Third Party Investment from a UK Perspective – Daniel Geey
April 23, 2015
What is Third Party Investment?
In brief Third Party Investment (TPI) in the football industry, it is where a football club does not own, or is not entitled to, 100% of the future transfer value of a player that is registered to play for that team.
There are numerous models for third party player agreements but the basic premise is that companies, businesses and/or individuals provide football clubs or players with money in return for owning a percentage of a player’s future transfer value. This transfer value is also commonly referred to as a player’s economic rights.
There are instances where entities will act as speculators by purchasing a percentage share in a player directly from a club in return for a lump sum that the club can then use as it wishes.
Why did the Premier League ban the practice?
The Premier League, Football League, Football Association, the Polish and French leagues have all brought in TPI bans. The original ban in the Premier League came as a result of the Tevez affair where a third party owner had the contractual right to force West Ham to sell the player if a suitable bid was received.
This was against the ‘material influence’ regulations that were in place at the time. Previously, there was no express clause prohibiting TPI; only the act of influencing a club’s policies or performance was forbidden.
Tevez’s third party contract contained a clause giving exclusive power to the third party owners, MSI and Just Sports, to facilitate the transfer of the player. West Ham did not have a veto over this right and such a stipulation breached the above Premier League rule as it meant that outside parties had material influence over the decision making of West Ham.
A common misconception throughout and after the Tevez case was that any third party player owner would have been in breach of the Premier League rules. This was not the case. It was the clause giving the owners of Tevez influence over West Ham which incurred the Premier League’s wrath (plus the non-disclosure of the agreement itself).
It was for this reason that West Ham was judged to have breached the old Premier League rule Rule U18 and fined £5.5 million by the Premier League.
Subsequently, the Premier League significantly strengthened its regulations to prohibit any type of TPI. Other leagues followed as a result. The Premier League decided that from the beginning of the 2008/9 season an absolute ban on TPI was required. A spokesman stated:
“The clubs decided that third-party ownership was something they did not want to see. It raises too many issues over the integrity of competition, the development of young players and the potential impact on the football pyramid. It was felt the Premier League was in a position to take a stand on this. No one wants to see what has happened to club football in South America repeated over here”.
There are also Football League and Football Association rules prohibiting TPI but the below analysis takes the Premier League rules by way of example. Current Premier League Rules U39-40 (which at the time were rules L34-35) govern the actual prohibition and buy-out mechanism.
Premier League Rule U39 is the exemption rule which covers scenarios where clubs are allowed to receive money or incur a liability, for example, for the player registration or transfer of a player registration. Such instances include payments or receipts of transfer fees, loan fees and sell-on fees, payments for image rights contracts, payments for agency/intermediary work and payment of training compensation and solidarity contributions as set out in the FIFA regulations.
Premier League rule U40 is the mechanism to enable a third party owned player to transfer to a Premier League club. This can occur so long as the Premier League club purchases the third party’s economic interest in the player. It states:
“In respect of a player whom it applies to register as a Contract Player, a Club is permitted to make a payment to buy out the interest of a person or entity who, not being a Club or club, nevertheless has an agreement either with the club with which the player is registered, or with the player, granting it the right to receive money from a new Club or club for which that player becomes registered.
“Any such payment which is not dependent on the happening of a contingent event may be made either in one lump sum or in instalments provided that all such instalments are paid on or before the expiry date of the initial contract between the Club and the player. Any such payment which is payable upon the happening of a contingent event shall be payable within 7 days of the happening of that event”.
This ensures that any future transfer sums, should the player be subsequently sold, would be kept by the selling Premier League club and eliminates any third party element to any future sale transaction. Interestingly, the Premier League club who ‘buys-out’ the third party interest may still be paying the third party investor through installments during the period that the player is playing for his new Premier League club.
Whilst the player is owned by the club and no third party interest is possible, there is still the eventuality that a club could default on the installment plan and then the third party investor could sue based on the buy-out obligations in the contract. It would be unlikely yet is unclear from the regulations whether the investment stake could be transferred back to third party investor if default occurred or what other alternative recourse that an investor may have.
Nonetheless, any player registered to play in the Premier League cannot be third party owned by a TPI company. It means that the buying Premier League club has to satisfy the football authorities that all other economic interests have been extinguished. This occurred over the summer when TPI players Markovic and Mangala were transferred to Liverpool and Manchester City respectively.
Premier League clubs undertake to the football authorities that it is the only entity that owns the player’s economic rights and only then can the transfer can be completed. It is likely that Falcao had a TPI contract whilst he was at Porto but as the French league also prohibits TPI, when Monaco bought him, there may well have been a requirement in place to extinguish any third party rights.
As such, when he was then loaned to Manchester United this summer, his TPI rights would certainly have been extinguished to ensure there were no major complications with his Premier League registration.
Why is it such a problem?
As the Premier League spokesman explained above, their major concerns related to integrity, youth player development and money flowing out of the game. An internal FIFA report recently concluded that TPI trapped clubs in a “vicious cycle of debt and dependence” and “posed risks to players and to the integrity of the game”.
The main concerns about TPI include:
– Conflicts of interests can potentially occur between investors, club owners, agents and coaches. For example, what if the owner of Club A also owns an economic stake in Player B playing against his club?
What if an agent of a manager who buys TPI players is also an advisor of a TPI fund? Regardless of any actual conflict, there is certainly a perceived conflict which may damage the image of the game, public confidence in integrity of competitions and even lead to potential match-fixing or insider trading concerns.
Questions continue to be asked over the transparency of the TPI funds and what role they have, if any, in influencing clubs.
– Clubs become reliant on such funding which in turn leads to dependence on external owners to continue to assist in such financing arrangements. As such, TPI encourages short-term profit making with economic owners looking to the club to sell its players to realise their ‘asset’ ahead of purely on-field sporting concerns.
The consequence is that the rapid turnover of TPI players at certain clubs means fans become less loyal to the players who know they will be transferred when the right offer is received. Clubs are seen as a short term ‘speculation tools’ with the result that money leaves the football family.