Argument

Soccer’s Financial Crisis Could Transform Leagues Forever

Private equity’s power may eliminate promotion and relegation.

Mohamed Salah of Liverpool scores a goal against Manchester United.
Mohamed Salah of Liverpool scores their side's first goal past Dean Henderson of Manchester United during an Emirates FA Cup match in Manchester, England, on Jan. 24. Fans were prohibited from sports stadiums around the United Kingdom under strict restrictions due to the coronavirus pandemic. Michael Regan/The FA via Getty Images

Mohamed Salah of Liverpool scores their side’s first goal past Dean Henderson of Manchester United during an Emirates FA Cup match in Manchester, England, on Jan. 24. Fans were prohibited from sports stadiums around the United Kingdom under strict restrictions due to the coronavirus pandemic. Michael Regan/The FA via Getty Images

Last October, with stadiums emptied by the COVID-19 pandemic and revenues plunging for sports leagues, news broke of Project Big Picture: a radical plan to restructure English soccer proposed by the country’s two biggest clubs—Liverpool and Manchester United. The plan involved a 250 million-pound ($334 million) rescue fund for the smaller clubs affected by the COVID-19 crisis; in addition, the dominant English Premier League would increase revenue share transfers to the three lower divisions from 8 percent to 25 percent.

This might seem like a generous proposal, but it caused an immediate and aggressive reaction. On Twitter, a torrent of unprintable abuse erupted, aimed at the would-be benefactors. The Premier League’s official response to the proposal was swift and unambiguous: “In the Premier League’s view, a number of the individual proposals in the plan published today could have a damaging impact on the whole game.” Even U.K. Prime Minister Boris Johnson said the plan was “exactly the type of backroom dealing that undermines trust in football’s governance.” For Americans—including the owners of both Liverpool and Manchester United—that might seem incomprehensible. But the plan struck at one of the sorest points in the game: the power of the big clubs and of their even bigger owners—and the erosion of any sense of fairness and competition as a result.

Project Big Picture came with significant strings attached. In exchange for financial support, the leagues would be required to cede significant decision-making powers over organization and structure. Nine “long-term shareholders,” i.e., big clubs, would acquire “special voting rights,” giving them broad powers to control the sale of broadcast rights and ultimately the structure of competition. In the short term, these clubs apparently sought to reduce not only the number of teams in the top tier but also the number of Premier League games, freeing them to play more lucrative games against top European clubs such as Bayern Munich and Real Madrid.

But the biggest fear was that the big clubs would use their power to bring an end to one of the most sacred aspects of soccer: promotion and relegation. In the U.S. closed-league athletic system, positions in a league are fixed, permanent, and closed. A minor league baseball team will always be a minor one. Yet in English leagues—and most other soccer leagues around the globe—a small number of the worst-performing teams move down to a lesser league every year, while high-performing ones move up. While the Premier League is the most famous, the bulk of soccer in England is played at lower divisions—and unlike in the United States, clubs very rarely move cities, making local loyalties to a team intense no matter where it sits in the ranking. The dream of the Premiership is always possible.


And yet, desperate times call for desperate measures. COVID-19 emptied stadiums around the world, canceled games, and threatened revenue streams from broadcasters and sponsors. Even before the pandemic, most English clubs were technically bankrupt—and England has probably the most profitable soccer clubs in the world. English clubs’ finances are easily assessed, because by a quirk of financial regulation, all limited liability companies in the U.K. must deposit their financial statements at Companies House, a government agency that makes them available for free on the internet. Since the clubs engage in almost no economic activity other than soccer, their financial statements are completely transparent.

The figure below is based on 89 balance sheets for clubs in the season preceding the COVID-19 pandemic. The bottom line of this table is the figure for net assets, i.e., the value of their assets minus liabilities. This is their equity, the business’ underlying value to the shareholders. Premier League clubs in aggregate reported positive equity, but in the lower divisions, liabilities exceeded assets in aggregate—and by some margin.

Negative equity generally implies that without a financial injection from shareholders, the business is not viable in the long term. At the same time, many analysts do not worry overmuch about negative equity on the balance sheet, as assets such as buildings and land are usually valued well below their market rate. Soccer clubs, however, have only two assets of any significant value: the tangible asset of the stadium and the intangible fixed asset of the players’ contracts. As is apparent from the figure below, player contracts (“intangible fixed assets”) make up most of the asset value in the top two tiers. The stadiums, in turn, may be tangible assets, but they are difficult to sell—local politics generally prevent club closures.

While the above table only reports aggregates, there are simple tests to determine the financial positions of the individual clubs, including the positive net asset test and the EBITDA test, an acronym for “earnings before interest, taxes, depreciation, and amortization” and a popular measure of a business’ profitability. If the EBITDA is negative, the business cannot generate enough cash to cover its day-to-day operating costs and is essentially paying to play rather than getting paid. I ran both solvency tests for the 92 clubs that played in the top four tiers in the 2019-2020 season; the results are reported in the figure below. Due to incomplete financial reporting, it was impossible to run either asset or EBITDA tests for 12 of the clubs and impossible to generate EBITDA tests for 35 of them. Of those for which data was available, 58 percent failed the profitability test and 58 percent failed the asset test, with 76 percent failing at least one of them. Of the clubs for which we do not have data, most were in the lowest three tiers, which are most financially vulnerable. In the end, fewer than half passed at least one test, and only 15 passed both. We are looking at a collection of businesses hanging by a thread that could break at any moment—and, again, that was before the coronavirus hit.

England has some of the world’s wealthiest teams, so how calamitous is the state of clubs in the rest of the world? Andrea Agnelli, the scion of the family that controls Fiat and the chairman of Juventus and the European Club Association, put it crisply: Clubs “are faced with a real existential threat … the biggest challenge our game and industry has ever faced.” His assessment is echoed by the accounting firm Ernst & Young. It conducted an extended analysis of COVID-19’s effect on the economy of all Swedish clubs and came to a stark conclusion: “The clubs will go bankrupt if there is no capital injection.”

The Liverpool and Manchester United owners appear to have made a simple calculation: A business on the brink of bankruptcy faced an existential threat from COVID-19, so their proposal would be greeted with gratitude and relief. They likely expected to be hailed as saviors and must have been dismayed to emerge as villains instead. The striking disconnect makes sense only once you see it in the context of a deep divide in global sports: the U.S. model of sports league organization versus almost everywhere else’s. Both have deep roots, and both have been successful. But they are dramatically different.

The American closed-league model dates back to baseball’s National League, founded in 1876 and still going strong as one-half of Major League Baseball (MLB). In this model, teams are franchises, they are granted exclusive territorial rights, and entry into the league is controlled by money: If you want to join, you have to pay a fee to the incumbents, which is their incentive to admit you. This structure encourages economic cooperation among sporting competitors in the form of revenue-sharing and cost-control measures such as salary caps and the draft system.

It also, as many analysts have argued, encourages illegal collusion, and the major leagues have indeed been in and out of antitrust courts for decades. Still, the National Football League, the National Basketball Association (NBA), and the MLB are certainly among the richest and most profitable leagues in the world, though their global impact has been uneven: American football has struggled to attract fans outside the United States, baseball is popular in only a few countries, and only basketball and the NBA can fairly claim to have achieved a global following, most notably in China.

Soccer, by contrast, is a truly global affair, the world’s most popular sport by far. FIFA, the international soccer governing body, claims more members than the United Nations, and countries go to extraordinary lengths to host the FIFA World Cup, while the Olympics, by contrast, struggle to find a willing host. The sport’s preeminence does not rest on a single league but on a global network of leagues.

The key feature that distinguishes these leagues from the U.S. enterprises is the system of promotion and relegation, where a league’s worst-performing teams drop to the lower tier while the best-performing ones in the lower tier move up to take their place. The primacy of this system is established by Regulation IV. 9 of the FIFA Statutes. Any country with enough interest in soccer to sustain two professional leagues already has promotion and relegation, while countries that cannot sustain two pro leagues, such as Canada and Australia at present, are committed to adopting the system once they can. The only outlier is the United States’ Major League Soccer.

In a promotion and relegation system, it is sporting merit rather than wealth that eventually grants you entry to a league—although money can certainly help buy the former. As a result, countries have developed soccer “pyramids,” interlocking leagues that can stretch to a depth of more than 10 levels. In theory, at least, anyone is free to form a team, start at the bottom, and, several promotions later, play at the top. The system sustains a network of thousands of professional clubs worldwide that survive largely on the hope of rising up one day to compete with the grandees. At some point, similar networks operated in the United States: Every small town had its own baseball team. But radio and TV broadcasts allowed everybody to follow the top teams, and the minor leagues, without access to broadcast revenues or any hope of entering the closed major league, withered until they were little more than a noncompetitive farm system for the big clubs.


In the standard model of capitalism that has evolved since the 1960s, the financial failure of an industry represents an opportunity. Supported by battalions of consultants, the forces of private capital such as hedge funds, venture capital, and private equity have seen financial failure as an opportunity to seize control; to rationalize, restructure, and revive the industry in a more profitable form; and to resell the businesses for a healthy profit. This process has gone hand in hand with the global phenomenon of increasing wealth inequality as the reorganizers profit and a large fraction of the reorganized are shunted into low-paid work or unemployment.

Today, there is evidence that private equity senses such an opportunity in soccer. Given its perennial popularity, soccer should be a safe investment: There is a steady flow of revenue from ticket sales, merchandizing, and broadcast rights, supported by enthusiastic sponsors. In the last year alone, we have seen private equity buy into clubs in England (Silver Lake investing in Manchester City), France (RedBird investing in Toulouse FC). Italy’s top league, Serie A, sold a stake in broadcast rights to two private equity firms, Advent and CVC, while the German Bundesliga has announced a similar plan. American investors have recently taken over three Italian clubs, ACF Fiorentina, Parma, and Roma.

This is the proper context of Project Big Picture. Its proponents—Joel Glazer at Manchester United and John Henry at Liverpool—belong to an earlier generation of American investors attracted to English soccer. Glazer took over in 2005, Henry in 2010. Like American sports franchise owners everywhere, they want to make money, and in pursuit of profit, they proposed a standard industry approach: restructuring.

But investors looking for straightforward profits in soccer are likely to end up disappointed—unless, as with Project Big Picture, they can change the rules of how it works. This was not the first attempt to bring financial market acumen to soccer. It started in the modern era as a flirtation between the stock exchange and soccer clubs. Tottenham Hotspur was the first to float shares on the market, entering the London Stock Exchange in 1983, at a time when another financial crisis in soccer had encouraged hopes of a fundamental overhaul. Those hopes were dashed: Nothing changed, and it wasn’t until 1991 that a second club, Manchester United, went public. This one, perhaps uniquely, proved to be an immense financial success.

Encouraged, a herd of investors followed in the mid-1990s—no fewer than 20 clubs entered the stock market in one 18-month period. By the early 2000s, around 40 clubs across Europe had tapped the financial markets in one way or another. However, as economists have painstakingly documented, these businesses have dramatically underperformed the investment market, generating an annual mean return of 3.7 percent between 1991 and 2009. That was roughly half the rate of return on European stocks, but with even more volatility—a very poor trade-off between risk and reward.

In consequence, the markets started to tire of the poor returns on soccer clubs at the beginning of the millennium. And yet, the rich kept buying clubs. Why? Because, contrary to the usual rules of capitalism, it wasn’t actually about the money. Wealthy businessmen—and the rare businesswoman—have for decades bought soccer clubs not for the profits but for the glory and the status. Gulf state rulers have capitalized on the sport’s popularity to enhance their image and bolster their precarious power over oil-rich principalities, Russian oligarchs have used soccer clubs as a means to move their fortunes out of President Vladimir Putin’s reach, and, since arch-soccer-fan Xi Jinping became president of China, there has been a flood of Chinese investors.


A ticketless fan reacts on the steps outside Wembley Stadium during the 1995 FA cup Final between Everton and Manchester United in London on May 20, 1995.

A ticketless fan reacts on the steps outside Wembley Stadium during the 1995 FA Cup final between Everton and Manchester United in London on May 20, 1995. Graham Chadwick/Allsport/Getty Images/Hulton Archive

Soccer’s ecosystem has thrived because the wealthy have been willing to lose money on it in an exchange of cash for cultural capital only—a trade unappealing to the majority of American businesspeople. The fact that clubs are perennially insolvent has been a feature, not a bug, allowing investors to present themselves as selfless benefactors, sweeping in to rescue a team from certain doom. Promotion and relegation guarantees a form of hyper-competition unmatched in capitalist systems. The rich and powerful can lavish their wealth on the world’s most popular entertainment in the pursuit of prestige, and there is an endless supply of them, just as there is an endless supply of clubs willing to relieve another tycoon of a slice of his fortune.

Soccer clubs simply don’t die—in part because they don’t just belong to the owners; they belong, in a deeper sense, to their towns and their cities. Owners can and do fail: There have been a staggering number of corporate insolvencies over the years. My own research has identified 243 cases between 1992 and 2014 in England, France, and Germany alone, predominantly in the lower tiers and frequently following relegation. But to my knowledge, none of these clubs actually folded—they have all risen like so many phoenixes from the ashes of the money their investors burned. That is another difference between soccer clubs and other businesses: A factory may go bust, leaving a town economically devastated, but the death of a club is simply an invitation to a local magnate to come to the rescue. And increasingly, if a wealthy individual won’t do it, the fans will do it themselves, crowd-funding the rebirth.

That is the way professional soccer has worked since its inception in the 19th century, and it has worked spectacularly well. It is hardly surprising, then, that fans react with rage to anything that might undermine the model and result in a shift toward the American profit-centered approach. The outrage provoked by Project Big Picture reflected this. If a flood of post-pandemic private equity investors, bent on profit and committed to restructuring in the process, enters the picture, a giant clash between tradition and money, and between fans and owners, is inevitable.

The soccer system is fragile not because clubs are insolvent but because a cartel of big clubs could credibly break away and reorganize along the lines of the American model. In Europe this threat has been present since the 1980s, and it periodically resurfaces under the name of a “superleague.” So far, the commitment to the current model has been intense enough to prevail over the siren call of profits. Should private equity now enter the field on a large scale, the struggle will enter a new phase, possibly arousing passions more fierce than anything that happens on the field.

Stefan Szymanski is the Stephen J. Galetti professor of sport management at the University of Michigan.