When French football club Lille sold winger Nicolas Pépé to Arsenal for €80m last year, it was not just the fans who watched the transfer with interest.
The sale, or rather the profit that Lille reaped from it, help to explain a complex debt arrangement worth €140m between club owner and president Gerard Lopez and Elliott Management, the $38.2bn activist hedge fund founded by US billionaire Paul Singer.
The deal extends Elliott’s foray into football after it took control of Italy’s AC Milan last year, and marks the latest example of how the world’s largest investment groups are seeking to cash in on the world’s favourite sport.
Elliott declined to comment, but Mr Lopez insists its motivations with Lille are different than at AC Milan, saying that the loan deal is a show of faith in the French side’s business model in player trading.
“[Elliott] funded AC Milan to be bought [by another party at a later stage],” said Mr Lopez. “They didn’t fund this club to be bought. They funded this club to start a process of investing in players, creating value, selling some of the players, keeping others to grow the club.”
In recent years, high-profile backers have invested in top French clubs. State-backed Qatar Sports Investments owns Paris Saint-Germain. Ineos, the chemicals conglomerate controlled by British billionaire Sir Jim Ratcliffe, acquired Nice in August. US private equity firm General American Capital Partners bought Girondins de Bordeaux in 2018.
Mr Lopez, co-founder of European venture capital group Mangrove Capital Partners, became majority owner of Lille in an €80m deal in 2017. Marc Ingla, formerly a top executive at FC Barcelona and Lille’s chief executive, also owns about 20 per cent.
Mr Lopez, who was previously owner of the Lotus Formula One team, says a combination of factors explains investor interest in French football.
One is that club valuations are lower than those in more prominent leagues, such as in England and Spain. But just like in those countries, the top four teams in Ligue 1, France’s top tier, gain entry each season to the Champions League, in which clubs share more than €2bn prize money.
According to the latest available figures from the consultancy Deloitte, Lille made revenues of €53.9m over the 2017/18 season, roughly half of which came from its share of French domestic broadcasting contracts.
Revenues are expected to be far higher this season, as it played in the Champions League before being knocked out in December. The team lies fourth in Ligue 1, harbouring realistic hopes of returning to Europe’s most lucrative and prestigious tournament next season.
Another factor is that France, current world champions, has a record of producing some of the world’s best players. Meanwhile, Lille is seen as having one of the best youth programmes in French football, having previously developed the likes of Eden Hazard, Benjamin Pavard and Divock Origi — all of whom have gone on to play for some of Europe’s biggest clubs.
Strong performances have been achieved by consistently promoting players from its youth academy to its first team to replace departing stars. “Without sporting success, it would be impossible to do what we do,” said Mr Lopez.
Under Mr Lopez’s ownership, Lille has faced financial difficulties. In the 2017/18 season, the latest for which figures are available from the Ligue de Football Professionnel, the sport’s governing body, it posted an operating loss of €103m. The majority of this was related to “exceptional” costs, however, such as writing off 18 player contracts in a move designed to slash the club’s wage bill.
In December 2017, French football authorities banned Lille from acquiring players during the winter transfer window over a dispute regarding its financial reporting. In a related sanction, Mr Ingla was last year fined and handed a three-month suspended sentence from footballing activities, for allegedly providing false information relating to the legal and financial situation of the club.
In an effort to shore up Lille’s finances, Mr Lopez raised €140m from Elliott in 2018 through a loan with an interest rate in the “low double digits” that is to be repaid by August 2021.
The deal has prompted accusations that Elliott is lying in wait to take control of the club if the loan is not repaid.
At AC Milan, the hedge fund took control of the club after its Chinese owner Li Yonghong failed to repay €300m in high-interest loans.
Yet Mr Lopez insists the circumstances are vastly different at Lille. He said a new company structure means that he is personally liable for the loan rather than the club itself, which has had its debts cleared. Elliott is also not the senior lender, with a loan of an undisclosed amount from investment bank JPMorgan having priority over the hedge fund. Mr Lopez said €80m had been repaid to Elliott and JPMorgan so far.
And unlike Mr Li, who did not refinance the debt or sell AC Milan despite receiving offers, Mr Lopez said he would take these steps before defaulting on loan payments and losing the value of his equity at Lille.
People briefed on Elliott’s thinking also said it would be difficult for it to own two clubs with Champions League ambitions, due to regulations covering ownership of multiple clubs that feature in the same competition.
Instead, Mr Lopez insisted Elliott had bought into Lille’s player-trading model, saying the club had made a net transfer profit — sales minus acquisitions — of almost €200m over the past two years.
He added that costs, such as player salaries, meant that Lille must make net transfer profit of at least €30m each year just to break even, if it does not qualify for European competition.
The reliance on player sales contrasts with many top clubs in other leagues, particularly in England, Germany and Spain, where income is bolstered by bigger broadcasting rights and sponsorship deals.
Mr Lopez admits that to free himself of the Elliott debt, the club must continue to perform on the pitch, while still selling its best players each season.
It is a model he insists can succeed. “For me to tell you that we’re the best club in the world in trading players would probably not be too far off the truth,” said Mr Lopez. “If not the best, we’re probably in the top three, four or five clubs.”