The Premier League and the Championship have unsurprisingly been in particularly high demand because of the lucrative TV rights deals. Investors are now sitting on cash cows, if their clubs can avoid the dreaded relegation
Alexander JarvisAlexander Jarvis, chairman of Blackbridge Sports, was the ﬁrst British ﬁnancier to set up an investment company to assist Chinese investors in acquiring football clubs. He recently brokered the sale of Barnsley FC to a US-Chinese consortium.
Football clubs in Europe for many investors used to be considered just a 'trophy asset'. The fastest way to become a millionaire was to be a billionaire and buy a football club. Of course, you can still lose a lot of money if you don’t get the right management team in place and go on an unsustainable player acquisition binge, but times have changed.
In recent years, billions have been poured into the English game through ownership groups from China, UAE, Thailand, Russia, Iran and the United States. The Premier League and the Championship have unsurprisingly been in particularly high demand because of the lucrative TV rights deals. Investors are now sitting on cash cows, if their clubs can avoid the dreaded relegation.
In December 2014, I was at a dinner in Chongqing, China, working on a real estate deal with several ‘fuerdai friends’ (translates as ‘rich second generation’) and one of my friends, who is the son of a newly-minted billionaire said: “Alexander, do you know any football clubs that are selling in Europe? We want to buy one.”
It was an odd request as no mainland Chinese investor had owned a football club before in Europe, but I was known as a bridge between the East and the West in the circle and thought I could help. So I got the ball rolling, lining up meetings, and the rest was history.
The first football club investment from China was a 20-per-cent stake in Atlético Madrid for €45 million ($52 million) by the Dalian Wanda Group. This was followed by a huge statement of intent by president Xi Jinping who signified that he wanted China’s domestic sports industry to be worth £550 billion by 2025.
The scale of this state-led investment in mainland China has been unprecedented, and with the country’s colossal political and capital investment it will surely change the global sports industry.
Over the last three years, an extensive list of football clubs have been acquired by, or have received investment from, a Chinese group. They include: Atlético Madrid; RCD Espanyol; Granada CF, FC Jumilla; Real Oviedo; Lorca FC; Internazionale; West Bromwich Albion; City Football Group; Birmingham City; Aston Villa; Wolverhampton Wanderers; Reading; Newcastle Jets FC; ADO Den Haag; Olympique Lyonnais; OGC Nice; FC Sochaux-Montbéliard; AJ Auxerre; Sport União Sintrense; SCU Torreense; Oriental Dragon FC; C.D. Pinhalnovense; SK Slavia Prague; Vejle Boldklub; Desportivo Brasil; AC Milan; Parma Calcio 1913; Northampton Town; Southampton; and Barnsley.
What’s interesting about this list is the mixed investment profiles – there clearly was no grand strategy by the Chinese government in Beijing. The private sector led the charge. The one state-backed deal was the $400-million investment for a 13-per-cent stake in the City Football Group (owner or part-owner of several clubs wordwide, led by the Premier League's Manchester City).
Has the Chinese football investment bubble burst?
However, after a series of fruitful acquisitions the government intervened. Chinese authorities took action to reduce the amount of cash leaving mainland China, in an effort to limit 'irrational' spending on football club purchases abroad, curb the depreciation of the yuan and guard against money-laundering. The situation is now fragile and tense, with private investors not wanting to be seen to be acting against the wishes of the state. I doubt Beijing’s position will change any time soon.
Several of Blackbridge’s deals last year were stalled as a result of the crackdown and seven investors backed out of commitments that they had made to club owners in England and Spain. Many investors, both public and private, are still spooked. The success of Fosun’s Wolves this season will result in some good PR but the troubled AC Milan saga still continues.
Most people thought Chinese investment was about to eclipse US investment in football club ownership in Europe last year, but, I think that the current trajectory over the next 12 months will be less Chinese-led football club takeovers (thanks to changes in Chinese government policy), and more US investment.
The rise of the US model
Like it or not, the Trump administration has been good to corporate America and good for the stock market. The run-up in the value of stock prices since president Trump was elected is some $6.6 trillion.
Many US investors are eyeing up Premier League targets and consider them good value and easier to acquire, compared to the limited investment options and longer process to buy into US sports franchises.
I have met with a lot of investors all over the US who want to buy into football clubs in Europe but so many clubs pose a very high financial risk for investors and are totally unsustainable on their current trajectories.
Selling Championship and League One clubs using models with a focus on enterprise-value-to-revenue multiples and EBITDA makes making the business case extremely difficult, unless the club sells a few of its best players each season and gains promotion into the Premier League.
The financial condition of the majority of clubs worsens as you go down the leagues, as shown very recently by Hartlepool United which reside in England’s National League (fifth tier) and are on the brink of going into administration. We are all wired to overreach, but in football you really do need cash to burn unless you are in the Premier League.
Manchester United lead the way in sponsorship and partnership deals from tyres to noodles
However, some of that pressure has been lifted as football clubs become more commercially sustainable. Manchester United lead the way in sponsorship and partnership deals from tyres to noodles – and now they can add a new official tractor sponsorship to their money-making collection.
United, Liverpool and Arsenal have been huge commercial success stories. When the owners of those clubs in the future choose to sell they will make quite the ROI which will further reinforce investor appetite that huge profits can be made if you get it right and remain a Premier League club for three-plus years.
I had an interesting conversation recently with a big name American investor who used to own a Premier League club and he told me that managing expectations of fans is tough work and the majority of Americans who own clubs still don’t see their role as a short-term custodian, which angers the fan base who long for the good old days and cheaper tickets. I think this is one of the key issues.
Many of the recent US investor-led deals in football clubs across Europe have been consortiums with a celebrity involved, which are all about the return. This is also on the rise in the US, with the latest major takeover of MLB's Miami Marlins by Derek Jeter, a retired baseball superstar.
‘Brexit’ uncertainty certainly helped the US trend – the British pound was down 20 per cent in value against the dollar last January. That was quite a discount.
Blackbridge’s latest deal, which is the only one in the last six months in England to close, was the takeover of Barnsley, in the Championship. The new ownership group includes Chien Lee, Moneyball legend Billy Beane and several US and Chinese investors. The sudden closure of the Chinese market has led to a surge in US investors.
What the future holds
Huge investments are being made in mainland China, building the much-needed infrastructure needed to develop football from the bottom up. Building the football culture is going to be one of the hardest challenges for the Chinese state. Although, the Chinese do generally approach things with a long-term approach I find Chinese investors to be very impatient and short-term when it comes to sports investments.
When you can purchase a lower-half Premier League club for the transfer fee of one player from the top half of the league it really shows how far England’s top tier has come in recent years.
Despite ‘Brexit’, the value of London-based clubs has also especially skyrocketed, and, long term, it seems they will be best placed to deliver a decent return of investment.
India, Brazil, Malaysia, Indonesia, Canada, Bahrain, Saudi Arabia and several other states have still not entered the market in a big way. This year, we will see a new wave of acquisitions across Europe but smaller clubs, fewer trophy assets and a bigger focus on profit. In China, you now have to make the commercial and strategic case to the regulators, which is a difficult proposition. No longer will Chinese toy manufacturing conglomerates be acquiring football clubs.