Football is serious business for private equity

Professional sport around the world is getting ever more professionalised in multiple ways. Private equity investors have taken a growing role in managing clubs and are applying new approaches more akin to investments in traditional companies. Is the “purity” of the game at risk?

“MCOs have become so popular that regulators are looking at ways to supervise these entities while integrating the rules of the Fifa and the Uefa will also apply to Luxembourg,” said Nicolas Moura, analyst EMEA, private capital at Pitchbook, during an online interview on 9 January 2023.

A multi-club ownership structure, or MCO, is a financial vehicle used by private equity firms to centralise their holdings. In a , Pitchbook reported that their popularity has increased as minority and majority shareholdings in clubs of the “Big Five” European leagues have increased to 41.7% (i.e., 40 out of 96 clubs) in the 2023-2024 season, compared to 36.7% in the prior season. The Union of European Football Associations (Uefa), has that ownership by MCOs in football clubs has increased to 180 in 2022 up from 40 in 2012.

These figures include the recent acquisition by INEOS of a 25% stake in UK’s Manchester United FC for £1.3bn and a 12.5% stake in France’s Paris Saint-Germain by Arctos Sports partners. The takeover by 777 Partners of Everton FC, also in England, for £550mn was cleared by UK’s Financial Services Authority in December 2023, a major hurdle before completing the transaction.

Based in Miami, 777 Partners is an MCO with $10bn in assets under management which has invested in clubs around the world: Spain (Sevilla), Germany (Hertha Berlin), Brazil (Vasco da Gama), to name a few.

Synergies as a path for higher valuation

Among other reasons, Pitchbook explained that the attractiveness of MCOs lies in their capacity to “create synergies” as they replicate buy-and-build strategies of PEs. According to Pitchbook, the potential source of synergies are common sponsorship contracts, player/coaching staff transfers/loans, decentralised local scouting, wider brand reach, balance sheet management, and data sharing based on GPS tracking or tactical analysis software.

A poster child MCO is the City Football Group (CFG), which is owned by a private equity firm that is itself owned by Abu Dhabi’s ruling family. CFG owns 13 clubs globally, including the dominant European football team that won the last Champions League: Manchester City.

MCOs are generally built around a “star team” in the most profitable leagues whereas the other stakes are in satellite clubs from less prominent leagues. Pitchbook explained that synergies enable an MCO to claim a valuation at the group level that is higher than the sum of the parts, “similar to buy-and-build PE synergies.”

This setup aims at avoiding conflicts of interest of MCO teams competing against each other while the PE-backed structure enables the replication of the successful star team with weaker teams in the portfolio.

Price of glory

Two clubs that are majority-owned by the same group advancing to same competition (national league or in one of the three prime European competitions) may require a quick divestment below 50% for one of the teams as prescribed by Uefa rules to avoid a conflict of interest. Yet Pitchbook reported that the rule has been “circumvented several times” upon the approval of the regulator.

Some MCOs are overcoming these issues by purchasing clubs across continents or in other sports. Pitchbook reported that the US owner of Arsenal FC, Stan Kroenke, invested in clubs in the NFL American football, MLS football and the NBA basketball leagues.

Alternatively, MCOs may decide to invest in minority shareholdings to avoid forced selling. Indeed, 20 of the 31 football transactions in 2022 involved minority stake. However, MCOs have steadily increased the number of transactions in majority stakes over the last 10 years from one in 2013 to 11 in 2022.

“There are no business models that fit all. There are groups such as 777 Partners that are looking for majority ownerships in the largest clubs to gain operational control, whereas some other investors are content with the management in place and a passive minority investment,” said Moura.

Americans getting big in soccer…and football

Pitchbook noted that the 60% of the clubs in the Big Five European leagues operating under an MCO umbrella have US participations from diversified PEs such as Silver Lake or Ares Management, but also specialised sport groups (777 Partners, MSP Sports Capital, Arctos Sports Partners).

A football club can’t be run like a normal business

However, the success of the structure has a snag. Some governing football bodies have expressed concerns that it may offer an unfair competitive advantage to the MCO sponsored clubs.

The Uefa has reflected concerns that MCOs may “distort transfer activities” given that the transfer of players can take place at transaction prices that may reflect balance management needs and/or a compliance to the “financial fair play rules (FFP)” rather than the true valuation of a footballer.

According to the Uefa, 36 divisions have domestic rules on MCOs, such as the “Owners and Directors Test” in England requiring the review of the criminal record, human right abuses and the financial profile of the 25%+ shareholders.

MCOs may backfire

Could the insatiable pursuit of higher valuation wreak havoc with the credibility of the beautiful game? There may be a breaking point whereby football fans may drop their favourite club, or the sport altogether should they start believing that the club they are supporting is not aiming at becoming the best team but a simple financial tool to create greater valuation for its financiers.

Consequently, there might be some logic for the German Bundesliga not to welcome a majority ownership from “professional investors,” under the “50+1 rule” that requires individual club members to own 50% plus one voting share in each club. Yet it may simply be a matter of time also in Germany as the two top football divisions in the country opened the doors to potential investments by PEs as it agreed last December to sell 8% of the “global media rights and other commercial rights (e.g., central licensing partnerships and sponsorships at league level)” estimated to be worth between €800m and €1bn to DFL e.V.

The new company has a license to exploit Deutsche Fussball Liga’s rights for 20 years. Advent, Blackstone, CVC Capital Partners and EQT are all reported as having submitted bids for the rights, with the latter valuing the unit at €12.7bn ($14bn), the highest bid according to .

Luxembourg clubs not in the action

We that the statutes of the Luxembourg Football Federation allow a club to be as formed as an ASBL (non-profit organisation) only and not as private company. Moreover, we reported that “99% of the club members are happy with this legal structure and there are no plans to change that.”

According to the Uefa, 12 countries, including Luxembourg, account for 48% of all associations and foundations across Europe’s top divisions. The body explained that this share is increasing over time on the back of a growing number of conversion of clubs into limited companies.

This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .