Get full access to one story every week, and to summaries of all other stories. Just create a free account

This newsletter has been discontinued. But you can read The Stack which includes our newsletters around cleantech, fintech, personal finance and e-commerce in India!

Private equity firms, mostly from the United States, have been on an investment spree in European football clubs over the past few years—and, more recently, an IPL team. They’re now starting to show results

Mumbai Indians, PV Sindhu, Disney+ Hotstar, Dream11, and much more. The only newsletter that deconstructs the business of sport from India. Someone sent you this? Sign up here

Good Evening [%first_name |Dear Reader%],

What a week it has been for private equity in sport. Last Sunday, Gujarat Titans, owned by American PE firm CVC Capital Partners, won the Indian Premier League title in their first-ever season! The Titans, captained by India all-rounder Hardik Pandya, lost only four matches out of 16 en route to the title.

Another US investment group, RedBird Capital, then paid €1.2 billion (US$1.3 billion) to take control of the new Serie A champions, AC Milan. RedBird, incidentally, also has a 15% stake in IPL 2022 runners up Rajasthan Royals, and a 10% stake in Liverpool, which lost the Champions League final to Real Madrid, a week after a heartbreaking second-placed finish in the Premier League. It would have been an astonishing treble for RedBird had Rajasthan Royals and Liverpool won their respective finals.

But the biggest PE-in-sport news of the week—at least in terms of the deal size—was the £4.25 billion (US$5.3 billion) takeover of Chelsea Football Club.

Private equity is really cracking sport

Chelsea fans have a reason to be cautiously optimistic, as they say, after a turbulent last three months off the pitch. The Roman Abramovich era (which I had written about earlier) is truly over. The Premier League and UK government have approved the purchase of Chelsea FC for £2.5 billion (US$3.1 billion), along with a commitment to invest a further £1.75 billion (US$2.2 billion) in the team and infrastructure. The new owners: a consortium fronted by American businessman Todd Boehly.

I used “fronted by” and not “led by” Boehly, as has been written in many news reports this past week, because that would be a bit inaccurate. While the 48-year-old’s name has dominated media coverage since the takeover was finalised, he won’t get to call the shots. Well, at least not all of them.

It’s more like Boehly, who is also the co-owner of the Los Angeles Dodgers baseball team, is the face of the consortium. But over 60% of the deal’s equity is actually being provided by American PE firm Clearlake Capital, according to Financial Times. The Santa Monica-headquartered company also holds equal ownership rights in the club.

The consortium has not revealed the actual shareholder breakdown, and everyone involved in the bid has so far stressed in the media that Boehly will be the “controlling owner”. But, as The Athletic reported, Clearlake’s vast investment “makes it inconceivable that it will not have significant input into all key boardroom decisions at Stamford Bridge.”

It’s kind of like how British business executive Amanda Staveley has become the face of the consortium led by the Public Investment Fund, Saudi Arabia’s sovereign wealth fund, which bought Newcastle United Football Club last year. Staveley holds only a 10% stake in the club.

“I don’t think there’s a world where Clearlake is saying, ‘OK, Todd, you’re in charge, we’ll see you at the next board meeting’,” one US investor in European football tells The Athletic. “I’m sure they’re happy for him to be the face of this and to delegate a lot of decisions to him, but there’s no way they haven’t got a say on the big stuff.”

That’s not to say Boehly—or even Staveley, for that matter—is not capable of running a Premier League club. Since Boehly bought the Dodgers in 2012 for US$2 billion, they went on to win the World Series in 2020 for the first time since 1988. The team is currently valued at just over US$4 billion, according to Forbes.

But Clearlake will have an important role to play as Chelsea enters a new era. Founded in 2006 by billionaires Jose Feliciano and Behdad Eghbali, it’s one of the fastest-growing buyout firms in the world. According to FT, it manages more than US$75 billion in assets, a third of which was taken in over the past year. It has made over 100 acquisitions since 2020. And it has done pretty well so far in terms of returns on its investments.

Flagship funds that Clearlake raised between 2013 and 2018 have earned net returns of between 34 per cent and 56 per cent, according to public pension fund disclosures, putting them in the industry’s top quartile. The $12.6bn Clearlake has invested across its first six flagship buyout funds was worth more than $27bn as of mid-2021, according to a public review released by Connecticut.



[...]



Clearlake’s most successful deal was its $180mn carve-out of healthcare software company Provation from conglomerate Wolters Kluwer in 2018. After striking four acquisitions, Clearlake sold the business to Fortive last December for $1.43bn. Because Clearlake financed its purchase using debt, it made more than 20-times its money.

The same FT report says that Clearlake finances about two-thirds of the purchase price of its takeovers using debt—a concept that Manchester United fans are painfully aware of. However, debt is not financing Clearlake’s investment in Chelsea, according to The Athletic. It’s also an unusual PE deal in some other ways.

“By its nature, US private equity is fixed-term investing, with most private equity firms needing to get liquidity (i.e. get their money back or sell up) within seven years,” another US investor in European football tells The Athletic. In contrast, those in Boehly’s consortium have committed not to sell a controlling stake in Chelsea for at least 10 years, though it is not clear whether the investors in his group — including Clearlake — could still trade shares among themselves.

PE firms also seek annual returns of 20-30%, which is absolutely alien to Chelsea when you consider how the club’s previous oligarch owner ran it for nearly two decades. Chelsea was immensely successful under Abramovich, winning 19 trophies in as many years, but the club took interest-free loans from the Russian amounting to a reported £1.5 billion (US$2 billion).

The Boehly consortium has not given any indication that it will drastically change the way the club is run or compromise on its success. However, the modus operandi of PE firms was something rival bidder Sir Jim Ratcliffe warned against. Ratcliffe, who is the chairman and chief executive of INEOS, a British chemicals company, had worked for American PE firm Advent International previously.

“It’s a simple business: You persuade a pension fund or an insurance company to give you some money to manage, you manage the money with the intention of increasing the value, and if you increase the value, you get share of the profits,” he told the BBC.



"Your focus is always on, ‘How do I invest and make that money grow?’ and it’s typically a five-year time horizon. In America, the big sports clubs won’t allow those people to come in and buy the clubs. So you can’t buy an NFL club, but in the UK you can.”

In the US, the National Basketball Association (NBA), Major League Baseball (MLB), and the National Hockey League (NHL) bar PE firms from holding majority stakes in their teams. But the National Football League (NFL) prohibits institutional investors from taking even minority stakes.

There are no such restrictions in European football, though. Unsurprisingly, that’s what PE firms have made a beeline for in recent years.

In November 2019, Manchester City became the most valuable football club in the world after American investment firm Silver Lake bought a 10% stake in the City Football Group (CFG) for US$500 million. CFG, the parent company of Manchester City, is majority-owned by the Abu Dhabi United Group, a PE firm with links to the Abu Dhabi royal family. Last year, Redbird Capital bought a 10% stake in the Fenway Sports Group, a syndicate of American billionaires that owns Liverpool, for US$735 million.

Atletico Madrid, Sevilla, Lille, Toulouse, and Atalanta are among the other European football clubs that are under private-equity ownership, either partially or fully. PE firms have taken advantage of the fact that the pandemic delivered a severe blow to many clubs. With traditional financing hard to come by, private equity was seen as a viable alternative.

Perhaps the best example for this is AC Milan.

In April 2017, Chinese businessman Li Yonghong caused a flutter when he paid US$860 million to acquire AC Milan from former Italian prime minister Silvio Berlusconi, who had owned the club for two decades. Li funded the takeover by taking high-interest loans worth more than €300 million (~US$360 million) from American hedge fund Elliott Management Corporation.

Milan hadn’t won Serie A since 2011, and the last of its seven Champions League titles was clinched in 2007. It had even failed to qualify for Europe’s most lucrative club competition since 2014. It was a team in transition, but Li had ambitious plans to exploit its large Chinese fan base.

Without going into details, the plans did not work out. In 2018, Li defaulted on the loans and lost around €500 million in equity overnight. Elliott decided to treat AC Milan as a distressed asset, rather than “flipping” the club through a firesale, reported FT. It effectively acquired AC Milan for around €400 million (~US$470 million), which is just over half of what the club had been valued at months earlier, the report said.

It wasn’t an envious position to be in as a club owner, with the previous administration splurging hundreds of millions of dollars on buying players but to no avail. Milan also breached Uefa’s financial fair play rules, which resulted in a one-year ban from European football in 2019. According to the rules of European football’s governing body, clubs aren’t allowed to make losses of more than €30 million over three seasons. Uefa believed Milan had breached this cap between 2015 and 2017.

Elliott first injected €50 million (US$60 million) in emergency funds to stabilise Milan’s financials, before it set about rebuilding the club. It kept costs at sustainable levels by purchasing younger footballers for lower transfer fees, but also those who have the potential to command higher valuations in the future.

Earlier this year, AC Milan returned to the Deloitte Football Money League, a ranking of Europe’s top clubs by revenue, for the first time since 2017-18. The club was placed 19th on the list, with revenue of €216 million in 2020-21.

More importantly, last season, Milan qualified for the Champions League for the first time in seven years. A year later, it won the Serie A for the first time in over a decade. And then, just days later, RedBird Capital agreed to buy the club from Elliott for €1.2 billion (US$1.3 billion). That’s a profit of at least US$500 million after spending roughly US$740 million on the club over four years, according to Forbes.

And there’s no reason to believe AC Milan’s fortunes will dip again with the new ownership. RedBird is a seasoned PE player when it comes to sport. It plans to retain most of the management team set up by Elliott, including Milan’s technical director and former captain Paolo Maldini.

On the other hand, Chelsea’s Clearlake has never invested in sport before, either in the US or the UK. Which partly explains why Boehly, the successful LA Dodgers owner, is the face of the consortium.

Which of the two clubs will turn out to be more successful under their new PE ownership? It’s anyone’s guess, but what’s certain is that private equity’s era in sport has now truly arrived. Just ask the Gujarat Titans.

Quick singles

⚽️🇮🇳🧑‍⚖️ The I-League could regain its status as India’s top-tier football league, at the expense of the Indian Super League (ISL), if the Supreme Court-appointed Committee of Administrators’ draft constitution for the All India Football Federation (AIFF) is passed. The CoA had submitted the draft constitution to the Supreme Court in January 2020, but it has been made public now. The CoA’s recommendations are likely to face opposition from various quarters. What a deja vu, if you’ve been following Indian cricket over the last decade. [ESPN]

⚽️🇮🇳🔵🧸 The AIFF has, meanwhile, signed a strategic and commercial partnership with Scottish giants Rangers. The deal, whose length was not specified, will build on Rangers’ existing partnership with Indian Super League club Bengaluru FC, with an aim to grow the Scottish team’s footprint and commercial ventures in India. Rangers will deliver a wide range of programmes to support thousands of Indian coaches covering areas such as talent identification, scouting, and analysis. [Rangers]

🎲📱📉 Indian esports and mobile gaming platform Mobile Premier League (MPL) is laying off 100 people or 10% of its workforce, and is exiting Indonesia. The Bengaluru-based company is also scrapping its streaming product. MPL’s founders reportedly told its employees that the “philosophy of growth at all costs is now reversed”. MPL is also an official sponsor of the Board of Control for Cricket in India (BCCI). [Moneycontrol]

🏏📺 Zee Entertainment Enterprises may bid for the IPL media rights on its own, rather than a joint bid with Sony Pictures Networks India, with whom it’s merging. Addressing investor queries, Zee’s managing director CEO Punit Goenka said that the company had a strong balance sheet and could, therefore, go solo in the auction, which is slated for later this month. Zee recently bought the global media rights for the UAE T20 League, signalling its re-entry in sports broadcasting after a gap of six years. [Business Standard]

That’s all from this edition of Moneyball. Please write in with any feedback, good or bad, you may have. And also suggestions for topics to write on.

Take care.

Best,
Jaideep

This newsletter has been discontinued. But you can read The Stack which includes our newsletters around cleantech, fintech, personal finance and e-commerce in India!