Football Fever: PE Investment in European Football

16 Dec 2022 /

Football Fever: PE Investment in European Football

By Ethan Hall

With the World Cup in Qatar nearing its end with a final between France and Argentina, Luminii thought that it would be topical to look at the involvement of private equity investment into European football. The sale of Chelsea for £2.5 billion earlier this year, as well as the recent announcements by the owners of Liverpool and Manchester United that they are looking to potentially sell their respective clubs, has brought increased interest into the ownership of clubs in the Premier League (England’s top-flight league) and across Europe. Over recent years, private equity investment into football has increased, with Financial News reporting that global private equity deal flow to football between 2016-2021 showed rising demand, with 10 deals inked during 2021. The attractiveness of sports for investors can be seen as there are now funds which are set up specifically for sports investments, such as a $2.6 billion fund from US-based RedBird Capital Partners, who in August 2022 acquired AC Milan.

So, why are private equity investors looking at football as an investment opportunity? A large reason why investors look to football clubs is the commercial opportunities. Football clubs have multiple revenue streams, which means the cash flows they generate are more sustainable. These include income from ticket sales generated on match days, selling broadcasting rights to games, and sponsorships. Merchandising deals, prize money from winning competitions, and earnings from transfers all top up a teams’ income which will turbo-charge the internal rate of return for general partners.

Broadcast Revenues

It is often considered that there are two main ways to make money from sports: increase the number and intensity of fans, and/or monetise this fan engagement through traditional and emerging revenue sources. For investors, the growing prize money of the Union of European Football Associations (UEFA) Champions League, the escalating TV revenues for premium competitions, and the internationalisation of marketing measures have strengthened the incentives to compete among Europe’s leading clubs. Considering the Premier League, commercial revenues have grown at an 11% CAGR (Compound Annual Growth Rate) from 1991-92 to 2020-21, while broadcast revenues have grown at a 20% CAGR over the same period.

Broadcast rights make up a substantial portion of the revenues for clubs in the top leagues, for example, 59% of Premier League clubs’ revenues in the 2018/19 season came from broadcasting. TV rights in the Premier League have increased from just over £50m a year when the Premier League was launched in 1992 to over £3bn with the most recent TV deal. Moreover, in an age of on-demand streaming, sports remain something which people watch live, giving it an edge over other areas of broadcast media in terms of the popularity of live TV rights.

Merchandise and Sponsorship Revenues

Singh (2022) reports that the rise of Fanatics, an online American sports merchandise retailer, points to how big and how popular the merchandising segment of the industry is becoming, growing from a start-up to a reported $27bn valuation in just over 10 years. However, investors would need to be aware that clubs often receive a small portion of kit sales, with most of the revenue going to the manufacturers (typically at least 80%), where the clubs receive the revenue in advance. For example, Adidas pay Manchester United £75m a year to be the club’s official kit supplier. The advertising segment is one which clubs are looking to take advantage of. City AM describe how the most commercially successful football teams may now have more than 50 commercial partners, ranging from airlines to official wine, car tyre and bedding suppliers. Sponsorship revenues can be very lucrative for clubs, KPMG’s Football Benchmark reported that the total value of sponsorship across the big five leagues in 2020 was more than €3.3bn per year.

Investment Risks

Whilst investing in a football club can allow investors to take advantage of increasing revenues generated by the clubs, there are risks associated with investing in European football clubs which may decrease the attractiveness of the club as an investment proposition. Football clubs in Europe are subject to the risks of poor performance on the pitch, which could lead to them missing out on broadcast revenues which come from top competitions such as the Champions League, or even relegation. Investors would probably prefer a closed model such as the one in many American sports. However, an attempt last year to create a European Super League, a closed league with 15 of the top European clubs was met with huge backlash by fans, and plans were promptly cancelled.

Another risk for investors is that despite strong revenue growth across the ‘big five’ leagues in Europe, profitability has not followed the same trend. Of course, the pandemic had a large negative impact on clubs, but even prior to the pandemic, clubs in France’s Ligue 1 and Italy’s Serie A were making consistent losses. If one excludes the Premier League, the total operating losses from clubs in the other four leagues in the big five were €0.9bn in the 2020-21 season. As costs rise for football clubs, notably transfer fees and player wages, investors may find that they are unable to make large profits despite strong revenue growth.

Another way to mitigate the risk of investing in an individual club is to invest in the league instead. The FT reported that CVC Capital Partners invested €2.1bn in La Liga, giving it a share of broadcasting and commercial revenues for up to half a century, suggesting that if those revenues keep growing at present rates, CVC could treble or even quadruple its money in the next decade. Since the league is not on the hook for clubs’ costs, most of CVC’s revenue is profit. A similar deal was considered in Germany, however Reuters reported that the deal was pushed back due to a lack of consensus among the clubs in Germany’s top two divisions. A 20% stake in the Bundesliga’s media rights was priced at €3.6bn. If investors can invest in football via a league rather than clubs, one would argue that it would be a less risky investment, as the league is not subject to some of the risks that individual clubs face, such as relegation or other poor on-field performances.

Map of PE Investment in European Football

See map for a list of some investments made into football clubs and leagues:

Overall, football clubs, and more recently football leagues, have become an increasingly attractive investment opportunity for private equity investors. The internationalisation of the game has led to growing broadcast rights and the commercialisation of the game has given clubs the ability to commercialise vast amounts of their activities to provide consistent revenue streams. A challenge for private equity investors is balancing on-field success with financial results, as the growing influence of state-backed clubs make it increasingly difficult for clubs to compete. It has also proved difficult to drive elevated levels of profitability among football clubs, which is a major turn-off for investors. I am sure football fans would welcome the news if profit-driven investors were turned off football clubs, but if that leaves their team as part of a sportswashing venture, there will also be disgruntled fans. To compete at the top level of football, you need money, and lots of it. If investors want to make money from football clubs, it appears that their best option is to become a club which develops young players and sells them on at a profit.

References

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