only time will tell that truth.
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