Long read: The Financialisaton of The Beautiful Game

Last week, we featured a piece on how capital markets are ‘enshittifying’ most aspects of life i.e, commercial interests undermining the quality of the ultimate experience of goods and services. This piece zooms in on how this is playing out in the world of sport in general, and football in particular, a sport that we call ‘The Beautiful Game’.

Specifically, the author points to how money power is reducing competitiveness in several football leagues across the world. Indeed, such football leagues could learn a thing or two about the construct of India’s cricket league, the IPL. Despite teams owned by commercial interests with even Private Equity participation, the IPL has managed to keep competitiveness intact – read more about how in this piece we featured in the 3L&3S a few weeks ago.

“Before the 1990’s, football clubs operated as community institutions with modest budgets. This was way back when clubs, for the most part, genuinely had to prove themselves via on pitch performances.…Most were owned by local businessmen or operated as member-owned organisations. Due to limited budgets, transfer fees were relatively small (unless the player was considered one of the best in the world) and players had limited mobility due to restrictive contracts.”

What changed? It all began in the UK, home to the most popular football league in the world.

“The breakaway Premier League had signed a five-year, £304m deal with Sky for right to televise the matches from the 1992/93 to 1996/97 seasons. At the time this was the biggest deal in the history of British sport. The deal was ~6.9x larger than previous TV arrangements (like the four-year, £44 million contract [£11m per year] that ITV had with the Football League from 1988–1992) and this was how the template for football’s media-driven financial transformation was born.

On 15th December 1995, the European court of Justice ruled that the existing transfer system restricted free movement of workers (in this case, football players) and was prohibited by EU law. This landmark case which took five years to resolve, introduced one of the most seismic law changes in football history. The Bosman Ruling enabled players to move freely at the end of their contracts and removed nationality quotas which fundamentally altered the player market.

Foreign billionaires began purchasing clubs as “investment vehicles” or a “trophy asset.” Roman Abramovich’s Chelsea takeover in 2003, Sheikh Mansour Bin Zayed Al Nayhan’s Manchester City acquisition (in 2008) and other similar investments like the PIF-led stake in Newcastle United (in 2021) as part of a consortium have transformed clubs into global brands backed by sovereign wealth.”

The author demonstrates the financial power of the Premier League using a remarkable chart that shows how even the last team in the league earns more than the top team in any other European league except the Spanish La Liga. And the exception itself is a result of financialisaton of the sport. The financial power of Barcelona and Real Madrid have eliminated any competitiveness. “ La Liga has gone from being one of the most exciting leagues in the world in the 2000s to an absolute uncompetitive borefest where basically two games a season matter to the global audience. This is all because Barca and Real Madrid built a business model that cannot weather failure (which in competitive sport should always be a given), which then led them to hijack the league’s revenues to create an unbridgeable gulf with the rest of the league. La Liga is over and these revenues will only decline further for them.” Talk about killing the goose that lays golden eggs.

Private equity can’t be left behind. The author laments about his home club Manchester United’s decline in league success and now even in revenues, attributing it to the leveraged buyout by the Glazers. But he illustrates the impact using the more recent take-over of Chelsea:

“Chelsea’s 2022 sale to Todd Boehly and Clearlake Capital represents the largest football club acquisition ever and the template for private equity’s modern approach….Clearlake are running Chelsea like a private equity portfolio company, clearly. Asset optimization means aggressive player trading (60+ signings in two years), long-term contracts (six to eight years) to spread transfer fee amortization, and youth academy exploitation (selling homegrown players equals pure profit on the balance sheet). 

Cost extraction includes management fees paid to Clearlake (undisclosed but standard PE practice), strategic advisory fees from related entities, and transaction fees on player deals structured through Clearlake vehicles. Balance sheet engineering involves extended amortization schedules reducing annual expenses, sale of future revenue streams creating short-term liquidity, and creative accounting to navigate Premier League PSR (Profitability and Sustainability Rules).

The exit strategy is they hold five to seven years, demonstrate revenue growth and “profitability,” sell to the next PE buyer, SWF or high net-worth individual at ~2x its enterprise value pre transaction, and extract value through debt refinancing before exit.”

If your love for the game intersects with an interest in finance, there’s plenty more in the piece worth reading.

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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.