It was a nice bit of business. Three years ago, the top Portuguese soccer club FC Porto paid FC Santos in Brazil €13 million ($13.8 million) to sign the defender Danilo. A couple of weeks ago, Porto agreed to sell the 23-year-old to Spanish giant Real Madrid for €31.5 million, a markup of 140 percent.
Signing promising players at a relatively low cost and then selling them on at huge profits has become a specialty at Porto, which hasn’t seemed to suffer on the field as a result: The team beat German champions Bayern Munich in the European League this week. Since 2004, publicly listed Porto has generated more than €700 million from transfer fees, paying out just half that amount for new players.
But those funds rarely find their way into the club’s coffers untouched, as third-party investors are heavily involved in most of the trades. Among Porto’s business partners is the Malta-based private equity fund Doyen Sports Investments.
Seeking investors to cover the costs of transfers remains an exception in Germany’s soccer league, called the Bundesliga, where it is more likely that wealthy fans stump up the cash to buy new players. But in Portugal, Spain and eastern Europe, so-called third-party ownership, or TPO, is a core source of funding.
Now, the world soccer association, FIFA, wants to halt the practice.
“Should the ruling remain valid, it would deprive many clubs of their funding base.”
Starting on May 1, FIFA will ban investment in transfer rights. Clubs must disclose to FIFA the role third parties play in their transfer dealings by the end of the month. The ruling has hit the leagues and teams like a thunderbolt.
“Should the ruling remain valid, it would deprive many clubs of their funding base,” said Philipp Grothe, chief executive of the sports rights agency Kentaro, which also owns the British player consultancy SEM.
Global professional services firm KPMG estimates that the market value of European players whose transfers in 2013 were partially financed by third parties is as much as €1.1 billion.
FIFA talks about a “modern slave trade” and justifies its effort by claiming the ban will prevent manipulation, for example, if an investor has stakes in players in different clubs in the same league. But legal experts are doubtful that the ruling will stand up in court.
“If a ban should be imposed on the transfer of financial entitlements, then it is an encroachment on the freedom of contract,” Mr. Grothe said. “It’s similar to the way clubs often borrow against their sponsor income or future gate receipts.”
Critics of TPO argue that investors threaten the financial independence of clubs, yet the ruling presents many teams with huge problems. This is especially the case in Latin America, where few clubs own the transfer rights to all their players.
“If this is carried out, there won’t be any more club-based soccer there,” Mr. Grothe said. “It would be a total collapse of team financing in many countries. Investors there often hold large stakes. The clubs don’t have the money.”
Among the TPO investors are firms such as Brazilian Traffic Group, which has substantial investments, and consortiums of doctors and lawyers who band together to invest in teams, Mr. Grothe explained. Brazilian Traffic, for example, owns Estoril Praia, a rising Brazilian star playing in Portugal.
One of the most spectacular transfers involving outside investors occurred when Brazilian superstar Neymar moved from FC Santos in Brazil to FC Barcelona in Spain in 2013. According to media reports, the transfer fee was about €90 million, but FC Santos received only €17 million with the remainder reportedly going to a retail business involved in the deal. Barcelona’s president, Sandro Rosell, lost his job because of devious dealings.
But resistance to TPO is growing in the core market of Europe, where hundreds of young South American players ply their trade. The Portuguese and Spanish leagues have filed complaints with the European Commission, the executive arm of the European Union.
A lawsuit filed by Doyen Sports Investments, the Maltese private equity fund, will be heard in Paris on May 28. A Doyen spokesperson argued that the FIFA ruling violates a number of principles of E.U. law as well as national legal norms. “The effect on sports would be dramatic,” Doyen said. English and German leagues with their strong revenues would always attract the best players, the spokesperson added, but “the other leagues would be deprived of both talent and resources.”
FIFA has since backpedaled a bit, allowing players to continue to share in revenues generated by their own transfer.
FIFA has since backpedaled a bit, allowing players to continue to share in revenues generated by their own transfer. Exceptions will also be made for clubs that give up players.
The German firm Hanseatisches Fussball Kontor invests in transfer rights using money raised from private investors. “The FIFA decision blocks the further purchasing of transfer rights,” said managing director Kai-Volker Langhinrichs. “We now concentrate on entering into broader partnerships with clubs or to gain a majority interest in them.”
Clubs receive fresh capital from investors, and in return, Fussball Kontor participates “in the total economic performance.” For example, the company is already active in Slovenia, where it has a partnership with the first division club NK Domzale. The club has received loans and, in return, will relinquish part of its future income.
Video: Porto have agreed to sell Brazilian star Danilo to Spanish giants Real Madrid for €31.5 million.
Mr. Langhinrichs said Hanseatisches Fussball Kontor has invested €7million to €8 million in European clubs, primarily in Scandinavia and the Benelux countries. But he foresees evasive maneuvers on the horizon.
“The FIFA changes are likely to cause a shift in bilateral contractual obligations between clubs and investors through the acquisition of shares,” Mr. Langhinrichs said. He doesn’t accept FIFA’s argument that it is trying to protect competition. “If that were the real reason, a lot more needs to be examined,” he said. A sore point would be investment by large sponsors and strategic partners in a number of clubs.
Thomas Mersch and Stefan Merx are freelance business journalists in Cologne. To contact the authors: firstname.lastname@example.org