Margin call: how the investor of the future will identify football clubs
7 MIN READ
Inspired by what you’re reading? Why not subscribe for regular insights delivered straight to your inbox.
The second decade of the 21st century has seen a new breed of investors in European football clubs. From the west, American ownership groups have observed media rights growth rates that have outstripped even their own major sports leagues, and have therefore been attracted by the prospect of riding that wave. From the east, Chinese owners have looked to capitalise on their government’s momentum of investment in football. The idea of an owner who is in it for ego or profile may not have disappeared entirely, but it has certainly become the minority approach.
Despite arriving in Europe with good intentions and strategic ambitions, not every investment has realised its potential. Whether it’s Marseille or Southampton, Milan or Sunderland, there are plenty of case studies of clubs that have struggled under new ownership in the past decade.
Part of the problem for new investors has been an underestimation of the task required to sustain or improve performance. Liverpool owner John W Henry described the “surprise” he faced upon buying the club in 2010 for £300 million. “There was a huge multi-year pay-roll for a squad that had very little depth… It was a bigger issue than we feared.” It would take nearly a decade for Liverpool to be consistently competitive at the top end of the Premier League.
New owners also face an increasingly unpredictable broadcast rights market. The plateauing of the Premier League’s domestic rights deal from 2019 provided some suggestions of the market having peaked, or at least pausing for breath. So-called over-the-top (OTT) platforms have provided disruption and rights growth in some markets, but for the time being they remain the exception.
As such, the opportunity for investors is increasingly about finding a margin on the initial deal. The question is, how? We’ve pulled together some tips.
Tip #1: Forget what you know about divisions
In December 2018, our World Super League model identified Luton Town as the 38th-best team in England, Huddersfield Town as 39th, and Millwall as 40th. There’s nothing remarkable about that – until you realise that these three clubs were in three different divisions at the time, with Luton in the third tier, Millwall in the second, and Huddersfield in the Premier League.
So what, you might ask – why wouldn’t you still invest in the Premier League team, with all the benefits that being in that league brings? Well, the implication of this ranking is that in the long run, all three clubs were as likely as the other to be in the top flight – but while Huddersfield Town would come with the price tag typically associated with a Premier League club, Luton Town would be considerably cheaper.
That all three clubs were in the Championship together in 2019/20 bears this out – though by this time the opportunity for an investor to buy a bargain club would be gone.
Tip #2: Spot the unlucky teams
Football is the lowest-scoring sport, which means that teams can play badly and win, or play well and drop points. We estimate the latter happens 35 percent of the time, which means that there are teams all over the world who deserve to win three, four or even five games in a row, but have failed to pick up more than a couple of draws.
This can have major implications for a team at the end of a season. In the 2018-19 season, Ligue 1 club Nantes suffered a poor run of form in January despite good performances, which meant they earned seven fewer points than they deserved over a short, eight-game period. Those extra points would have put them in the top seven instead of 12th, and the club may have appeared an entirely different proposition to a naive prospective investor. There’s no reason why a team can’t have been unlucky for two or even three seasons in a row – after all, someone must be – and such a team would likely be undervalued for a savvy investor.
Tip #3: Compare apples with apples
There’s no use comparing Barcelona to Betis, such is the gap in resources between clubs. There is merit, however, in comparing Real Betis to Celta Vigo, as they have similar salary spends. The club that is consistently finishing higher – in recent years that is Betis – tells investors something about how efficiently the club is applying its resources.
Investors can then assess clubs in context, and make a decision as to whether it is preferable to buy the more efficient club (on the assumption that little investment would be needed to sustain results), or the less efficient club (on the basis that the team could be improved simply through better front-office operations). This narrowing of the focus helps new ownership groups be aware of the issues – or lack thereof – that they need to address post-takeover.
Tip #4: What you saw is not what you’ll get
There is a tendency to assume that past results are a good predictor of future results, but in an industry where performance is at the mercy of finely-tuned athletes who only enjoy a few years of peak output, this is not always the case. Clubs typically enjoy their best seasons with a peak-age squad, at which point they tend to attract the attention of prospective investors. However, by the time the takeover is complete, the investor is often faced with a rapidly ageing team that needs significant investment, as Fulham and Blackburn Rovers’ owners discovered in the first half of the 2010s.
Part of the problem is that peak age is often thought to be older than it actually is (typically early/mid-20s for attacking players and mid/late 20s for defensive players). An undervalued team is likely to therefore be one with a squad that is on the younger side and has managed its contracts such that they can retain these players as their performance improves, or sell them for maximal fees.
The investor of the future
It is no longer sufficient to have an investment business case in football simply based on macro trends in viewing figures. The investors of the future will recognise that identifying teams that are below their natural level – and therefore likely to increase in value – are the places to shop. That needn’t be clubs like Sunderland or Hamburg – huge clubs who have performed poorly in recent years – but instead are the teams that no one else has noticed are undervalued.
This article was originally posted in Changing the Conversation, Volume III – A collection of boardroom insights.