The then Leeds chairman, Peter Ridsdale, explained the profligacy that had led to the collapse of his club’s fortunes as “living the dream”, but it was the beginning of a nightmare for other teams seeking to fund their success by mortgaging future revenues.
It is easy for clubs to be caught in a downward spiral. Relegation from the Premiership, for example, as happened to Leeds in 2004, represents a year-on-year drop in income of at least £15m, while the collapse in 2002 of the Football League’s broadcast deal with pay-TV start-up ITV Digital, left lower-division clubs £180m out of pocket. No wonder banks are jittery.
Yet such is the clamour from fans for on-pitch success and shareholders’ desire to tap into Premiership riches, that football boardrooms have tended to chase Ridsdale’s dream by spending money they have not yet received. The difficulty now is that the banks are no longer prepared to fund such speculation.
As far as lenders are concerned, the game’s problem is that it has a sweet tooth, and it gets its sugar rush by delving into a very costly bag of bonbons marked “transfers”. Yet, in some ways, it is these costly transfers that could turn out to be football’s newest avenue to tapping future revenue.
For all the wariness of the institutions, the game today is awash with cash. The satellite-TV channels Sky and Setanta have pledged to pay £1.7bn to broadcast Premiership matches to the domestic market from 2007 to 2010, up from £1.024bn for the previous three-year cycle. With the possibility of a further £500m to come from overseas rights, there is no shortage of future income for top-flight teams. And now there are new ways to draw against it.
Former Manchester City full-back Ray Ranson now makes his living as a football financier. It was his “sale and leaseback” scheme that allowed Leeds to buy a string of expensive players in the hope that future revenues would rise to cover the cost. Ranson’s idea was to offset the cost of a new player with a loan from a financial institution (with water-tight insurance) for the same amount, which is paid back, at high interest, over the duration of the player’s contract. The strategy worked well at first, but before long Leeds was borrowing against future season ticket revenues just to pay off the interest on the many debts it had accumulated. The bubble burst.
Leeds United’s creditors lost millions, the club lost its place in the Premiership, but Ranson continued to broker deals elsewhere. “It wasn’t just Leeds,” he says. “I did £250m of sale and leaseback across Europe, so I know the market very well.”
Ranson is now promoting the Sports Asset Capital fund, a fresh initiative to bring more finance into football, which works by targeting talented, emerging players and investing directly in them. Bill Gerrard, professor of sport management and finance at Leeds University Business School, and a long-time associate of Ranson, will act as an expert consultant to the fund.
“Ray saw a problem back in the late 1990s—the debt market was closed because the banks were so exposed, so he opened up the insurance market with the sale and leaseback model. Now he’s opening up the equity markets through a specialised route.”
Ranson’s new project is just as speculative as any other football investment product, but he believes it spreads the risk better than previous mechanisms. He will talk to the managers in the dugouts, coaches in youth academies and club scouts—all contacts cultivated over “30 years in football”—to identify promising talent. Clubs in need of funds can then sell a share of the player’s registration and both parties, that is to say the club and the fund, will benefit proportionately from a future club-to-club sale according to the stakes they own. “We expect to offer them returns of 15 per cent to 20 per cent net,” says Ranson, who is personally conducting the £50m-plus fundraising.
On the face of it, those figures might seem optimistic, since the pressure on players’ values is often downward. And under the so-called “Bosman” agreement, players may leave their clubs on a fee-free basis when their contracts expire. But Ranson is confident he’s built in the right safeguards. “We’ve got all sorts of clauses in our contracts to deal with Bosmans,” he says, determinedly refusing to offer further details or divulge commercial secrets.
Ranson will concentrate on young players, whose values are likely to soar. But even a promising young player, such as Dean Ashton at West Ham United, can suffer downturn in value. Bought for £7.5m from Norwich City in January this year, Ashton’s notional worth was due to rise exponentially after he received his first call-up with England in August. But a training-ground collision with Shaun Wright-Phillips broke his ankle and, unless he recovers fully, his value may well plummet. “I would have been investing in Ashton when he was at Crewe,” says Ranson, referring to Crewe Alexandra, where the 22-year-old was a trainee. “I would have bought 50 per cent of him for £500,000.” Crewe, a club in football’s third tier, sold Ashton to Norwich for £3m in January 2005.
Provided the funds are raised, the product will be attractive to poorer, lower-division clubs. They railed against the “transfer-window”, which only allows players to be traded during one three-month period in the summer and a one-month period in January. The rule was designed to restrict clubs from selling players to cover short-term debt—but it only allows them to generate extra revenue twice a season. And for a small club, cashflow problems occur far more often than that. Ranson says his fund allows smaller clubs to trade through such restrictions.
But the Professional Footballers’ Association, the players’ union, has made its opposition perfectly clear. “It is like trading in human beings,” says PFA chief executive Gordon Taylor. “It is destabilising for outsiders to have a financial interest in a player.”
The official position of the Football Association, the game’s governing body in England, is softer. “We are keeping a watching brief,” says a spokesman. “There are no regulations in this area but we are looking at what develops, to make sure it is detrimental to nobody in football: clubs or players.”
It’s not a ringing endorsement, but there is a view that the involvement of institutional investors in what has traditionally been an opaque and unregulated transfer market can only be a good thing.
Such is the present perception of subterfuge that the Premier League, the organiser of Premiership football, is conducting an inquiry led by the former Metropolitan Police commissioner Lord Stevens, to find out if any tax-evading “bungs” have been taken from transfers in the two-year period from January 2004. “The direct involvement of hedge funds and international banks in transfers would make investigation much easier because there would be a clearer paper trail,” a source close to the inquiry suggests.
The fund directors are hoping that the attraction of being involved in the transfer market—when the closest most fans get to it is through fantasy football leagues—will outweigh the fear of heavy losses, or association with the dark side of the sport.
Nick Rucker, a solicitor with law firm Lawrence Graham, which advised Sports Asset Capital’s competitor, the Hero Football Fund, says: “There will be sophisticated advisers and people who won’t stand for sharp practices. This should help take the transfer market out of the realms of the cloak and the dagger.”
Hero’s champion is so-called “super-agent” Pini Zahavi. The fund expects Zahavi’s access and network of scouts to open the right doors, but the fund is keen to stress that its reliance on Zahavi’s judgment will not be absolute. “Pini is pretty fundamental because he is the consultant: he and his scouts will source the investment opportunities,” says Rucker. “But once Pini has made a suggestion it goes to a committee including [former Premiership referee] David Elleray and David Griffith-Jones,” who is a QC specialising in sports law. This pooling of experience is a well-tried formula in all forms of hedge-fund investment. There is also the added incentive for Zahavi to advise the fund well, since he will share in its dividends.
But Sports Asset Capital is confident it has a more scientific approach. Among Ranson’s portfolio of companies is the ProZone match-analysis system that provides data on players’ performances in games. Professor Gerrard, who will provide the initial and future valuations of footballers in the fund’s portfolio, claims this means much more than one man’s hunch, since it will provide objective data for investors.
The happy corollary for clubs is that when they come to sell their players, there are in-depth reports to draw on, which should help in achieving the desired value. And with the new TV deal to rely on, Premiership clubs now have enormous reserves of cash to splash. After bottoming out with the collapse of ITV Digital and the faltering of clubs like Leeds, Leicester City and Bradford City, deals such as the Ashton transfer to West Ham show that the market is again buoyant, even for clubs outside the top tier.
“Bolton [Wanderers] and Wigan [Athletic] put in £8.5m bids for Andy Johnson. That’s Bolton and Wigan!” says Ranson, incredulous that these modest clubs have such funds at their disposal. “Over the next five years, there is only one way that football is going.” And the funds intend to go the same way