Déjà vu all over again.
That's how some observers of ownership changes in European soccer might describe the recent turn of events at Burnley Football Club. The English soccer team, acquired in a debt-financed deal in 2020 by US investor Alan Pace, suddenly faces a world of new financial challenges after a poor season resulted in demotion to a lower league.
The relegation, which drops Burnley into the far less lucrative second tier of English soccer, throws Pace's team-rebuilding plans into doubt and raises questions about the wisdom of debt financing in deals for mid- to lower-ranked European teams, which each season face the risk of dropping into a lower league.
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What Pace and his club are going through may simply be the latest example of an old saying that the best way to make a small fortune in soccer is to start with a large one. And by no means is Pace the first investor, foreign or domestic, to suffer from the vicissitudes of European soccer's league tables.
However, Burnley's experience is a stark illustration of how the threat of relegation can wreak havoc for team owners. The ritual of relegation The yearly relegation ritual, which exists across European soccer and other sports on the Continent, has no real equivalent in the US, and American investors coming to English soccer have sometimes been burned by it.
Because Burnley has been demoted to the lower tier, the club is suddenly facing a revenue drop of an estimated £90 million (about $112 million), reflecting the lesser league's paltry broadcast and other commercial rights. But it gets worse: The terms of a £65 million loan that Pace received to finance the club deal allow the lender, MSD Partners, to demand an accelerated repayment if Burnley falls into the lower tier.
A spokesman for MSD Partners declined to comment on whether it planned to invoke the full weight of the repayment clause, which states that in the event of relegation "a significant proportion" of the loan—subject to negotiation—is payable shortly after the end of the season.
But Burnley's newly diminished cash flows are a strong incentive for MSD to seek early repayment, said Kieran Maguire, a lecturer at the University of Liverpool who specializes in soccer finance. Further, Burnley is expected to receive tens of millions of pounds this year in so-called parachute payments, which the league allocates to newly relegated teams to help them manage life in a lower league.
"MSD will want the parachute payment money," Maguire said.
If Burnley, which was largely debt-free when Pace acquired it, is forced to divert those payments to MSD, that would hurt the club's ability to shore up its prospects through steps like replacing nine free agents who might leave, hiring an experienced new coach or other spending priorities.
"It will be very challenging for Burnley to be competitive next season because while they're receiving these parachute payments a significant portion of them will be used to repay the loan," Maguire said.
Burnley and Pace's ALK Capital, his investment firm, didn't respond to requests for comment.
In addition to presenting Burnley with financial and competitive challenges, the club's relegation offers yet another cautionary tale for American investors lured by the glamor of the Premier League, arguably the world's best soccer league.
We've been here before. In 2008 US PE investor Ellis Short gained a controlling interest in Sunderland AFC, another Premier League team. Ten years, two relegations and reported losses of as much as £200 million later, Short sold his stake.
Two years before that, US businessman Randy Lerner, a former owner of the NFL's Cleveland Browns, bought a controlling stake in Aston Villa. He sold the stake in 2016 after Aston Villa was relegated from the Premier League.
Club owners have suffered similar fates in other European leagues, including Italy's Serie A. US investor Kyle Krause purchased control of Parma in 2020 and soon saw the club demoted to a lower tier at the end of the 2020-2021 season. Alternative narratives There are, of course, alternative narratives. US investors Fenway Sports Group, which bought Liverpool FC in 2010, have overseen a run of trophy wins and global fame while watching the value of the team soar. Chelsea, one of the most successful European soccer teams of the 21st century, was recently acquired for £4.25 billion by a US group led by Todd Boehly and Clearlake Capital, after owner Roman Abramovich was forced to sell as part of anti-Russian sanctions. That deal was done without any debt financing.
These and other top teams such as Manchester City, controlled by Abu Dhabi United Group, and Paris Saint-Germain, owned by Qatar Sports Investments—groups backed with the financial power of nation states—rack up championships and face essentially no risk of relegation.
Meanwhile, lower-ranked teams—including Burnley—accept punishing spreads and other terms set by risk-aware lenders such as MSD Partners in an attempt to explore a passion while building a successful sports business.
Burnley's situation, like Sunderland and Villa before it, shines a light on the risks of investing in a mediocre team fighting year after year to remain in the more lucrative ranks at the elite level.
There's a lot of talk in sports about the winning mentality and giving 110%. But Burnley's relegation and looming financial reckoning reminds us of the power of big money to build and maintain a self-perpetuating upper-class of teams atop Europe's soccer leagues.
That's not healthy for the sport or its investors, no matter which team you cheer for on weekends.
Featured image by Caroline Suttie/PitchBook News
This article originally appeared on PitchBook News