The evolution of football player transfer funding
Football player transfer funding has been long coming. Whilst some pinpoint the virus as the trigger for this trend, it has in fact been a longer-term complex issue that has seen significant financing evolution.
Back in 2018/19, the “big five” leagues in Europe saw their clubs’ revenue hit record heights. This was bolstered by the new broadcasting arrangements with, for example, BT, Sky and Amazon, which mostly benefitted the top performing clubs. As a natural consequence, clubs inflated wages in their continued race for league and cup titles. However, increasing talent retention and acquisitions within the top-level clubs saw operational pre-tax losses creep in. These unforeseen losses were then vastly accelerated by the global pandemic however, the race for quality and performance – both on and off the pitch – remains.
Third-party player transfer funding has evolved over the years. As players move, financing needs to be raised to pay for the transfer, as clubs are typically cash poor.
This then creates a receivable that’s repayable in instalments over a medium-term, typically three to five years, with a certain percentage payable on the actual transfer. This upfront proportionate repayment enables the selling club to use such capital for other player transfers. The rest of the debt will be repaid on predetermined dates.
Traditionally, it was the banks pushing more debt into the clubs, but now we’re seeing fund managers seek opportunities in this sector. This group of financiers aren’t having to battle with regulatory capital allocation like banks. They saw the gap in the market and realised this more esoteric asset type would make a great investment. The pandemic has since led to major cash flow issues, causing myriad disruption to the upward flow of funds to investors. Some simply got out of the game, while others restructured – which on its own, is an expensive business.
More recently we’ve seen a demand for increased bespoke financing arrangements which continue to use the capital markets route via special purpose vehicles (SPVs).
These are bankruptcy remote lending entities for isolated player transfers, as opposed to balance sheet lending or complex fund-like structures. The key players in this space are the pension funds who, in such a continuously low-interest environment, are seeking enhanced yield and adding transfer debt to their investment portfolios as part of a diverse investment strategy. If carefully selected, the risk on return is low and the cash flow is easily predicted in what’s still a relatively short-term asset. We’ve also noticed a more centralised approach to lending, namely that the leagues are now looking to secure larger pools of funding via pension funds and insurance companies on a (largely) secured basis for onward funnelling down into the respective clubs. However, it appears that these types of lending arrangements are only interesting to investors with a ticket size of a minimum £10mn or above and focusing predominantly on top tier clubs. This leaves a gap for mid-tier clubs who equally require third party funding to part take in a continuously competitive landscape. The inherent corporate restructuring will become the subject of closer scrutiny, bringing desired operational enhancement and cost-efficiency. Thankfully, loyal fans, the majority of who are currently avidly watching closed games in front of empty seats, will be eager to return to the stadiums.
The leagues and clubs are certainly going to have to review their wage expenses and how they recalibrate their income stream to match their growing book of debt.
Private debt set to become a big area for diversification
Private debt is fast becoming an exciting area for many firms, and it’s likely that the largest direct lending firms with distressed situation capabilities will be well placed to capitalise.
As the global economy is gearing up to reboot, distressed debt and structured credit have become the two hottest topics in credit with many private capital fund managers planning to diversify into direct lending strategies over the next year.
A lot of those managers have the benefit of surviving a global financial crisis and offer in-house expertise. Others will be raising new capital in anticipation of upcoming opportunities such as sport financing deals.