Everyone is piling into football clubs, even small and obscure ones. However, they are high risk investments. Lex in the Financial Times makes an interesting comparison with small cap investments in general.
Small football clubs used to be seen as money pits for local
business owners, but now everyone from hedge funds to tech billionaires wants a
piece.
With top teams out of
reach for all but the richest, Deloitte has described the English Football
League — the 72 clubs in three divisions below the Premier League — as a “more
accessible asset class”. As the second-tier Championship kicks off this
weekend, these potential diamonds in the rough will get to prove their worth.
Investors, though, ought to think about them like another market full of deceptive “bargains” — small-cap stocks. The appeal is similar: big names might be safer, but find a future winner among the also-rans and the potential gains are enormous. Manchester United’s revenue grew 2 per cent in the 2024 financial year; Wrexham’s rose 155 per cent. But small companies are also notorious value traps — in the US, the Russell 2000 is underperforming the S&P 500 for the fifth consecutive year.
Not every small cap is a giant in waiting. Some are doing
just fine, but have a limited total addressable market, for example. Exeter
will never have the same fan base as a team in Manchester or London. Many
others are in bad shape.
In theory, any of the
thousands of teams in the “pyramid” — the English hierarchy of leagues — can
make it to the top, but football is a brutal business. Of the 20 third-tier
clubs that reported full financial accounts for 2023-24, only three were
profitable and one of those got relegated.
There’s always the possibility of diversifying into new
businesses. Birmingham City’s Knighthead Capital, for example, has plans to
combine football with property development, but such transformations, which can
involve gradual regeneration of local areas, take decades.
Still, there’s a reason small caps are a popular playground
for private equity — some can be turned around in a few years with a change of
management. There’s some evidence this can work in football — Elliott had
success at AC Milan and Oaktree is trying at crosstown rival Internazionale.
But those were household names in a global city; could they
do it on a cold rainy night in Stoke? If an investment case relies on not only
being the smartest people in the room but also being extremely lucky, it sounds
more like a gamble than an investment.
For every fairytale story of a Brighton or Brentford that used smart management to climb the pyramid efficiently, there’s a Barnsley — which was a few games from the Premier League before missing out and falling back to the third tier 12 months later. [Barnsley did have one season in the top flight].
Another key difference to remember: when the romance wears
off, abandoning a football club is not as easy as offloading a bad stock.
Sheffield Wednesday and Morecambe FC are currently struggling under owners who
failed to sell earlier. When that happens, entire communities can suffer.
Football clubs have similarities with small stocks; casual punts they are
definitely not.
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