Private equity and the English Premier League
March 2016 | FEATURE | PRIVATE EQUITY
Financier Worldwide Magazine
Traditionally, English football clubs were owned and operated by local businessmen. For more than 100 years they were deeply rooted within, and accountable to, their local communities. But times have moved on. Indeed, the Premier League boardroom of 2016 is more likely to seat a Russian oligarch or a Middle Eastern sheik, a Thai billionaire or an American businessman than a local business owner.
Over the course of the last decade, the financial landscape of the modern football industry in England has transformed. With television and digital media rights ballooning in recent years, the English Premier League is in uncharted and extremely profitable territory. Beginning in the 2016-2017 season and lasting for the next three seasons, the league will generate combined television revenues of £8.5bn, £5.2bn of which will be derived from domestic deals with the league’s various media partners. The remainder will come from overseas rights. The domestic deal represents an increase of 70 percent from the previous agreement. Such has been the increase in revenue, 17 of the 30 richest clubs in world football now compete in the EPL, according to Forbes.
Given the recent profitability of English clubs, it is no surprise that private equity groups are beginning to show an interest. Of course, the PE industry is no stranger to sports ownership. Funds and top management are regularly involved in ownership groups in the US and do have some history of football club ownership in Europe, however the attention of PE groups seems increasingly focused on the EPL, driven by clubs’ increasing income levels.
In 2015, Crystal Palace FC agreed a deal in principle with Josh Harris and David Blitzer, two US private equity executives with a history of buying into sports teams in the US. Meanwhile, AFC Bournemouth sold a 25 percent stake to PEAK6, the Chicago-based investment vehicle run by veteran financier Matt Hulsizer. Though both of these deals are for minority holdings, the transactions are notable. With investment firms taking ownership stakes in two EPL teams in a short period of time, and with many more deals rumoured, the influx of PE money and influence is an interesting, and potentially volatile, proposition.
By their nature, long term strategising and major expenditure is fairly uncommon for PE groups, which are more interested in synergies and value generation than regular multimillion dollar outlays on playing staff. “Traditionally, private equity has not been a ‘core’ investor in football,” says Alex Haffner, a managing associate at Dentons who helps run the firm’s Sports Group. “No doubt, this was based on the reality that football clubs could not offer the rates of return PE investors would typically seek, and indeed have historically rarely been profitable. Nor could PE investors necessarily put together an attractive ‘exit strategy’ given the vagaries of owning and operating a football team and the difficulty in finding buyers for any onsale.”
Furthermore, while US sports salary caps and collective bargaining agreements can help keep a lid on costs, until fairly recently no such agreements have existed in the EPL, and with pressure from investors and supporter groups to achieve success both on and off the pitch, clubs can find themselves assembling expensive squads. In the 18 months or so that Dutch coach Luis Van Gaal has been in charge of one of the world’s biggest clubs – Manchester United – its owners have spent around half a billion dollars on player acquisitions but have nothing to show for it, except for anxious supporters and disgruntled commercial sponsors. One of the club’s main backers, German sportswear giant Adidas, recently expressed its dissatisfaction with the club’s present playing style.
With significant commercial pressures permeating the modern EPL club, it is hard to see the PE industry viewing soccer as a viable and attractive investment vehicle; however, one look at television revenues for the coming seasons might just change their minds. Significant shifts in income will mean wider profit margins and safer investments. Up until very recently, it was notoriously difficult to turn a profit in soccer. The 2013-14 season was the first time in 15 years that the EPL generated a collective pre-tax profit. The league saw pre-tax profits of £190m during 2013-14, almost four times higher than the previous record of £49m recorded in 1997-98. Given the level of revenue due to be generated in the EPL in the coming years, pre-tax profits could soar.
“The impact of UEFA/EPL regulated cost control has made clubs genuine profit centres for the first time,” says Mr Haffner. “Whereas those making a profit were previously very much the minority, now any well run EPL club can genuinely expect to do so. With the ever increasing allure of EPL football on the global stage, PE investors will also no doubt believe they can increase returns over and above those already being achieved.”
During periods of significant revenue spikes in the past, player wages and agents fees also ballooned, but the introduction of domestic financial fair play rules have changed things. For Mr Haffner, these regulations have been every bit as impactful as the deluge of money brought into the game from television deals.
Given the revenue generation potential of the EPL, as teams pursue silverware on the pitch, it is likely that we will see more PE groups regard the clubs themselves as viable investment opportunities.
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