Diamonds in the rough
As more sophisticated Football club owners and operators try to unlock financial value and growth , there is an increasing focus on youth players, both in the short term and the long run.
Modern day Football is in constant flux. On the field, it is becoming more mechanical, tactics based and data driven. Off it, its is evolving into something more expansive - spreading its footprint across the traditional footballing borders and onboarding an ever increasing number of fans via (existing and new) IP-led and other experiences.
The latter could be linked to football clubs now increasingly being run and operated by entities to unlock financial value and growth. The former feeds off it, as clubs bring in tools and professionals with their refined playbooks to drive results which in turn drives commercial value for the club.
Football finances are at the heart of it all. In the short term, clubs have been scrambling to fix their finances after the governing bodies and leagues have introduced new Fair Play and Sustainability rules.
These new rules target limiting unfettered spending by clubs on wages and transfers to maintain competitiveness, and protect smaller clubs from bankruptcy as they try to bridge the ever widening on and off field gap with their larger peers. UEFA focuses on wage cost ratios and three year breakeven rules with a cap on three-year net losses to EUR 60mn , while the Premier League limits the combined losses over the previous three seasons to GBP 105mn (a brief intro to the rules here).
Squad costs have taken centre stage: player wages, transfers and other squad related expenses need to make the numbers work. In the long run this is pushing clubs to evolve their operating model, with youth players becoming an integral piece of this puzzle.
Cashing in on youth - Short term benefits
Spending on the squad has become an imperative for clubs to compete. Transfer and wage bills continue to balloon, putting pressure on the squad cost ratios and profitability of clubs. This year too, the story was no different. The top 10 leagues spent more than EUR 1.8bn (on a net basis) with the Big 5 European leagues taking a lion’s share of it.
The English Premier League continues to be the biggest spender with more than GBP 2.4bn of gross spend, but it was actually down 42% from a year ago as the new financial rules start to kick in.
The June 30th deadline for clubs to submit their annual accounts for the PSR assessment (which is also an accounting deadline for them for the financial year) saw a flurry of activity of player trading and sales between clubs to prevent any PSR breaches. As a result a number of homegrown youth talent changed hands (or turf rather).
Something to keep in mind here is that football accounting rules dictate a lot of the decisions clubs take when it comes to their squad. The full amount from a player sale can be recorded in the same financial year, whereas when you buy them you can spread the cost over the years of the contract (amortisation in pure finance terms).
But how have the homegrown or youth academy players suddenly become even more valuable financially? From an accounting perspective a sale of a player developed by the club or a youth player from the academy has a starting value of zero on the balance sheet. Selling these players allows clubs to record the full amount of sale right there and then. Another player who was bought by the club when sold instead records the difference between the sale price and the carrying value of the player on the club’s balance sheet.
“I didn't want him to leave but it is the rules. The clubs have to deal with the Financial Fair Play rules and the rules are not great. The rules are, I would even say, bad... it forced us to make this decision”. - that is Erik Ten Hag on the sale of Scott McTominay, another homegrown player and fan favourite sold this summer to avoid PSR breaches, amongst many.
Clubs have now increasingly started to increasingly cash in on their youth or homegrown talent to balance the books or rake in additional player trading profits and be above the water for PSR. Some clubs have even apparently formed transfer alliances to help each other with comply with the new rules.
Everton sold — and the emphasis is on sold — Lewis Dobbin to Villa for £9million, a day after Tim Iroegbunam went in the opposite direction for the same sum. The clubs could have swapped the two youngsters, but two sales helped push them towards compliance. Profit is booked from sales but the outlay is amortised — spread over the length of the player’s contract up to a maximum of five years.
Villa have struck mutually beneficial deals with Chelsea, too. Ian Maatsen has become their new left-back for around £37.5million, while relatively untested rookie Omari Kellyman will go from Villa Park to Stamford Bridge for £19m. - The Athletic
And questions have been raised how clubs could be inflating the value of youth players (on both sides) to record a better number on the books for PSR compliance.
The third area of debate is the valuations of some of the players. Take Kellyman for instance. Chelsea rate the England Under-20 international very highly. But is it understandable they were prepared to spend £19m on a player that Villa picked up for £600,000 from Derby County’s academy two years ago, and who has made just six first-team appearances, totalling 150 minutes of action? Such a valuation is great news for Villa of course, who can register almost £19m of profit in this year's accounts. - BBC
While this might help clubs fix their financial issues in the short term, one could question what kind of impact this could have on the game.
There is an increasingly long list of clubs which do not meet the regulations, both at the top level and lower tiers.
Larger clubs which are financially comfortable (are well below the squad costs and net losses limits) might now be in a position to easily buy attractive youth players from the ones which are in a more precarious situation financially. Where does that leave the gap between the Big 6 or 8 and the rest in the long run, the very thing these rules were trying to target? As an owner or operator of a club outside the top 8, this puts you in a tough spot.
Additionally, there is an added intangible risk of developing youth players with an eye on just using them as commercial assets eventually impacting the squad mentality. You sell a vision of the long term project to your youth players, help them integrate with the club’s ecosystem and build a connection with the fans who hope they will break into the first team. High squad turnover with a short term myopic view offsets most of this progress, and is unlikely to sit well with supporters.
A club like Chelsea for example has slowly lost its lustre under the new ownership with the constant trading of players, no real identity on the field but some shrewd financial engineering and gains off it.
Numerous other Chelsea academy products have been sold: Fikayo Tomori to AC Milan for an initial £25million, Marc Guehi to Crystal Palace for an initial £18million, Tino Livramento to Southampton for an initial £4million, Ruben Loftus-Cheek to AC Milan for an initial £15million. Lewis Hall has joined Newcastle United on loan this summer and is expected to sign permanently next summer in an initial £28million deal. Bayern Munich have been in talks over a deal to sign Trevoh Chalobah before the transfer deadline and Conor Gallagher would have been sold had the right offer come for him (who was eventually sold to Atletico Madrid).
Even before add-ons and sell-on clauses, plus numerous other smaller deals, are taken into account, it is getting on for £200million in transfer revenue for academy products over a two-year period. - The Athletic
Diamonds in the rough - A long term play
The focus on youth is not recent development though. Clubs had long realised that the operating model around the squad had to evolve, from scouting for a few undiscovered stars to having a proper structure in place for youth training and development. The average age of squads has been constantly declining in the major European leagues, an indicator of where the focus is shifting to.
With higher demand for youth players, their values have also soared, both in top leagues and outside of it.
World class youth academies and have become crucial strategic investments for clubs as it covers both commercial and footballing aspects for the owners.
From a footballing PoV, youth players coming through the ranks are well versed with the club’s philosophy and style of play and can be shaped to fit into different roles the team needs.
Younger players are like diamonds in the rough. Their technique, skill and temperament can be tested internally, or developed outside at a different club via loans for example. This is hard to put into place for a player who you paid a handsome sum for, and signed them on a long term contract expecting them to deliver from day zero.
Financially, it is a long-term play to improve your squad costs and expenses. Younger players are less expensive as they start with a basic contract which is slowly improved as they become an increasingly important part of the first team squad, which meaningfully helps lower the squad expenses.
If their market value continues to improve, they become an even more attractive asset commercially. With a carrying value of zero on the balance sheet, they can be opportunistically sold to generate income. Player trading revenues from academies from some of the top clubs just goes to show how valuable a strong youth setup can be.
An interesting research paper tracking player transfers between 2015/16 and 2020/21 shows that the economic impact of homegrown player sales is the largest at the biggest clubs with more resources the scout the best talent and train them at their top level facilities. Their lack of necessity to sell whenever an offer arrives also helps keep the asset and increase its value.
But there ares still a whole bunch of clubs in the middle of the pack that have really turned their financials around, like AS Monaco going from -EUR 60mn transfer balance to EUR 161mn and Olympic Lyonnaise from -EUR 85mm to EUR 136mn showing the growing importance of homegrown players in the squad economically.
Youth training and infrastructure being exempt from the new PSR and FFP rules is an extra bit of tailwind to the long term trend already in play.
Academies and player development have become an integral part of a club’s setup. There are clubs like Borussia Dortmund in Germany, Ajax in the Netherlands, Benfica in Portugal which have a thriving youth setup and have made player sales to bigger clubs as a core part of their operating model. Other approaches with a blend of tranining the youth towards first team development and opportunistic sales are increasingly more common. Financially, the youth setup of the club could slowly become one of the engines of a club driving it forward.
The diamonds in the rough cannot be ignored in the modern game. Some might even call it an indicator of long-term success when assessing the potential of a club commercially and on the field.
Until next time,
The Atomic Investor
Kudos @title