It was October 2018 and Paolo Maldini found himself locked in a debate about money with Gordon Singer. The former captain of AC Milan and Italy wanted the head of the London office of Elliott Management, the $38.2bn hedge fund founded by his US billionaire father Paul, to open his cheque book.
Earlier that year, in an audacious move that even Elliott executives consider its most high-profile venture since fighting the government of Argentina over its sovereign debts, the hedge fund gained control over the seven-time European club football champions.
At Milanello, the Italian team’s country retreat-cum-training ground, Singer junior was being asked to sanction a minor transaction by Elliott’s standards: a €35m fee to acquire Brazilian forward Lucas Paquetá. But the deal broke the tight transfer budget its executives imposed on a club in dire financial trouble. Mr Maldini was among the team officials arguing it was worth gambling on a player that could change AC Milan’s fortunes.
Mr Singer relented: “Let’s do it.”
“That was something that gave us a lot of energy,” says Mr Maldini, recalling the scene. “We saw the passion also to have something nicer and more attractive and, in the end, more successful for the business.”
The discussion between the footballing legend and the London financier illustrates one of the most fascinating questions in both the sports industry and the Italian business world — can the world’s most-feared hedge fund find a formula to crack the volatile football industry?
Sensitive to the charge their ownership is a vanity project, Elliott executives say their plan for the Rossoneri — the Red and Blacks — has a clear profit motive: win matches on the pitch, raise revenues off it, all to raise the club’s value and sell for a healthy return. So far that has been easier said, than done.
This account of Elliott’s plans for AC Milan is taken from more than a dozen interviews including with executives at the two organisations plus bankers, agents, analysts and rival club officials.
Elliott’s task is to revive a fallen giant. AC Milan last won Serie A, Italy’s top league, in 2011. It has failed to qualify for the Champions League, Europe’s most lucrative club competition, for the past five seasons. Over the past decade, its annual revenues have stagnated at around €200m, according to the consultancy Deloitte. Those at Real Madrid, the world’s highest-earning club, have almost doubled to around €750m over the same period. In its heyday, AC Milan employed greats such as Marco van Basten and Kaká. Today, it is forced to settle for more unheralded talents like Paquetá.
The stakes are equally high for Elliott. Failure at AC Milan would be a reputational blow, particularly in Italy, where the hedge fund is active in battles over the future of Telecom Italia and CNH Industrial, the tractor and truckmaker controlled by the Agnelli family, which also owns rival club Juventus.
“I think it’s going to be really hard to turn Milan round and sell it for $1bn,” says one club executive who declines to be named. “I keep thinking there must be a more obvious play here that I’m not seeing. It could be as simple as Paul Singer’s son wanted to get involved in football and they have so much money that they could just do that.”
That view is rejected by figures close to Elliott’s leadership, who point to the fund’s healthy returns to investors over many years as evidence that it does not succumb to distractions. Largely unnoticed, Elliott has also funded a complex debt deal with the owner of French club Lille, deepening its presence in the world’s favourite sport.
Yet, much depends on how the Italian team performs on the pitch. After losing four of its opening six league fixtures the club sat 16th before victory over Genoa on Saturday moved it up the table. Last Sunday, fans watching the team beaten 3-1 by Fiorentina started chanting: “This ownership doesn’t deserve us”.
“We all saw that last year, 14 of the 16 teams that qualified for the second round of the Champions League had the highest revenues [in world football],” says Mr Maldini. “We’re not magicians. We know that.”
In April 2017, Li Yonghong, an unknown Chinese businessman, catapulted himself to global attention by acquiring AC Milan for €740m from Silvio Berlusconi, the Italian media mogul and three-times prime minister who had owned the club for two decades. The takeover was funded by high-interest loans worth more than €300m from Elliott.
According to people familiar with the talks, Mr Li presented a radical plan for the club based on exploiting its large Chinese fan base. Elliott’s executives were dubious of the strategy. Further due diligence garnered limited information on the origins of Mr Li’s wealth.
Elliott calculated that either the loan, which carried annual interest of more than 11 per cent, would be repaid or a default would give it control of the club. In July 2018, Mr Li did the latter, losing around €500m in equity overnight. Elliott and AC Milan executives say they have had no further contact with the Chinese businessman. He could not be reached for comment.
Though Elliott injected a further €50m in emergency financing to shore up the club’s balance sheet, it effectively acquired AC Milan for around €400m — just over half of what the club had been valued at months earlier. Instead of “flipping” the club through a fire sale, Elliott elected to treat AC Milan as a distressed asset needing a turnround.
The first step was to hire competent managers. Elliott appointed Ivan Gazidis, who during his previous role as chief executive of Arsenal played casual football matches with Gordon Singer, as AC Milan’s new chief executive.
“It’s not an intellectually challenging business,” says Mr Gazidis. “It’s emotionally challenging . . . Fundamentally, we’re talking about a group of 23-year-old millionaires kicking a piece of leather into a basket . . . Millions of people around the world invest their self-esteem in their ability to do that well.”
Under Mr Gazidis, the club has initiated approaches to hundreds of brands in the search for new global sponsors. In the 2017-18 season, the club made €70.2m in endorsement agreements, compared to €143m at Juventus, Italy’s highest-earning club, and €356.2m at Real Madrid.
This counts as new thinking at a club which previously had no dedicated sponsorship salespeople. “It is probably too much to call it Stone Age but [AC Milan’s] commercial team was definitely 10 years behind the Premier League and probably two, three years behind the top clubs in Italy,” says Casper Stylsvig, the club’s new chief revenue officer, and a former global sponsorship director at Manchester United.
Structural challenges remain. Last season, Serie A teams shared €1.2bn in broadcasting revenues, €2bn less than clubs in the English Premier League. Instead, Elliott is banking on raising the value of the club by transforming Milan’s skyline.
In September, AC Milan played its city rival Inter at San Siro, the 93-year-old stadium shared by the two clubs. An hour before the match, AC Milan’s new chairman Paolo Scaroni greeted Matteo Salvini, head of the rightwing League party and a man with ambitions to become Italy’s next prime minister.
Mr Scaroni, who has run Italian energy groups Eni and Enel, is known as one of the country’s best-connected businessmen. He says Elliott hired him for tasks considered uniquely “Italian”. Lobbying Mr Salvini, a diehard AC Milan supporter wearing his faded red and black jersey, over plans to build a new stadium, was one such moment.
AC Milan and Inter, owned by China’s Suning retail conglomerate, are proposing to fund the €1.2bn construction costs. The new ground would be built by 2023, next to the current site, which is owned by the local municipality and faces demolition. In return, the two clubs would have a 90-year lease on the land and retain all match day revenues. The clubs estimate annual income from a new stadium would more than double from €40m today to over €100m, closer to Barcelona which earns almost €145m from match day revenues.
The San Siro decision is political, needing approval by Milan’s mayor, who will make a decision in October, and will be influenced by public opinion, hence the lobbying of key figures such as Mr Salvini. The Milan clubs have threatened to build a stadium elsewhere if they cannot stay at the current site.
“When you have a team like Milan, you have to climb two mountains at the same time,” says Mr Scaroni, who is also deputy chairman of investment bank Rothschild. “One mountain is the economic results . . . but the other mountain is the sport results, and [they] are very much connected. If you lose all the games, your sponsorship [income] goes down, the stadium is empty and you don’t have the money to buy players.”
Elliott also needs more immediate improvements. “We want to win on the pitch,” says Franck Tuil, a senior portfolio manager. “We want the football to be attractive to our fans. We want the football results to improve in order to move toward participation in the biggest club competition, which today is the Champions League.”
Top European teams are reliant on income from the Champions League. Around €2bn was shared between participating clubs last season. But to regularly qualify, AC Milan must overcome intense domestic competition from the likes of Juventus, Inter and Roma.
To run its sporting operations, the club hired Mr Maldini as technical director and Zvonimir Boban, another former player, as chief football officer. “Our presence here is also kind of a guarantee to the fans, for the supporters that it’s not going to take 10 years to get back,” says Mr Maldini, who says anything less than a return to Europe’s top competition within three to five years would amount to total failure.
But they have also had to accept Elliott’s edict that AC Milan must avoid ageing stars and acquire young players who have higher transfer resale value.
AC Milan cannot, at the moment, outspend the opposition anyway. This season, it accepted a one-year ban from European competition in return for the authorities ending an investigation into violations of so-called financial fair play rules between 2015 and 2017.
The club also allowed expensive player contracts to run down last season shaving €20m from the wage bill and helping reduce the average age of the squad, now the youngest in Serie A.
The approach has problems. “No young team, with all young players, won the Champions League. That’s a fact,” says Mr Maldini. “Even a scudetto [Serie A title],” adds Mr Boban: “Our dream is to have results tomorrow. [Elliott] have a different path, they have a different vision . . . I think we can find a way that we’re both happy.”
Some argue that Elliott is exacerbating the tension between winning now and building for the future. A person close to club operations says Elliott had set up a “weird power struggle” by elevating familiar figures like Mr Maldini and Mr Boban, while also hiring people underneath them who advocate a modern “Moneyball” approach of using statistics to locate undervalued players.
The newcomers include Hendrik Almstadt, a former Arsenal executive with degrees from the London School of Economics and Harvard who is tasked with identifying transfers, as well as Geoffrey Moncada, the former head scout at AS Monaco.
Yet three consecutive defeats before the Genoa win, had led to doubts over the position of head coach Marco Giampaolo, who was hired only this summer. In contrast, Inter Milan spent heavily on players and sat top of the league before this weekend.
Elliott’s attempts to fuse modern thinking with the club’s historic traditions remains a work in progress.
“They’ve handed Maldini and Boban a loaded gun,” says a club insider. “If they try to fire [Maldini], he’s going to . . . say, ‘these owners don’t understand Milan’.
“If they turn it round in a couple of years, no one will care. But in terms of bad press, there’s a huge liability here . . . The risk/reward of owning a club like AC Milan for a company like Elliott seems really bizarre.”
But Mr Maldini and Mr Boban defend the new owners, arguing they saved the club from insolvency. For its part, Elliott believes the scarcity value of such a renowned club will always ensure a healthy market of potential buyers. People with knowledge of its plan suggest executives hope to raise the value of the club and seek a sale price of over €1bn.
A methodological hedge fund has become exposed to the vagaries of sporting luck. “You’ll see the fruits of this work at the end,” says Giorgio Furlani, portfolio manager at Elliott. “Whenever the end will be.”