LOI Club Ownership: Should Success Compromise Sustainability?
Peak6 and LOI 'Investors'
There was an air of expectation and excitement when it emerged that Dundalk's takeover by a consortium led by venture capitalists Peak6 Investments was actually going to happen. Local businessmen and Dundalk supporters Paul Brown and Andy Connolly had rescued the club from near extinction in 2012, brought it to incredible heights and after meeting with multiple potential buyers, decided that Peak6 & co. would be the responsible guardians best placed to bring this proud and storied Irish football institution to the next level.
A lot was spoken of refurbishing the tired and downtrodden Oriel Park, upgrading the Youth Development Centre - both issues that had been the subject of much legal wrangling with Gerry Matthews over the preceding years.
However, this expectation and excitement has been somewhat diminished following the Q+A session held with the investors two weeks ago when it became clear than any infrastructural improvements and capital expenditure would only occur after the required revenue had been accumulated by the team's on-field success.
This challenged the perception of what many League of Ireland fans understood with the arrival of foreign "investors" into the league. That private money would be invested into the club rather than the club's money itself.
"Investors" will only do so where they see opportunity for profit - which either comes from revenue (and dividends) or a rise in the value of the club.
What most supporters are essentially asking for are philanthropists or benefactor, who put money into a club and seek nothing in return.
While many wealthy Irish business people do indeed want to give back to sporting institutions, owning a LOI club hardly brings with it the prestige to whet the appetite of our wealthiest citizens.
It might not be so ridiculous to speculate that indeed Brown and Connolly might be the only ones who've ever made a profit from owning a League of Ireland club.
LOI - A History of Financial Mismanagement
Most Cork City fans get extremely twitchy at the mention of "investors" and consortia looking to take clubs to "next levels" etc but making the comparison with Dundalk's new owners and Arkaga, is probably unfair at this stage.
But the League has a long and gory recent history of absolutely catastrophic financial mismanagement. From the romantic, yet deluded, fan chairmen to the Arkaga's - the private equity fund who's brief ownership of Cork City ended with them abandoning the club with debts of €800k+, the league has stumbled from one financial trauma to the next.
The list of clubs nearly going into extinction (Shamrock Rovers, Cork City, Derry City, Bohs, Shels, Drogheda, Galway, Dundalk and Limerick) and actual extinction (Sporting Fingal, Kildare County FC, Kilkenny City and Monaghan Utd) in the past 10/11 years is appallingly long. Some of those after periods of great on-field success (arguably achieved by spending far beyond their means on player wages).
Reckless overspending and very little development of income streams have been central to the fates of most of them. In many cases, the excessive pursuit of on-field success has directly lead to the demise of the club.
Most supporters care little for financial aspects of the game - they want the best players at their clubs and they want trophies, not bank balance surpluses and steady accounts.
This isn't helped by the utterances of many ex-players who place little or no-importance on financial prudency. It's probably a clear reason why so few "football men" are involved in football administration, much to the detriment of the game globally.
But unfortunately the financial mismanagement of the league, by both its governors and its members, lies at the root of the lack of sustainable long term growth and international competitiveness.
At a time when the league is one of the youngest in Europe (average player in 24.4 years old) and is producing more players for the national team than at any stage over the past 30 years, the league has been prevented from implementing real long term changes to sustain this production line and competitiveness at European level, by the constant short-term financial fire-fighting.
That being said, the Boom and Bust of the Irish economy was nowhere more visible than in the League of Ireland. So too the resurrection. The taps have started flowing again, wages are increasing and 8 of the Premier Division clubs are now full-time.
But have the lessons been learned?
Plus ça Change, Plus C'est la Même Chose
The absolute debacle that was Bray Wanderers in 2017 suggests very little has been learned by the League.
The granting of a licence to a club that had total gate receipts of €94k in 2016 and a wage bill of €560k was utterly negligent. Bray were essentially financially doping, offering contracts in excess of other top half clubs, contributing to unnecessary wage inflation in the process, which impacts gravely on the budgets of other, more prudently managed clubs. The fact that they eventually met all their wage obligations has satisfied the FAI enough to grant them a 2018 licence, which is short sighted in the extreme.
This approach of recklessly "speculating to accumulate" is a result of a culture that is encouraged and validated by the granting of licences.
The Association's concerns seem to centre on keeping the PFAI from their door and in the main, guarantees from the clubs around ability to pay wages appears to be the main issue to be satisfied.
As the 2018 season starts, despite all of the financial crises that LOI clubs have previously landed themselves in, more than half of Premier Division clubs have operating costs that vastly exceed their incomes.
It could be said that none of Bray, Limerick, Derry, St Pat's, Shamrock Rovers and Waterford are financially self-sustaining entities, all reliant on 'sugar daddies' for their continued survival.
Rovers, for example, racked up a loss of €1.5m in the 2013-2016 period and had accumulated debts of circa €1.1m by the end of 2016, which led to the auditors questioning their ability to continue as a going concern. Enter Ray Wilson and club sponsor Pepper, and an interest free loan of €1.5m, €1m for capital investment on training and academy facilities but a very worrying 500k borrowed for "day to day operations of the club".
Derry City chairman Philip O’Doherty has provided hundreds of thousands of euro to the club. Their 2016 Director's Report said that the club’s income for the year “includes a donation of £225,000 from Philip O’Doherty”. The Report questioned their ongoing viability -without the current funding provided by O’Doherty and the guaranteed UEFA income stream, it is unlikely that the company would be able to operate at its current level as a going concern.”
Same story with Garrett Kelleher and Pat's, Gerry Mulvey at Bray, Lee Power at Waterford and Pat O'Sullivan at Limerick. O'Sullivan recently announced that he cannot continue to sustain the day-to-day running of the club - identifying a shortfall of €500k a year between the club's financial needs and their income.
Many will argue that there is no issue with clubs having 'backers', that this is commonplace in football.
However, there are many ramifications to this model.
Being forever reliant on the patience and continued enthusiasm of the sugar daddy, and that if/when he decides he's had enough, an equally generous owner is found, with deep pockets and a stable business to fund it all.
There is also the inertia it breeds in clubs. When there is always someone on the end of the phone when things get sticky, innovative approaches to developing income streams and expanding support bases are not always stimulated. For example, it is very difficult to imagine the absolutely astonishing situation that left St Pat's without a shirt sponsor occurring at a supporter ran club of a similar scale.
So why the interest in investing in LOI clubs now?
There are plenty of stories of outsiders buying up clubs in other secondary leagues with a view to using those clubs to park players with a view to profiting from their resale or moving them to sister clubs.
One quick glance at the transfer fees earned by LOI clubs from selling to foreign clubs would be enough to end that type of interest.
The attraction to Dundalk is pretty easy to see - UEFA €€€€'s.
Trevor Watkins, a specialist in sports law at Pinsent Masons, and former chairman of AFC Bournemouth, advised the Peak6 consortium on the deal to purchase Dundalk and manage the transaction, gave the following insight on the attraction of purchasing a club like Dundalk. On the LOI, he says:
"Gives any club a realistic opportunity to earn the right to participate in European competition. Dundalk has excelled in that regard, putting it on the international stage in recent years and there is a tremendous opportunity for it to do that regularly. Compare that to the mainstream leagues within England, Spain, France, Italy or Germany where that is considerably more difficult to achieve."
"In general terms, the importance of European competition to financial sustainability within the smaller leagues has grown in recent years. Clubs that manage to reach the Europa league or the preliminary qualifying before the group stages of the Champions League receive significantly more financially than five to 10 years ago.
"It is possible to imagine similar deals following this one elsewhere in Europe to bring together different investors with a view to achieving sporting and commercial success via both domestic success and participation in European competition" he said.
The increases in UEFA participation money that Watkins alluded to has changed the room temperature for Irish clubs in the past few years.
2015 saw increases of 46% in the minimum prize money for the UEFA competitions. Champions League representatives were guaranteed €550,000 in 2015 from one qualifier, up from €375,000 in 2014. This year Cork City will earn a minimum of €800,000 (closer to €1m) from the Champions League route, and Europa League money is expecting to rise from a minimum of €215,000 up from €200k in 2015 and €120k in 2014. Prize money in subsequent rounds has also increased accordingly.
So there is a clear opportunity for some very steady income streams for any would-be buyer of a LOI club.
The catch being that UEFA have also introduced an extra qualifying round in the Champions League route which greatly reduces the chances of another LOI side repeating the success of Rovers (2011) and Dundalk (2016) in qualifying for the Europa League group stages.
So 'investors' looking to hit the Europa League jackpot may not be able to do so without substantially investing in playing resources. And most likely operate at loss.
Which makes the need to qualifying for the EL group stages even more stark. If it doesn't occur, and the investor looks to jump ship, the club is left most often, with a vastly inflated wage bill and in serious debt.
The biggest impact of the changes to UEFA participation money will not be in European competitions but domestically, where it will contribute to a major gulf growing in what has been a reasonably level playing field up to now.
Partly attributable to the boom/bust history of Irish clubs, the league has generally been very open and competitive. The Economics of Sports blog from UCC identifies that "between 1963 and 2012 (50 seasons) the league had a higher number of champions (15 clubs) than any other European league" and that 2017 was the "first time in the history of the League, now nearly 100 years old, that the same teams finished in the top two positions in four consecutive seasons".
Those qualifying for European competition year-on-year will essentially earn an extra 50% (give or take) of the annual income of most of the non-qualifying clubs in prize money alone. Not to mention the additional income coming from ticket sales etc.
This may lead to calls for some form of solidarity payments when clubs earn over, say, €500k of UEFA money.
UEFA currently do have one for those who do not qualify for CL or EL Group Stages, that goes into a central fund (ie not given to clubs to splurge on wages etc) to be spent on strategic expenditure/youth development etc.
It's rare that one would look to England for guidance on matters of fairness and competition in football - it wouldn't be harsh to say that English football is the most free market capitalistic team sport in the world. Apart from its TV deals.
Until recently a similar premium was placed on a top 4 finish and lucrative Champions League qualification left clubs in a vastly advantageous position, and a top 4 became entrenched. That is until the game-changing TV deal of 2015 which was so vast, with a relatively equal spread, that it meant CL qualification no longer put the clubs in an elite financial position.
This egalitarian approach is visible in the lower leagues of English football too. In League Two each club gets £900k for TV rights. Prize money is zero. Each team earns the same amount for participation - £430k, regardless of finishing position.
Premier League drip down/solidarity payments are another £400k. So League Two clubs have a guaranteed income of £1.7m outside of gates, sponsorship, merchandise etc.
In the LOI we are now entering a similar position to the PL pre-2015 but since our TV deal earns the clubs a collective amount of zero euro and zero cent, the same avenue for the redistribution of resources does not exist.
Without the League instigating a policy where there is a redistribution of a percentage the UEFA monies, any club looking to bridge that gap and make the jump to the top 4 will most likely have to spend well beyond their means in order to do so, further undermining the risk of financial instability and potential for long term growth. Without amending the state of play, we are encouraging clubs to take financial gambles that could jeopardise their very existence.
In circumstances like this it can be common for the big clubs to preach against financial recklessness but it's easy to do so when the system is rigged in your favour.
Alternative Model for Growth - Fan Ownership
The traumatic financial history of the league is probably the main reason for the recent growth and prominence of fan owned clubs in the Ireland, which now has one of the higher rates in Europe. Fan takeovers, have invariably occurred where clubs have faced extinction, with their proverbial lives flashing before their eyes.
A key principle of these fan owned clubs is that the quest for on-field success should never ever threaten the longer term stability of the club. That the team is not more important than the club.
Football clubs have historically been among some of Ireland's worst run sporting institutions, a key reason for how few actually own their own stadiums or training grounds. One of the main contributing factors is that everything was focused on the success of the team. In fact that's all the clubs have been - a first team.
The FAI's creation of the underage national leagues has almost single handily forced League of Ireland clubs to become actual sporting institutions with multiple teams and participative members. Some playing, some non-playing. Some clubs are expanding this to bring in women's teams and even amputee teams and it is not ridiculous to imagine clubs expanding into other sporting codes.
Fan-owned clubs, embedded in their local communities, have taken the lead on this.
However, leaving aside issues like a club's community and social responsibilities or having a stronger connection between professional and grassroots football, fan owned clubs invariably display greater financial prudence, compared to the spending as the quick-route-to-success approach, often favoured by an investor or benefactor.
Very often they are self-governing organisations, who hold themselves to higher standards than even FAI guidelines seek to promote.
Further, fan-owned clubs, ostensibly social enterprises, with a strong community presence, are a far more attractive proposition for sponsorship streams and public funding. They become institutions that businesses and politicians want their names to be associated with.
While it is easy to point to Cork City as a glowing example of how to run a club, many will say it's a lot easier to follow this model when you're a one club city, with a large population catchment etc but in reality there are similarities in many respects to the conditions Waterford, Galway Limerick, Rovers and Bohs exist in, when competing sports are accounted for.
But it's hard to argue against a correlation being drawn between Cork City's recent on-field success and how the club is organised and ran off the field.
It's also not hard to see the growth of the club and its very healthy financial position allowing it to stretch further away from the following pack. Such is its strong off-field position, that even allowing for a drop in attendances that would inevitably follow a poor on-field season, the budget available to Caulfield and his successors should mean Cork City should always be expected to achieve European qualification. And so reinforce the re-occurring cycle.
Cork City's self-generated finances allow it to have a playing budget probably 50-100% larger than most clubs not involved in Europe. Yet still operated within the acknowledged 65% wages to turnover threshold.
Clearly, the fan ownership model is not suited to all clubs. For example, Dundalk's population catchment means it probably will never be suited to following this approach, despite the history and popularity of the sport in Dundalk.
Instead, smart on-field and off-field management, as it has displayed in abundance, with some outside investment is most probably its ideal model, and with it, the comparisons with a clubs like Villareal, Burnley, Monaco, Hoffenheim or Wolfsburg etc are probably more appropriate.
The Role of the FAI's as Guardians of The Game
Since the FAI took control of the League in 2007, it has seen increased stability and gradual improvement. However, its lack of any meaningful interest in the League has also been very apparent. The Association have been largely focused on the health of the senior national team while not appearing to grasp the increasing importance of the League to the national team.
So too they seem to be missing the obvious fact that money invested by the FAI in the League is seeing greater payback now than ever, with LOI players graduating to the senior national team in more and more numbers.
There is so much the Association could do to improve the League that has been well documented elsewhere.
They received massive criticism with the launch of the Strategic Plan process. It was an absolute disaster in so many ways. After years of neglect, this was an announcement of the first new funding stream in years - a paltry €5,000 for each club. Uproar ensued.
But in all reality, while the abuse at the manner in which the whole Strategic Plan process was carried out was fair, the FAI were correct in requiring all clubs to submit Strategic Plans. Any half competent organisation of any kind would develop their own in-house strategic plan, especially ones looking for funding. Essentially it was designed to stop LOI clubs from bumbling along with the short term focus that has typified their management in recent decades.
It was at the Strategic Plan stage that the fiasco that ensued with Bray should have been foreseen. On submitting that the key enabler of their long term growth (and by inference, their short-term overspending) was the absurd idea of redeveloping the Carlisle Grounds (which they don't own) for apartments, their Strategic Plan should have been rejected.
While most clubs responded very negatively to the announced 'funding' (including St Pat's, who rejected the €5k), others such as Bohs and Cork City, had already been working on their own ones in the background.
A guest on the superb Off The Ball Panel discussion on the future of the LOI, Daniel Lambert, Strategic Planning Manager at Bohs, said "The FAI can do more and should do more, but too often the blame is placed at the hands of the FAI, the clubs have to look at themselves".
LOI fans have been unanimous in calling for increased funding to the League. However, this is highly unlikely to occur as long as the debt for the redevelopment of Lansdowne Road remains outstanding. The question arising is whether or not clearing the debt by 2020, while cutting off the supply of funding to areas like the LOI, is in fact a good thing at all. Or whether this deadline could be extended. Politics, of course, is central to this.
The issue of funding most often pointed out is the prize money, €475,500, €110k of the which goes to the league champions. Lambert believes that this is a total red herring:
"If you put up the prize money tomorrow by 100%, almost every club in the absence of any plan will spend that money on players and it will just create this boom and bust situation."
Where the FAI have clearly been negligent has been in the promotion of good governance. While club licensing process was introduced in 2004, it was foisted upon the Association by UEFA and in reality it appears to have been half-heartedly carried out and governed.
So too, the LOI became the first major league in Europe to introduce a Salary Cost Protocol in 2007, which meant that clubs could not spend more than 65% of their income on players' wages. Yet, clearly its interpretation has been liberal in the extreme. So too, the Association have placed no obvious requirements on where this 'income' could be sourced from. And most certainly do not care if it is self-generated or not.
A New Dawn or A False One?
Peak6's and co's announcement that no infrastructural investment will occur in the short term has disappointed many Dundalk fans, yet it cannot have been a surprise to all of them. While the consortium are here to make money rather than to spend it, what can Dundalk fans hope to gain from their arrival?
Their considerable experience of football administration, gleaned at Bournmouth, Swansea and Roma, can provide Dundalk with off-field expertise that separate it from its' LOI peers. Their arrival has been too late to have a direct impact on the 2018 season, the playing squad according to Stephen Kenny, is as it would have been under the previous ownership.
They are playing a high stakes game, failure to wrestle the league title back from Cork City, despite their seeding for two rounds of Europa qualification, will make their return to the Holy Grail - EL group stages qualification - all the more elusive. Without this, the sums they anticipate earning will lie much further from their grasp.
Rather than the jackpot year of 2016, last season is a much more comparable barometer of likely earnings (the amounts which will increase this year).
The money earned by LOI clubs in Europe in 2017 was as follows:
- Dundalk — €580,000
- Cork City — €440,000
- Shamrock Rovers — €440,000
- Derry City — €215,000
Generally, nearly half of this amount is spent on player bonuses and travel expenses for clubs. Are these the type of sums that will sustain the interest of Peak6 and co. who will, most likely, be looking to take dividends out of the club?
Where will the monies needed to create a playing squad capable of repeating the ever-more-difficult achievement of 2016 come from? Will the attempts to do so put the financial future of Dundalk into jeopardy?
Can it really be said that they will have the long term interest of the club at heart or will they be hedging their bets based on the anticipation of future success?
One of the healthiest aspects of Dundalk's outstanding 2016 Europa League success was the fact that it was achieved not with the cheque book, but by astute management and incremental growth. And as has been pointed out, Dundalk did absolutely nothing that any of the top 8-10 other clubs in the league could not have done.
Perhaps Dundalk's greatest contribution to the league was to provide it with more sense and realism than any of those dreaming of investors arriving bearing gifts - or those waiting for the FAI to come riding in on its white horse.
While sporting success is clearly the best catalyst for short term financial success, let's hope Dundalk and the LOI keep a very keen eye on what constitutes success in the long term.
Currently half of the Premier Division teams can't make ends meet. So we are at a crucial cross-roads and key decisions need to be made.
This aside, the League is in actually in a pretty healthy state, but now is the time to enshrine its future and for short term thinking to be consigned to the past. With the proper guidance and by following the good examples set by clubs within our League, clubs can choose the right path, the sustainable path, the path that secures the future of clubs in this country.
Otherwise, a league trying to support another era of failing clubs, is a league that will never progress.
There are no more plots available in the LOI Graveyard.