At its core, private equity involves utilising methods such as restructuring and performance improvement to increase to value of an asset in order to make a profit. Until now, private equity firms have targeted all sorts of businesses, ranging from finance, healthcare and manufacturing. However one type of business has gone relatively untouched: premier league football clubs.
From a distance, premier league football clubs appear to be the ideal target for private equity firms. They have growing revenue streams with exponentially rising income due to the recent record-breaking £5.136bn television rights deal. Traditionally, investment banks pay out 50-60% of their revenues to employees. Footballers received an average of 75% of turnover in 2013. According to the Guardian, accounts for the year to 31 May 2013 showed the Manchester City shelled out an astronomical 86% of turnover to employees. Private equity firms are experts in cost-cutting and restructuring and can make these wage structures much more sustainable by reducing basic salaries and introducing more performance-based bonuses. This would free up a large amount of capital to be invested into local activities such as stadium expansion as well as into foreign markets to increase their global fan base.
With regards to performance improvement, there is very little that private equity firms can do to enhance what goes on when the players are out on the pitch. However, they can play a vital role in revitalising the commercial activities which can provide a substantial boost to revenues. This is exemplified when looking at the contrasting fortunes of Arsenal and Manchester United. During the 90’s the two clubs were of an equal stature with similar success levels both on and off the pitch. Since then, Manchester United have gone on to win 18 major trophies and are presently worth $2.18bn according to Forbes, whereas Arsenal have won 11 major trophies and are presently worth $1.31bn.
From the outset it would appear that this could simply be attributed to the superior management provided by Sir Alex Ferguson over that of Arsene Wenger. However, on closer inspection it it clear that the way in which Manchester United have transformed themselves into a commercial juggernaut as opposed to the stagnated approach taken by Arsenal played an equally vital role. Trevor Birch, a partner at accountancy and advisory firm BDO, described United as a ‘commercial phenomenon’ and attributed this to the way in which they have
“Sliced and diced their commercial deals by category and territory and now has three global partners, nine regional sponsors and eight financial and telecoms partnerships internationally”
Arsenal have struggled to match this astronomical performance off the pitch was has manifested in lower revenues, provided lower wage bills and subsequently has reduced their attraction for world-class players and compromised their performance on the pitch. Private equity firms can learn from this example to exert their strong commercial expertise in order to ensure they maximise profits.
It seems that the potential for premier league football clubs have not been lost on capital investment firm Apollo Global Management and Blackstone, the world’s largest private equity firm, launched a £90m takeover bid for Crystal Palace in March 2015. For a long time, premier league football clubs seemed poor investment opportunities, however this recent takeover may serve as a catalyst for private equity firms to further increase their exposure to the worlds most popular football league.