With an increased regulatory focus on sustainable financial management, the world of football looks set to blow the whistle on third party ownership, writes Dan O’Toole.
These days, regulation is not a word that springs to mind when one thinks of FIFA. Since the arrest of seven current and former FIFA officials in Zurich earlier this year, the global governing body for football has become increasingly perceived as the archetypal example of an under-regulated, opaque organisation. Despite their apparent regulatory issues at the governance level, much of the world remains unaware that FIFA dedicates significant resources to the regulation of the game at the club level globally, most notably in the area of player transfers. Over the past decade, initiatives such as the transfer matching system, regulations on the transfer and status of players and regulations on working with intermediaries (agents) have seen a more transparent landscape develop within the market for elite footballers.
FIFA recently embarked on arguably its biggest regulatory foray into this increasingly valuable market. On 1st May 2015, a new provision in the FIFA statutes implemented a blanket ban to be phased in on the practice of what has become known as ‘third party ownership’ (TPO).
To introduce TPO, the following is a disclosure extract from the latest FC Porto holding company accounts referencing a TPO transaction: “On 22nd July 2014, FC Porto – Futebol, SAD reached an agreement with Granada Club de Fútbol for the acquisition of the sporting rights, and full economic rights, of professional player Yacine Brahimi, for €6,500,000. On 24th July 2014, the company alienated, under economic association, 80 per cent of the economic rights of this athlete for €5,000,000 to Doyen Sports Investments Limited”. This type of activity is now so prevalent that it is of systemic importance to the financial and operational management of many professional football clubs. This is particularly the case in the Latin American and Iberian markets.
Transfer of rights
TPO refers to situations where a portion or all of the “economic rights” of football players have been purchased by entities other than the club for whom the player is registered. These economic rights represent a claim on the monetary value of the future transfer of a player’s registration. They are legally distinct from the playing rights of players, which are federative rights derived from a contract of employment that govern for whom the player plays. These can only held by clubs.
Third party owners range from investment funds to individual high-net-worth investors. The above transaction disclosure cites Doyen Sports Investments (DSI) as the relevant third party. DSI is a private equity fund and subsidiary of The Doyen Group, a multi-billion euro holding with a variety of assets around the world. Such investors hope to enjoy large capital gains from the future sale of the players concerned.
A number of different forms of TPO have developed over the years with the most prevalent being ‘financing’ and ‘investment’ TPO vehicles. Financing TPO occurs when a club sells a portion of the economic rights of a player to a third party for an immediate cash release. This is most frequent in South America, where clubs tend to be cash-poor feeder clubs responsible for the initial development of young players.
Investment TPO occurs where a club acquires the economic rights of a player while simultaneously transferring a portion of these rights to a third party for consideration, in effect sharing the transfer costs involved. This is most common in Europe, where mid-level clubs are temporary pit-stops for young talent on their way to the elite European powerhouses.
Call to action
There are a number of reasons, most of which are ethical, for FIFA being so intent on banning TPO. The most frequently cited include: the motivation and ability for third parties to influence transfer decisions and promote contractual instability; the moral questionability of trading in assets linked to the rights of human beings; a lack of transparency as to ultimate rights of owners; and the propagation of dependency of clubs, undermining their sustainability.
In light of these threats, FIFA first introduced a ban on TPO in 2008. The application of this ban was limited, however, in that it prohibited TPO only where the third party in question acquired “the ability to influence in employment and transfer-related matters” of a club. This “influence” was virtually impossible to police in practice, but was clearly in existence. As a result, a blanket ban was seen as the only answer.
While the ethical motivations may be well-founded, there has been considerable backlash against the negative sporting and financial implications that may befall clubs accustomed to using TPO.
Repercussions
Detractors argue that the most immediate repercussion is the negative impact on the ability of clubs to finance new player acquisitions. Until now, sharing the cost of players was a standard method of asset finance – not hugely different from leasing or manipulating leverage to enhance performance in the business world. Now faced with the prospect of financing asset purchases in full, these clubs will have to invest in either fewer or lesser quality assets.
The argument further suggests that this will make players less competitive on the pitch. It is estimated that up to 75 per cent of the 2014/15 Atlético Madrid squad was at least partially held by third parties. Would Atlético have successfully broken the Barcelona/Madrid monopoly on the Spanish league that year, or come within minutes of their first ever Champions League title, without the access to higher quality, more competitive assets that TPO afforded them?
TPO has also become an important liquidity management tool for clubs. Through selling a portion of the economic rights of current players, clubs can release value immediately. This allows them to reinvest elsewhere or cover current expenditure, which is notoriously high and volitile for professional football clubs.
Cost to clubs
These benefits come at a considerable price, however. Where a player is sold for a large capital gain, this gain must be shared with a third party who arguably had little to do with the development and improvement of the player. A second, heavier consideration is the fact that these agreements generally feature contractual terms that place a significant burden on clubs. Conditions often stipulate that, where a player is not sold before the end of their contract (and therefore free to leave for nothing), the club must reimburse the third party with a minimum fee – often with an associated interest accrual. The clear result is an incentive for clubs to sell their assets in order to avoid punitive payments. For FIFA, this is the most direct challenge to the fundamental concept of contractual stability and self-automation of the sport.
For FIFA, wherever TPO is in place, clubs are losing out either directly in the form of punitive payments or indirectly in the form of missed opportunity to enjoy the full capital gain of sale. Many detractors argue that FIFA should stop worrying about others and concentrate on sorting out its own extensive issues.
Much criticism of the new regulation has also mirrored that levied at UEFA’s Financial Fair Play – a loss of competitive advantage, the consolidation of power in big clubs and the obstruction of quality players making their way to the top. In the early stages of both regulations, the long-term reality is that an increased regulatory focus on sound and sustainable financial management of the game - at least at club level if not at international governance level - is here to stay.
Dan O’Toole ACA is a FIFA Master alumni and sport consultant with TSE Consulting, Switzerland.