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Asset-strippers eye up football – they should keep their hands off
Private equity is showing an unhealthy interest in English football teams. But if it does get involved, says Matthew Lynn, it may live to regret it.
Plenty of cash flow? Tick.A growing global market? Tick. Lots of opportunities for corporate entertainment? Double tick.In some ways it is not hard to understand why the private-equity industry is showing an increasing interest in the Premier League of England's top football clubs. There are reports of the funds crunching the numbers on some big deals. In many ways it fits all their criteria for an investment. But they should think twice.
Two decades ago, football was only an investment for local businessmen who wanted to spend a bit of their spare cash on something they actually cared about. In the past ten years, however, Russian oligarchs and oil-rich Middle Eastern statelets have muscled their way into the League. Now, the private-equity industry is looking to join them. PEAK6, a Chicago-based investment vehicle, has taken a 25% stake in newly promoted Bournemouth. Crystal Palace has just completed a deal to sell a stake in the club to the American private-equity executives Joshua Harris and David Blitzer.
There are reports of many more joining them. Aston Villa is reported to be up for sale. Mike Ashley may not be able to endure the pain of owning Newcastle much longer. And Spurs could well be sold in the next few years. The private-equity industry has regular crazes for particular industries, from care homes to infrastructure assets, to pubs and hotels. Football may be the next one.
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The big difference right now is that not all that extra cash is automatically being spent on transfer fees and higher wages for the players. The result is that a lot of the clubs are making pretty decent money. Indeed, the overall profitability of the Premier League went above £600m last year, the most that any league has ever made, and more than three times the previous record set by the German Bundesliga in 2012-2013.
That is the kind of industry private equity usually wants a slice of. It generates cash, has decent growth prospects and operates in a solid market. Football fans will put up with a lot of disappointment without abandoning their team (as a Spurs supporter, I can certainly vouch for that). You can crunch the numbers, project the cash flow, protect the downside, and make a decent case for pouring a few hundred million into a club.
and why it may live to regret it
The first is that the game already suffers from rampant greed among the players, and short-termism and quick-fixes from the owners. It hardly needs more of both but that is precisely what the private-equity owners, hardly known for their reluctance to pay themselves extravagantly, or their enthusiasm for long-term planning, are likely to bring.
The clubs may well be making good profits right now, but that couldbe temporary, as TV revenues spike and wages and transfer fees take some time to catch up. If players and their agents see a lot of City money pouring into clubs, they will inevitably want a share of it and given the intense competition for the best players, they will probably get it. Don't count on those profits lasting very long.
Worse, any club is likely to go through bad spells. Look at Chelsea this season, for example. Despite vast spending over the years, the team probably needs extensive rebuilding. Or take a look at Manchester United a season ago. It had to spend massively to remain a major club. Is a City fund with bond payments to meet and targets to hit likely to sanction that kind of outlay? If it wasn't on the spreadsheet when it made the deal, the answer will probably be no butwithout it, clubs can quickly go into a spiral of decline. Is that the kind of responsibility any City fund with investors to keep happy wants to take on? Almost certainly not.
In reality, funds investing in the Premier League could easily find themselves making massive losses. Worse, they could find themselves attacked by supporters' groups, and assailed by local politicians no MP with votes to worry about could sit by and let a fund ruin the local club. Even more seriously, the Premier League is a fantastic commercial success for the UK, one that is growing all the time and creating wealth and exports for the country.
The last thing it needs is the private-equity industry, which hardly has a great record, to wreck it. The City has a bad enough image already. Just imagine how much worse it will get if it asset strips then closes down a couple of Premier League teams. To paraphrase the Nike advertisements that pop up at half-time on Sky Sports, "just don't do it".
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Matthew Lynn is a columnist for Bloomberg and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
