Look at the Premier League's New Champions: Chinese Capitalists Should Think Again About What a Good Investment Looks Like

For any company hoping to make money in football, the thing to invest in isn't the club — it's the players, or the system that finds them.

Leicester City are champions.

In matchweek 36 of the Premier League, Leicester held Manchester United to a 1-1 draw, and their closest rival, Tottenham Hotspur, were pegged back to 2-2 by Chelsea. That handed Leicester the title with two games still to play, and left old powers like Manchester United, Chelsea, Arsenal, and Liverpool behind them.

That is a little awkward for the Chinese capitalists who have been waving big money around Europe. In the weeks before Leicester sealed the title, the news kept coming: Suning was in talks with Inter Milan to buy 30% of the club for 80 million euros; Baidu was spending 5.1 billion yuan to buy AC Milan; Jack Ma and Xu Jiayin were putting up a large sum to jointly buy a Premier League or MLS club.

They behave like the Chinese shopping tourists who roam the world buying things, with eyes only for big-name logos — the bigger the better.

Next to those deals, the £39 million Vichai Srivaddhanaprabha put into Leicester City more than five years ago looks like small change. Vichai is now the club's chairman; according to Forbes, the Thai businessman is worth $2.9 billion, 612th on the global rich list. In 2010 he led Asia Football Investments — a consortium formed by his own King Power Group and several other Thai conglomerates — in buying Leicester City.

A small club that a year earlier was worrying about relegation has now won the most valuable league in the world. That ought to make these Chinese tycoons think again about what a good investment looks like.

The sums are already there to be done. As the new champions, Leicester stand to make a great deal over the coming year — an extra $100 million in revenue annually. Meanwhile the club's valuation has passed £400 million, ten times what Vichai paid for it. This may be the best-value investment in Premier League history.

It is also a useful case study for the Chinese money desperate to get a foot into world football. Whatever the goal — running a club well and winning trophies to feed one's own vanity, or purely chasing a return on capital, or even just as part of cultivating senior officials — what tests an entrepreneur or a capitalist is still his judgment, and his ability to actually run a club.

So what can Chinese capitalists learn from Leicester City?

Investing in a small or mid-sized club doesn't take deep pockets

European football in recent years has been carved up by the big clubs. Manchester United and Arsenal in the Premier League, Bayern Munich in the Bundesliga, Real Madrid and Barcelona in La Liga — they sit at the top of the food chain and leave small and mid-sized clubs very little room to live.

Even on the rare occasions when a club breaks that grip — Chelsea in 2005, Manchester City in 2010 — it has leaned mainly on big money, taking cash from a Russian and from Arab billionaires respectively to turn itself into a traditional heavyweight almost overnight.

Against that background, Leicester's title looks rarer still, because the club took money from capital but certainly not from big capital.

In July 2003, the Russian billionaire Roman Abramovich bought Chelsea for £140 million. By June 2014, the Sun reckoned Chelsea had burned through more than £1 billion. Manchester City, bought by an Abu Dhabi consortium in 2008, got to where it is today only after that consortium poured in £610 million over five years.

Leicester did nothing of the kind. Over the past five years, Vichai's net spending on new players has come to just over £60 million — about what a big club spends in a single transfer window.

According to Transfermarkt, Leicester's whole squad is worth 127 million euros, 12th among the Premier League's 20 clubs and far below the average of 220 million euros. This is a small to mid-sized club in every sense.

What does the title bring Leicester City?

In sport, results mean money. Now that Leicester have finally won the title, the sports consultancy Repucom expects the club's revenue to rise by at least $100 million in the near term.

Most of that growth comes from a bigger cut of the Premier League's broadcast money. From the 2016-17 season, those fees jump again: in the UK alone, Sky and BT are paying more than £1.7 billion a year for the rights, 71% more than under the previous deal.

As champions, Leicester will do very well out of this. Forbes predicts that Leicester's eventual share of the broadcast money could come close to $133 million. The club's total revenue for the whole of 2015 was only $152 million.

The extra gate money that comes with the title is also worth waiting for. In 2015 Leicester announced a plan to rebuild its ground and raise capacity by nearly a third from 32,000. Once that work is finished, ticket revenue will rise again.

Winning the Premier League also puts Leicester into the Champions League. When that happens, it won't just be local English fans pouring into King Power Stadium but fans from across the European continent — more gate money still.

Advertising and sponsorship go without saying: a Premier League title means sponsorship fees rise with it, though Leicester has yet to announce any new deals.

More important, perhaps, is what the club itself is now worth. Financial Intelligence, a New York consultancy, predicts that Leicester's valuation will climb to £436 million — more than ten times what Vichai paid, which means that on paper at least he has already roughly trebled his money. The deal could hardly look better.

Investing in a football club isn't a one-off purchase

The comparisons above may leave the impression that all an investor has to do is throw money at the club. But buying a football club is a long job. Long here doesn't only mean a slow payback; it also means you have to keep the money coming after the purchase.

In August 2010, Vichai bought Leicester City for £39 million — probably only a small part of everything he has put into the club.

By one estimate, between 2010 and 2015 Vichai spent more than £70 million on new players; even after the money that came back from selling players, his net outlay was still over £60 million.

On top of that, Vichai bought Leicester's home ground for £17 million and renamed it King Power Stadium, adding a substantial stream of matchday and venue income. He also cleared £130 million of the club's debt through a debt-for-equity swap, sparing it the interest it had been paying every year.

All of this spending was necessary. Money on players makes the club stronger on the pitch — after all, it is the players who play the football, not Vichai and his Asia Football Investments consortium.

Buying the ground was meant to put the club on firmer financial ground. It ended the rent Leicester paid for the stadium and its training facilities, and it opened a new source of income, since the advertising the ground itself sells is worth a good deal.

Clearing the debt spared Leicester a large interest bill every year and eased the pressure on its finances.

These investments mattered to Leicester. They did not make the team stronger directly, but they gave the club room to move in the transfer market.

Leicester used to have to tread carefully there, balancing what it spent on players against what it earned selling them so the club would not go under. Its annual spending on new players stayed low as a result, around £1 million to £2 million.

Now, with Vichai's money behind it, Leicester can loosen its grip a little. Since the 2010-11 season its net spending on players has climbed steadily, from £2.8 million when Vichai took over to £29.1 million last season.

Running a club well also takes people who know football

Money is only a foundation. Without good players, all the money in the world is wasted, so getting a return out of a small or mid-sized club also means the people running it must know how to make the team better. Here Leicester City has been lucky to have Steve Walsh.

Steve Walsh, now Leicester's head of recruitment, spent 16 years as a scout at Chelsea, where he became known for a ruthless eye and a gift for spotting good players. Didier Drogba, the famous “Beast,” and Michael Essien both arrived at Chelsea after Walsh found them.

The most valuable player Walsh brought to Leicester is the Algerian Riyad Mahrez. In January 2014 Mahrez joined from Le Havre, of France's second division, for £350,000. Across the 2015-16 season he scored 17 goals and made 10 assists. After being named the season's best player in the Premier League, his value on Transfermarkt rose to 20 million euros.

The other thing worth mentioning is the technology Leicester leans on to find players. The Wyscout platform is built by an Italian football data company of the same name. It has a 200-person technical analysis team that watches more than 1,300 matches a week in over 80 countries and runs the numbers on thousands of players. That data ends up as a key basis for the clubs' choices. Walsh found Mahrez on Wyscout.

Besides the scouts looking outward, Leicester's own academy keeps supplying the team with promising youngsters. Over its history it has produced Peter Shilton, one of the greatest goalkeepers England has had, and Gary Lineker, the outstanding forward.

It is still supplying fresh blood. Andy King, Leicester's 28-year-old midfielder, joined the academy at 16 and ended up as the heart of the midfield. Jeffrey Schlupp, Joe Dodoo, Ben Chilwell, and Hamza Choudhury are all promising players the academy has raised too.

It was with these players' help that Leicester City finally won the title.

When investing in small and mid-sized clubs, what matters most is still the “people” inside them

Vichai's investment gave Leicester financial security; the club's own scouting network and academy delivered the success. Leicester's case suggests that “money + people” may be the real formula for investing successfully in a small or mid-sized club.

The “people” here are not only scouts and young players. Fans matter enormously as well. Leicester Fosse, the club's forerunner, was formally founded in 1884, which gives Leicester more than 130 years of history. It spent most of that time in England's second and third tiers, but it built a deep base of supporters — by July 2004, still playing in the Championship, Leicester already had a 32,000-seat home ground. The average attendance in the Chinese Super League in 2015 was only about 20,000.

Look at other reasonably well-run small and mid-sized European clubs and you find the same “money + people” model. The example that has to be mentioned here is Udinese, of Serie A.

Founded in 1896, Udinese has spent recent years in mid-table and has flirted with relegation more than once. Yet it is the best-run club in the league commercially. Gabriele Marcotti wrote in the Wall Street Journal in April 2015: “Between 2009 and 2014, the other clubs lost around $111 million. Udinese, over the same period, made $26 million.”

In 2008 the Pozzo family, who own Udinese, sold Freud, the power-tool brand they had been running, to Bosch, and threw the whole 100 million euros they made into the club, using it to build a formidable scouting operation.

That operation costs more than 10 million euros a year to run. Working with a large number of South American clubs, they pick out young players with limitless potential who have yet to make a name. Those players spend a few years sharpening up at Udinese and are then sold on to bigger clubs at a high price.

Trading players this way has become Udinese's way of making money. According to public data, transfer fees for Udinese players sold for more than 5 million euros each have added up to 343 million euros over the past decade.

The Pozzo family has used the model to expand fast, going on to buy Granada in La Liga, Watford in the Premier League, CSKA Sofia in Bulgaria, and more — taking their player-trading business across Europe.

In short, the successful small and mid-sized clubs all have their own eye for unearthing young players. Once the money is there, they build a formidable scouting operation, and then either keep the players to make the team stronger and get better results, or trade young players for profit. Either way, the small clubs they run find space to live among the giants.

What Leicester City and Udinese can teach Chinese investors

In sport, commercial gain comes from results, and results come from the players. So for any company hoping to make money in football, the thing to invest in isn't the club — it's the players, or the system that finds them.

Vichai, the Thai investor behind Leicester City, used Steve Walsh's experience and the Wyscout platform to build a champion. The Pozzo family relies on a scouting operation costing tens of millions of euros a year, turning its clubs into an exchange for players. These are the ways they make money in football, and the reason the small and mid-sized clubs they run are thriving.

From that angle, neither Inter Milan nor AC Milan is an ideal thing to buy. Inter posted an operating loss of 30 million euros in 2015; Milan lost 94 million euros in 2014. On the accounts alone, both are distressed assets.

That is a warning for Chinese investors. You cannot judge a football club by its reputation alone; sometimes a well-run small or mid-sized club is worth more.

Chinese companies may not have grasped this yet. In the Chinese Super League, transfer records keep being broken, a measure of how wild the market has become. Judged by this season's results alone, that money may not have been well spent. In the AFC Champions League, Guangzhou Evergrande are already out, and whether Jiangsu Suning can get through is still in doubt.

They would do better to learn from Vichai and the Pozzos. Between them they have put no more than about £100 million and 100 million euros into football over the years, and taken out very rich returns.

In the end, football is a business about people.