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Treasury & Capital Markets / Viewpoint
After the Chinese, Milan football pits US hedge funds as adversaries
Can sustainable financial returns be generated from the sport when so much hinges on what happens on the pitch?
Keith Mullin 27 May 2024
Keith Mullin
Keith Mullin

That European top-flight football has long been a plaything for billionaire business tycoons and royalty is no secret. Or that money has transcended sport as the primary motivation for owners, whose principal tradeable assets just happen to include footballers.

I was taken by a story in recent days that Oaktree Capital, the US hedge fund and distressed debt specialist with US$192 billion under management, had taken full control of Italian Serie A champions F. C. Internazionale Milano SpA – Inter Milan. This was after the corporation’s former majority owner Suning Holdings Group, the Chinese retail conglomerate owned by billionaire Zhang Jindong, defaulted on a €395 million (US$428.6 million) three-year loan extended by Oaktree. Zhang had acquired majority control of Inter from Indonesian billionaire Erick Thohir in 2016.

Oaktree’s takeover highlighted that the beautiful game is not just a plaything for the super-rich, it’s been reduced to something that can be financially engineered and traded for profit. Yet I do wonder about the certainty of generating sustainable financial returns from football, given that so much hinges on what happens on the pitch. Can that be reduced to a flow of projected investment returns in a spreadsheet?

What gives the latest twist at Inter an added layer of interest is that it is almost a carbon copy of what happened to Inter’s bitter rivals AC Milan, which of course shares the same stadium, the fabled San Siro. AC Milan was acquired by Chinese entrepreneur Yonghong Li in 2017 from billionaire investor and former Italian prime minister Silvio Berlusconi. Financing for the deal came from Elliott Investment Management, the US hedge fund with over US$65 billion in assets under management.

And just like Suning after it, Li defaulted on the financing not long after the deal closed, so Elliott took full control until the 2022 sale for €1.2 billion to RedBird Capital Partners, the US private equity firm founded by former Goldman Sachs partner Gerry Cardinale. RedBird’s acquisition was apparently made possible by €550 million in vendor financing from Elliott. (That whole situation, incidentally, has sunk into a nasty legal case with lawsuits flying left and right that I won’t go into here).

Suffice to say that the rivalry between two Chinese investors owning rival Milan football clubs sharing the same stadium for a while became a rivalry between two US hedge funds.

Underpinning the point that football returns aren’t always linear, Oaktree described the loan that Suning defaulted on as a rescue financing. When the loan was granted, it had boosted the company’s depleted finances at the time of the pandemic-induced economic slump. Inter was apparently forecasting record financial losses. It was obvious something was very wrong: companies don’t go to the likes of Oaktree or Elliott for financing unless they’re reaching the end of the road and have no other real options.

Oaktree’s statement on the Inter Milan takeover was a rather comical tick-all-the-boxes classic. In it, the flaks allocated Alejandro Cano, Oaktree’s co-head of Europe, a tear-jerker of a quote that invoked Milan’s community, history and legacy, the promise of commitment to the club’s long-term success, and a bold assertion that Oaktree’s ambitions are “united with those of its passionate fans in Italy and around the world”. In that classic well-worn phrase, he would say that, wouldn’t he? Not many things are certain in life but one I’m pretty certain of is that the interests of Oaktree and Inter Milan’s passionate fans are not aligned.

The strength of that alignment could be tested sooner than anyone thinks because just as the ink was drying on Oaktree’s PR gem, Thomas Zilliacus, the Finnish entrepreneur and owner of internet, digital and media conglomerate Mobile Future Networks, was out in the media expressing interest in buying Inter and expressing disappointment that Oaktree hadn’t spoken to him. Zilliacus has apparently already made moves to buy Inter (he also had a tilt at Manchester United). Let’s see if Oaktree’s alignment and its clients’ money stay with Inter Milan’s passionate fans or whether its passion lies more in the direction of Zilliacus’s readies.

Odd destination

Football is in some respects an odd place for financial investors to put their money as financial success depends so much on sporting success, as I mentioned above. European football is hardly known for being super-profitable, particularly as the best players and coaches in the world don’t come cheap. An off season can have dramatic consequences. For clubs’ fortunes as well as players’ values.

A quick search on of European club transfers reveals they spend billions on buying players, which takes a chunk out of revenues. The 27th edition of the Deloitte Football Money League showed that the total revenue generated by the Top 20 Money League clubs in 2022/23 – all European – was a record €10.5 billion, up 14% over the previous year and pre-pandemic levels. Income is made up of matchday revenues, commercial revenues (from retail sales, non-matchday events and sponsorship), as well as broadcast revenue.

But here’s why I wondered about financial investor interest in football: Deloitte’s club-by-club breakdown shows that not all clubs reported year-over-year increases in revenue. That, it said, was due to a downturn in on-pitch results across domestic and European competitions. “This further underscores the importance of developing a diversity of commercial revenue streams for clubs to ensure their budgets are cushioned against lower than expected on-pitch results,” Deloitte noted.

Which only goes to prove that financial investors can do all the modelling in the world. But while they spend billions on the best players in the world in order to eliminate the competitive element and minimize the risk of random outcomes, there’s still one thing that they can’t model with any degree of certainty using spreadsheets or artificial intelligence.

And that is the certainty that your investee company’s principal assets – a bunch of very wealthy 20-somethings kicking a ball around a field and running after it – get the ball over the goal line more often than the other team does. That bit is called sport.

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