This week, FIFA announced that it will ban third party ownership of football players, a practice whereby investors buy the transfer rights of players from teams. The decision is set to hurt many clubs, especially in South America. Firmex takes a closer look at third party ownership, and why this practice is so controversial.
Third party ownership has long been part of funding football teams in Eastern Europe and South America, particularly in Brazil, Argentina and Uruguay. But recently, the practice has come under fire. The English, French and Polish football leagues banned the practice in 2008. Now FIFA is banning the practice altogether.
What is third party ownership?
Third party ownership is an economic arrangement in which a third party investor holds the economic rights to a player. Investors often cover the costs of a player’s training and accommodation, in return for a percentage of their future transfer fee. Some opponents of the practice claim that teams could be pressured to move a player on in order to achieve gains for an investor. Others suggest it is “indentured servitude” because the player can be sold to a club without receiving profit from the sale. However, third party ownership isn’t always 100%; in some cases, the third party receives as little as 5% of the profits.
Regardless of their stake in a player, third party investors make their money from transfer deals. These deals are often worth millions of dollars. When Brazilian footballer Anderson Luís de Abreu Oliveira (commonly known as Anderson) was transferred to Manchester United in 2007, agent Jorge Mendes received approximately £4 million. Mendes had invested £3.75 million into Anderson’s previous football club as a third party owner.
Why the controversy?
Third party ownership began in South America in the 1990s, and spread to Europe after the 2007 financial crisis, when banks reined in lending to cash-strapped clubs. According to a 2013 KPMG report, investors own stakes in as many as 1,100 players, worth as much as €1.1 billion in European football, or 5.7 percent of the regional transfer market. Though third party ownership has grown in popularity, a number of specific incidents with players have brought the practice under fire. One of these involved Carlos Tevez from Argentina.
Tevez was completely owned by a third-party investment company, Media Sports Investment (MSI). When he was transferred from Corinthians to West Ham in 2006, Corinthians did not receive any money from the transfer (an undisclosed fee thought to be several million pounds) because MSI had stipulated in its investment contract that it could transfer him to any team it wished.
Opponents of third party ownership saw this as problematic for two reasons. First, the arrangement made Corinthians miss out on making any money from losing its player. However, more importantly, the contract’s stipulations broke Premier League rules, which state that third parties are not supposed to influence the player selection process.
MSI was deemed to have broken Premier League rules and was subsequently fined £5.5 million. However, opponents called for the practice to be banned altogether, believing that many such illegal deals are made; MSI just happened to get caught.
Third party ownership in South America
As controversial as the practice is, third party ownership is common among South American football clubs–and with good reason. Third party ownership helps players from lower socio-economic backgrounds get access to the same opportunities as other players. Without third party investors, these players would need to pay large upfront fees to play in football clubs, especially in Europe.
In addition, many Brazilian clubs see third party ownership as a financial tool that helps them “unlock the equity” in an asset (player) without paying for it. In the same way a company would prefer to lease a plane rather than buy one, a club would prefer to field a player without having to pay for him and risk his transfer value depreciating over the years. Third party ownership helps clubs share the risk in players, or better yet, abstain from any risk entirely.
Most third party investors are well known conglomerates run by wealthy investors. For example, Creative Artists Agency, which represents big names in the US, such as George Clooney and Tom Cruise, also owns Quality Football Ireland Ltd, a third party ownership firm. When investors like these step in, clubs are able to gain players for much lower initial fees. For South American clubs, which might not otherwise be able to afford top players, third party ownership helps them bring desirable players on board and, in turn, helps players progress in their careers.
For these reasons, third party ownership is extremely common in South America, especially in Brazil, where an estimated 90% of players in the top division are somehow linked to third party investors. These arrangements are also increasing in countries like Spain, Portugal and the Netherlands. According to KPMG, investors hold as much as 36 percent of the transfer market value of league players in Portugal.
The end of an era
After years of debate, FIFA has now made the decision to ban the practice of third party ownership entirely. FIFA executives decided to ban the practice after committee members from different nations failed to reach an agreement on what to do about it. “The only way to fight against third party-ownership is to ban it,” said Jerome Valcke, FIFA General Secretary.
According to FIFA, the practice will be phased out over the next 3-4 years. This will of course have a huge impact in South America, where third party investors are critical to nurturing young talent.
For third party investors who wish to remain in the business, they will need to rethink how they make money from football players. Investment funds like Traffic Sports, based in Sao Paulo, are already hatching new plans. They “put the brakes” on raising money for a new fund this year because of uncertainty over whether the regulations would change. Instead, Traffic is now focused on running its own teams in Brazil and Portugal, and will seek to make money from player trading.