Review puts investment in English soccer under the microscope

Fans cheer for Newcastle United, whose recent acquisition spotlighted one of the issues under scrutiny. (Ian MacNicol/Getty Images)
A fan-led review, commissioned by the UK government, is calling for a regulatory overhaul of English soccer, potentially impacting the appeal of future private equity investments into clubs.

The review, chaired by former sports minister Tracey Crouch in consultation with fan groups, recommends the establishment of a so-called Independent Regulator for English Football that would not only oversee financial regulation but also assess who can be an owner, or a director, of soccer clubs.

The review—which could lead to the biggest overhaul of English soccer since the founding of the Premier League, England's top-flight league—also calls for a better distribution of wealth in the sport. Under the current system, the most successful and popular teams get a disproportionately large share of the commercial and broadcasting revenues. That has helped turn the wealthiest teams into major global brands. Meanwhile, smaller teams, with fewer resources to do things like buy better players, have been locked out. Not everyone is happy with efforts to redress the imbalance.

"For me—as a financier and a businessman—that's just a massive red flag," said Roger Mitchell, the founding CEO of the Scottish Premier League, who advises on team investments. "If I am investing in a team like Everton or Wolves [Wolverhampton Wanderers], in corporate finance terms, it's just going to make me have to apply a higher discount rate to all my future cash flows because of the uncertainty and the volatility."

English and other European soccer clubs have been an increasingly attractive target for investors—including private equity—in recent years. Manchester City Football Club, for example, is owned by the Abu Dhabi-controlled City Football Group which was backed to the tune of $500 million by Silver Lake in 2019. More recently, RedBird Capital agreed to buy a stake in Liverpool Football Club owners Fenway Sports Group for £540 million.

Some deals have been more controversial. In October, Saudi Arabia's Public Investment Fund, PCP Capital Partners and Reuben Brothers to acquire Newcastle United for £300 million. Some supporters hope the wealthy new owners will be able to bankroll the team's future success, but critics are concerned about Saudi Arabia's human rights record.   
A core issue highlighted in the review—and illustrated to an extent by Newcastle United's circumstances—is that many clubs rely on owners with deep pockets to be successful. Because the gap between the small coterie of the most successful clubs and everyone else is so large, the majority of teams spend well beyond their means in order to compete.

This gap is even bigger for teams in the Championship league, the second tier down, which have to compete with clubs relegated from Premiership that are the beneficiaries of so-called parachute payments—which the Crouch review also wants to change or remove. While these payments are designed to soften the financial blow of being demoted, they also exacerbate inequalities lower down.

Understandably, the largest clubs have little incentive in addressing this imbalance. Indeed, earlier this year there was a failed attempt to set up a Super League, comprising a handful of elite English clubs and clubs from top-flight European leagues, that would permanently bar any other teams from entering. The move, and the outrage it caused, gave impetus to a review.

While some are critical of the changes proposed, others believe that by addressing imbalances between teams, a new regulator could bring the kind of stability that investors prefer.

"Football is increasingly being viewed as a long-term investment by private equity funds and high net worth individuals," Trevor Watkins, head of sport at law firm Pinsent Mason, wrote in a recent blog post. He added that the proposed measures would make the game more sustainable and better able to respond to fans—something that will only make the game more attractive to investors.

"Economic investors will not be deterred by measures that will give fans more control over their clubs’ heritage. It should be a common interest for both."
 

This article originally appeared on PitchBook News