Investing in soccer: What to expect in 2023?
The start of the new year has arrived and, with it, the time has come for us in the financial industry to venture some predictions about events that may influence economic activity over the next twelve months. Less common, however, is to focus this exercise on a sector that, to date, has been far removed from the world of professional investment. While soccer has been around as a sport for more than 150 years, the industry around it is just now being born.
As investors in publicly traded soccer clubs since 2019 – although we cannot claim to have a crystal ball to guess the future – we might dare, at least, to try to identify some issues that could mark the immediate outlook of the sector. In our opinion, some of the most salient questions to seek answers to in 2023 are as follows:
- Will the significant growth of multi-club models continue? One of the key trends in European soccer investment is the rise of multiple club ownership structures (MCOs). The number of MCOs worldwide has increased from around 20 in 2016 to about 80 today, according to CIES. Moreover, the figure is expected to increase further in the near term, as soccer club owners have recently discussed their interest in acquiring other teams for their portfolios. In our opinion, this is a fairly common-sense way of investing in soccer. It offers diversification, which is especially important in an industry where on-field performance can add volatility to financial results. In addition, as in other industries, there are significant synergies when more than one asset is operated.
- Will the valuation gap between the stock market and private equity close? As investors in the sector, one of the most striking facts today is the significant undervaluation of publicly traded clubs compared to the transactions that are taking place in similar assets at the private level. While individual investors or private equity funds seem to be starting to recognize the value that, in our opinion, exists in European soccer, the majority of listed clubs have not even managed to recover pre-pandemic levels of capitalization. Although private transactions have obviously typically included a premium for control of club operations, the difference is too significant to go unnoticed and a corrective trend should set in.
- Fundamental analysis or a rage for “trophy assets”? Another question to be clarified this year will be where the majority of investors interested in European soccer will go and what criteria they will follow. On the one hand, market niches such as the English Premier League are beginning to reach levels of valuation that are difficult to justify from the point of view of fundamental analysis and clubs’ cash generation capacity. Perhaps we are reaching a point, therefore, where the decision criteria of investors in this market are closer to the desire to own what we would call “trophy assets.” On the other hand, other geographies such as France, Italy and, particularly, Spain, do present opportunities at much more attractive prices for investors who follow rational criteria, from a financial point of view, in managing their interests.
- Economic control or a race to increase revenue? Closely related to the previous point, the immediate development of the sector also involves defining its business model. Competitions such as Spain's LaLiga (and, to some extent, the German Bundesliga) have bravely opted to tighten the criteria for the economic sustainability of their clubs, even though this may mean losing some of their top players in the short term. Conversely, both the English Premier League and other clubs with major investors behind them have focused much more on increasing the revenue of their participants, probably neglecting management of costs and, therefore, the soundness of their balance sheets. From our perspective as long-term investors, we clearly feel much more comfortable with salary caps and other tools that favor competition within common limits of financial sustainability.
- Will we see new IPOs in 2023? Another peculiarity of soccer (and sports in general) compared to other sectors of economic activity is the small number of companies that have decided to broaden their potential sources of financing by listing their shares on regulated markets. The options for stock market investors like us are quite limited, and include a significant number of clubs in countries with little political security like Turkey or in competitions that have yet to improve their corporate governance, like in Portugal. It will be interesting to see if the number of choices increases in the new year, either with individual clubs going public or within more diversified structures. In this regard, we will have to follow, for example, the news of a possible listing via the American SPAC of the investment vehicle that has just acquired the French Olympique de Lyon. In fact, that is the first club where we started to invest three years ago.
Obviously, we cannot be certain what the answer will be to each of these questions. However, what does seem quite likely is that, following the recent trend, 2023 will be another record year for both the number and volume of economic transactions in the European soccer sector.
Luis García Álvarez, CFA
Investment Manager at MAPFRE AM