Private equity investors provide a source of investment capital and the private equity comes from high net worth individuals or groups with the purpose of investing equity in the hope of acquiring greater equity in the near future. An example would be the American sports investment company Fenway Sports Group, who, in 2010, took over Liverpool FC for £300m, and also own Boston Red Sox. The other, opposing, sources of investment mentioned in the question are corporate investors. A corporate investor is a company that invests in, predominantly through shares, and acquires control of other companies; for example, most takeovers are examples of corporate investment. An example of a corporate investor would be Markus Liebherr, who through his Mali Group and holding company, DMWSL 613 Limited, has invested into 6 different businesses; most recently, Southampton Football Club.
Liverpool F.C.’s acquisition by Fenway Sports Group, an example of private equity investment, promised much when it first occurred in 2010: “we want to create a long-term financially solid foundation for Liverpool Football Club and are dedicated to ensuring that the club has the resources to build for the future, including the removal of all acquisition debts.” However, their financial motives, which would, from the business’s point of view, make them a larger return within seven years of purchase through selling on, have superposed long-term growth and instead instant success has been attempted to be achieved, with £110m being spent on 8 high-profile employees who have failed to deliver the immediate success Fenway Sports Group wished the investment would do so.
This is potentially partly down to a culture clash between the traditional management of Liverpool Football Club and the ideologies of Fenway Sports Group in regards to management. Fenway, who also own Boston Red Sox, base their employment criteria on quantitative scientific data, such as measurements of productivity and output (such as sporting stats like “chance creation” in their purchase of Stewart Downing and “key passes” in the purchase of Charlie Adam); a philosophy based on the statistical analysis incorporated in Baseball. The culture in regards to management at Liverpool FC, or English football in general, has a long history of extensive scouting and subjective analysis, rather than statistical interpretation, and a boot-room philsophy.
Clearly, the failure to achieve success, other than the Carling Cup win, finishing 8th place, their worst league finish in 18 years, is much down to short-sightedness, encouraged by the financial motives of the private equity investors. Further weight is added to my argument that private equity investors’ sole interest in financial motives is detrimental to businesses and therefore they are not “significantly more likely to succeed,” is given by Fenway Sport Group’s recent firing of Kenny Dalglish, which will mean Liverpool would have had three managers in under three years since the takeover. Further strain is put on Liverpool, as Fenway Sports Group is in America and thus the management team at Liverpool are regularly required to commute to USA for board meetings. Ultimately, private equity investors are often too short-sighted and this will hinder the success of the business taken over, irrelevant of their motives. As amateur economist Jasper Evans puts it, “long distance ownership can be a factor in the negavelopment of a football side.”
On the other hand, corporate investors are much more likely to be in it for the long haul and thus their motives branch much further out than simply financial motives, which would appease shareholders at least, into other motives such as corporate social responsibility, strong organisational culture and structure and sustained long-term growth: motives that are potentially much better for the business as a whole as the majority of stakeholders will thus benefit, not just those that are beneficiaries of financial motives.
For example, when Markus Liebherr took over Southampton Football Club through his holding company DMWSL 613 Limited, he stated, “I believe we have a superb opportunity to rebuild this great Club. Clearly, this will require resources, planning, hard work and patience. We will assemble a strong management team at every level of the Club. We will act rapidly, but also plan for the long term, because I am here for the long term.” This short statement highlights all the positives and strengths of corporate investment over private equity, namely a long-term commitment, financial investment and “strong management,” an essential component of a successful business.
Unlike private equity investment, where stakeholders may feel as if the business is purely having its profits squeezed for the benefit of a short term investor looking to make a fast buck, corporate investment, as illustrated by Markus Liebherr, puts financial motives no higher than any other. In fact, investment in the case of point goes to prove that having “only” financial motives does not make it more likely that the business will succeed.
To expand, Southampton F.C. were acquired for £15m and since then more money has been invested into the club’s long term future – rather than the short term future, as was the case with Fenway Sports Group at Liverpool. A further £15m was spent on improving Southampton F.C.’s training facilities, 93% of a £16.4m turnover was invested back into the club in the form of wages and a further £14m was paid into a capital contribution reserve by the corporate investor.
The various forms of investment from the corporate investor goes to show how the club’s long term interest is of sole priority and interest to the investor and the likelihood of success was further increased in early 2012 when Southampton had £33m of loans invested in the club by the corporate investor, Liebherr, converted into shares, removing it as a liability. This leaves Southampton F.C. with no debt, unlike Liverpool F.C, as, like many private equity investors, Fenway Sports Group financed the takeover using significant amounts of debt.
The leveraged buyout was alluded to in the new Liverpool owner John W. Henry’s press release, “we are dedicated to ensuring the removal of all acquisition debt.” Although The Gurdian’s David Conn, points to Henry clearing Liverpool’s £200m debt left by the previous owners, Fenway have organised a £120m facility to borrow money from banks. Another sure sign of financial motives being at the forefront of all decisions.
It has been three years this summer since Markus Liebherr took over Southampton F.C. and so far success has been achieved, financially and materialistically in each year, with Southampton winning one domestic trophy and securing back-to-back promotions to the Premier League, where annual revenue is guaranteed to increase by at least £47m, through TV revenue streams. Although Markus Liebherr passed away in 2010, chief financial officer at Southampton F.C. Gareth Rogers stated that “nothing has changed operationally or strategically,” and thus Southampton have enjoyed and will continue to enjoy success, due to the corporate investor having more motives than purely financial gain, demonstrated by the legacy he has left at the club.
Ultimately, whilst only having financial motives is essentially what business is about according to Milton Friedman, “the business of business is business,” it neglects many other factors that determine success and as the financial motive and private equity investors are synonymous with each other, it leads to the case that private equity investors are not in fact significantly more likely to succeed than corporate investors. By purely having financial motives, important factors such as culture and structure suffer or are jeopardised and this is potentially more damaging to the business in the long run, than any financial success in the short-run.
Corporate investment rarely runs the risk of this as the takeover is not a “leveraged buyout” and therefore it has a very real cost to the purchasing company if it doesn’t pay off and thus they work hard to ensure an environment in which success is likely is created. This encourages more motives than just financial to be targeted and this often leads to focus on the whole, rather than purely the part (financial gain), and a classic example of this outside of football is the takeover of Pixar by Disney.
Disney purchased Pixar and invested heavily in their ideologies and their “creative culture” and thus, in the long-run they have benefitted. For Pixar success has been huge, with its corporate investors Disney lending their expertise in advertising, marketing and merchandising. For Disney, a willingness to address more motives than purely financial has resulted in increased revenues, larger profit margins and an increase in the rate of production of films, and therefore success has been achieved. Ultimately, what will determine the likelihood of success is not the form of investment as such, but how the investor sees their investment: as a short term project, which often leads to failure, or a long term project, which is more synonymous with success.
Written by Jordan Florit for maycauseoffence.com/