Investing in European soccer: Buffett vs. Sotheby’s

Out of all of the markets existing around the world, the market for investing in European soccer clubs is perhaps the only one that brings together those considered to be “investors in value” and those who could be described as “trophy hunters” – by Luis García

 
The first group, with Warren Buffett as the prime example, tend to base their investment decisions on the fundamental value of the assets. In other words, they focus on an investment’s ability to generate cash flows for shareholders. Those belonging to the second group might typically be found at art and antique auctions, and they are looking for something else: emotional value.

In fact, these “trophy hunters” are not really investors, if we go by the definition given by Benjamin Graham, who is known as the father of value investing. In his classic book The Intelligent Investor, he defined an investment as a transaction that, based on an exhaustive analysis, offers a certain level of security plus suitable returns.

This definition does not seem to apply to those who purchase an asset strictly for sentimental value, or because they are hoping that another buyer will be willing to pay an even higher price a few years later.

These two types of financial players are usually found fishing in two different rivers, and their activities do not tend to overlap in any market. The only exception to this, at least as far as I am aware, is found in the market for shares in European soccer clubs, as existing during the last few years, or even the last few months.

To be fair, there are some additional details that should be mentioned, and although both groups of investors have entered into this market quite recently, it is very clear that they have done so in completely different segments or niches.

The “trophy hunters” (some large American investment funds, Middle Eastern sovereign wealth funds, etc.) have focused their efforts largely on assets that, as implied by that label, could be described as the shiniest objects.

These are the clubs that win major league titles and tournaments, with fan bases that are known to include wealthy business owners, politicians, and celebrities. Perhaps the most notable example of this is the glamorous north London club Chelsea FC, which was purchased by its new owners for an amount 11 times its current revenue figure (of course, this is still far from the level of the multiples at which American sports teams tend to change hands).

In contrast, there are the “investors in value,” which is the group we belong to ourselves. These investors tend to focus on clubs that are already generating positive cash flows, or that could do so with a few changes to their current business management.

Our fund is centered on clubs traded on the securities markets, and we are minority shareholders in the German club Borussia Dortmund (which has a market cap roughly equivalent to just one year of its current revenue, for example), and also in the Dutch club Ajax Amsterdam. In the past we also invested in the French club Olympique Lyonnais, until it was acquired by a new investment group.

Given this rather unusual convergence of these two types of investors in this market, it becomes reasonable to ask a basic question: what effect will this have on the price of the assets?

First of all, it would be natural to think about the undesirable effects, namely an artificial increase in the share prices for these clubs, as new purchasers flood into the market. However, because of the distinct separation between the two market niches, as explained above, the actual result is turning out to be (and will perhaps continue to be) rather different.

To understand how this works, we can borrow a concept from the world of politics, known as “trickle-down economics.” Those who support this type of economic policy argue that although it may seem as though wealthy investors and large corporations are receiving favorable treatment (in relation to taxes, for example), this will also drive an overall increase in business activity, which over the long term, will end up producing even more benefits for society in general.

In our opinion, something similar is now being seen in the world of European soccer. The “trophy hunters” are paying huge amounts to take on ownership of the top clubs, but this phenomenon is also injecting substantial amounts of capital into these teams, which they end up spending on the transfer market for players. And who is benefitting from these rising prices being paid to other clubs in order to sign their players?

Exactly. The ones benefitting are clubs like Borussia Dortmund, Ajax Amsterdam, and Olympique Lyonnais, along with other similar clubs, which have a reputation for selling off their players, while at the same time specializing in detecting new talent that they can sign at very low prices (without competition from the highest-level teams, which need players who have already proven their worth at the highest level). Clubs of this type are sometimes fully or partially owned by those considered to be “investors in value” (such as ourselves).

However, there is an additional question we need to ask: what is happening with the share prices of these “seller” clubs that are known for generating cash? The “trophy hunters” have not yet entered into the race for their ownership, which means that their share prices have not become artificially inflated.

In fact, the opposite is true: their shares continue to trade at levels similar to those we saw during the pandemic. In our opinion, these are prices that are far below the actual fundamental value of the assets, and this is why we see them as an interesting investment opportunity.

Furthermore, this scenario in which the big money is arriving at the top of the pyramid in the market for European soccer clubs (this is the part of the river where the “trophy hunters” tend to be fishing) is causing an increase in the income that the “seller” clubs are generating by selling their players to other teams. In addition, the expanding global interest in soccer is also generating another series of positive dynamics for the sports industry in general, because income from other sources, such as TV broadcasting rights, is also likely to increase.

In our opinion, the market for shares in publicly traded football clubs is perhaps one of the most inefficient in the world right now, and the discrepancies between prices and economic fundamentals are hard to explain.

Why did the share price for a club such as Borussia Dortmund, which has a market cap of about €450 million, hardly change at all when the club announced that its transfer of Jude Bellingham would generate an operating profit of €75 million?

Markets can remain inefficient for a certain amount of time (sometimes a long time), but only rarely can this go on forever, because there are always plenty of investors out there looking for new opportunities.

Luis García is manager of the MAPFRE AM Behavioral Fund, part of MAPFRE