Capital Allocation: The Football Transfer Market

Well, the 2015/2016 English Premier League fixtures are out. Only seven weekends until the opening day of the season and judging by Liverpool’s fixture list, it might be only a further 11 weeks till we’re planning for next season, unless there is some drastic action in the transfer market. Easier said than done of course. We’re now in silly season, the transfer window, where ludicrous values are assigned to players with no bearing on fundamentals. The easy money that has flooded financial markets has also been flowing through top tier football for years, inflating prices to record highs, feeding a growing disconnect with the grassroots of the world.

When it comes to developing a team to bring success, football clubs have the same choice to make as any other business, i.e. to pursue organic growth reliant on your own resources with lower upfront costs, or to pursue an inorganic growth strategy focused on acquisitions for faster growth, but with with much higher upfront costs. Just as is the case in many companies, short termism in football drives a natural bias to high priced acquisitions, in search of the instant success craved by football fans. Still, many of the lower end clubs survive based on an organic strategy of developing young talent for the bigger clubs. Sounds a lot like the biotech/pharma market!

The transfer market is ultimately about the allocation of resources and capital, a function that forms the core of the Chief Executive role of a company, or similarly the role of Chief Investment Officer at an investment fund. Given that most top-tier football clubs pursue an inorganic growth model in building their teams, an academy success story is a bonus, that ability to identify and purchase players at reasonable valuations that will quickly assimilate into a manager’s vision for the club is priceless.

The mantra of the active investment world is ‘win more than you lose (i.e. pick more winners than losers), cut your losers early and let your winners run’. The transfer market is not too different, more hits than misses defines the success of your strategy but the big winners are what propel you to the next level. Unfortunately, for my own club, Liverpool FC, the transfer policy would best be characterised by more misses than hits. The real game changers have been in the minority and they have inevitably moved on to greener pastures.

The Warren Buffett of the transfer market is without doubt Arsene Wenger, the longstanding manager of Arsenal FC. If Arsene was a hedge fund manager, earning a performance return of 20% on net gains from player transfers, his wealth would be many multiples of its current level, albeit still a handsome sum.  Instead, those gains helped build their state of the art stadium and a platform for the long term success of his beloved club. One of his best deals was in 1999 when he sold Nicolas Anelka for £22.5 million – a young player he bought for £500,000 from Paris Saint German two years earlier – and then used the proceeds to buy the the out of favour Thierry Henry for £11 million, who went on to become a club legend, while the remainder financed a new world class 143 acre training centre. Buffett would be proud!

However, 20 years ago, on June 20^th 1995, it was Arsene Wenger’s predecessor, Bruce Rioch, who signed Dutch genius Dennis Bergkamp. In the equity world, Bergkamp would be the bluest of blue chip stocks. He lit up the premier league with an enviable flare that seem to come with ease. Most importantly, the Dutch maestro immediately became a driving force in lifting the fortunes of Arsenal, winning three premier league titles and four FA cups in his 11 year career at the club. His peers revere him, ‘the greatest Arsenal player of all time’ they say. A statue outside the club’s ground marks the greatness of a living football legend.

Still, like the investment world, the football world can be divided in their opinions. Just as two investment managers disagree on the outlook for a stock, football people can have divergent opinions on how a new signing will succeed in the premier league or fit into a new team. Only time proves who is correct in their judgement, no matter how assured someone can sound in that moment. Take Stuart Pearce for example, the heroic defender who played for Nottingham Forest and England. In 1995, Pearce branded Bergkamp a waste of money, arguing that he would have signed Stan Collymore instead, “even for £1 million more”. Liverpool signed Collymore, the rest is history as they say. Perhaps, his stance then explains his relatively dismal record as a football manager!