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I've always been of the opinion that if this was done correctly, perhaps regulated by the FA, it would be a fantastic revenue generating vehicle for lower league clubs and encourage their youth development schemes to produce better players.
They call it third-party ownership, and to its proponents, it's no more harmful than owning a share in a thoroughbred or any other company. You pay a certain amount here and now in exchange for a slice of revenues that may or may not come rolling in down the road.
For a racehorse, that means prize money and maybe stud fees. For a soccer player, that means taking a cut of any future transfer.
Third-party ownership has persisted for decades in South America, primarily in Brazil and Argentina. Usually investment funds—or sometimes very wealthy individuals—will offer a club money up front for a stake in a promising player. When he is sold to a bigger club, typically in Europe, the transfer fee is split between the club and third-party owner, depending on the share.
If you put down $500,000 for a 20% share in Player X, and he's sold to Barcelona for $5 million, you recoup $1 million and double your investment. Of course, if he gets injured, or his career goes nowhere, or he simply leaves the club as a free agent, you get nothing.
The problem with this form of creative financing is that it has spread to Europe and it's making many uncomfortable, to the point that some leagues, like the English Premier League and Ligue 1 in France, have outlawed it.
FIFA doesn't explicitly allow the practice, nor does it prohibit third-party ownership. In Article 18 of its "Regulations on the Status and Transfer of Players," the sport's world governing body simply bars "third-party influence," which it defines as clubs entering into a contract that allows a third party to "acquire the ability to influence in employment and transfer-related matters its independence, its policies or the performance of its teams."
Sound like a fudge? Well, it sort of is. The rule is a way for FIFA to reconcile what has been standard operating procedure in nations that would otherwise be cash-starved without it and the need to crack down on the most egregious cases: When players are overtly manipulated to the benefit of third parties that own all or part of their economic rights.
When done correctly and transparently, advocates say, third-party ownership is no different from a form of securitization: You unlock some of the equity in your asset and only pay the lender back when you sell up. It's not hard to see how it would benefit a smaller club.
Imagine a cash-strapped team with a promising 20-year-old striker. If he is sold now, he might fetch $5 million, money the club desperately needs. But if he gets another season under his belt, he could be worth $10 million. So the club sells 50% of his economic rights to a third-party owner for $2.5 million.
He sticks around another year, scores boatloads of goals and is sold the following summer for $10 million. The third-party owner sees the value of his investment doubled. The club nets $7.5 million in total: $2.5 million straight away, plus half of the $10 million fee.
And if the kid turns out to be a dud? Well, at least the club made the original $2.5 million. It's a classic way of spreading the risk.
The counter argument is that the third-party investors only get their money back when the player is sold. Despite FIFA's ban on third-party influence, it provides There's a huge incentive for third parties to pressure clubs into doing their bidding—or, at least, only buying shares in clubs with pliant owners. It also takes the romance out of the game: Players aren't there to win as much as appreciate in value.
Then there are the obvious conflict of interest risks. Ideally, you'd want the most stringent wall between the third-party owner with an interest in the player and the agent who represents that player and influences his decisions. In practice, that's nearly impossible to police.
There's another major side effect to third-party ownership: Its impact on the new Financial Fair Play regulations that limit the losses clubs wishing to play in lucrative European competition can sustain. FFP enforcement goes into effect for the 2013-14 season, which means clubs whose audited losses exceed certain limits will face fines or exclusion from cash-spinning tournaments like the Champions League.
Given that player acquisition costs are one of the single biggest expenses a soccer club faces, teaming up with third-party owners appears to be a no-brainer. Instead of buying that $20 million midfielder, you simply put down $5 million and convince a third party to pay the rest. You'll make less money when it comes time to sell, but in the meantime, you get a $20 million asset for 25% of the price.
Some clubs are already doing this to great effect. Perennial Portuguese powerhouse Porto relies heavily on the practice, according to a recent paper by sports lawyers Daniel Geey of Field Fisher Waterhouse and Ariel N. Reck, who represents TYP Sports Agency, a Delaware-incorporated third-party owner of soccer players. They write that the club owns 100% of the economic rights of just five players on its 27-man roster, based on Porto's annual report.
The risk here is that FFP will be fundamentally distorted because the clubs that use third-party ownership to defray costs will have an unfair advantage over those prohibited to do so—like English and French teams. Gianni Infantino, UEFA's general secretary, told Bloomberg that "this kind of player ownership is a growing threat. We will ourselves look into the matter because it cannot continue in this manner."
But there is only so much UEFA can do. If it tries to ban third-party-owned players from its competitions, the organization could face a battery of legal challenges. After all, FIFA does not ban the practice, and when it comes to international regulations, UEFA is FIFA's little brother.
But even if UEFA found some kind of regulatory strategy to assuage fears over FFP distortion—perhaps by taking into consideration the full value of a player rather than the club's share—it would not change the fact that third-party ownership reduces players to racehorse status. Minus those stud fees, of course.
I've always been of the opinion that if this was done correctly, perhaps regulated by the FA, it would be a fantastic revenue generating vehicle for lower league clubs and encourage their youth development schemes to produce better players.