Real Madrid and the dangers of mixing fans and finance

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Florentino Pérez’s re-election on Sunday as president of football club Real Madrid revives what sounds like one of the world’s least enticing investment opportunities.

Pérez aims to sell 5 per cent of the world’s richest club, through a new subsidiary, subject to a referendum of its 100,000 or so owner-members, or socios. His defeated challenger Enrique Riquelme had attacked that plan as a “privatisation”, as though Real Madrid is a public good as vital as, say, fresh water. But Pérez explained to the FT last week that the investment would be more like a sponsorship: “In other words, there are people who associate themselves with Real Madrid without expecting anything.”

The 79-year-old, who first took the presidency in 2000 when the club was under financial strain, is a shrewd interpreter of what supporters want. Steven Mandis, an adviser to football governing body Fifa and author of two books on Real Madrid, says he has “never seen a management team so relentlessly focused” on fan satisfaction.

But at a time when Real Madrid is suffering a rare trophy drought, Pérez is playing a dangerous game at the place where emotion and cold investment calculation overlap.

This can be lucrative. Elon Musk has made a considerable fortune from exploiting the overlap and stands to make more if his SpaceX float is successful. People familiar with the plans say the entrepreneur wants to reserve up to a quarter of the IPO shares for retail investors. His hope must be that fans will help lift SpaceX stocks just as car owner-investors fuelled the share price performance of Tesla.

At Real Madrid, the injection of outside investment could underpin Pérez’s claim that the club is worth $10bn, a figure he says could double under his renewed presidency. That would demonstrate to loyal socios that by backing expensive expansion plans, including the redevelopment of the club’s Bernabéu stadium, they have enhanced their club’s value.

Fandom is a boon for organisations that can tap it successfully. One study in the International Journal of Sport Finance looked at German football club MSV Duisburg’s issue of unlisted “fan bonds”. The researchers found supporters accepted lower coupons on their bonds than the risk would normally justify. They were also slightly more likely to invest if they thought the business outlook was poor. “The greater the number of passionate fans among all fans, the higher the probability” of raising capital from them, they concluded. When passion turns to anger or resentment, however, things can go badly wrong. 

SpaceX’s prospectus already warns that “high retail investor interest” could trigger volatile trading. Febrile discussion on Reddit investor message boards shows a clear divide between traders afraid of missing out on the IPO opportunity and others warning they could become “bagholders” — jargon for dupes left with deep losses.

Confusion between fan and investor priorities can be costly, as the experience of British craft brewer BrewDog showed. It encouraged customers to become owners — dubbed “equity punks” — when it raised more than £75mn through crowdfunding, starting in 2009. But the punks’ stakes were wiped out earlier this year after the company lost its way and was sold. 

Fan-investors’ devotion to visionary leaders can also sour. Musk’s image took a hit among many Tesla fans when he went all-in behind Donald Trump’s polarising policies for the US. Finally, sports clubs’ financial success will never assuage fans’ irritation if the team fails consistently on the field.

A few models mark a clear division between fandom and financial returns. American football boasts the Green Bay Packers, a publicly held non-profit organisation with supporters that call themselves Cheeseheads. It offers “stock” that cannot be traded, pays no dividend, and provides no possibility of capital appreciation. Mandis bought one share, a “gift” to the Packers, even though he is a fan of arch-rivals the Chicago Bears: “I personally just love the idea of fan-owned clubs, as opposed to billionaire-owned clubs.”

Credit to Pérez for declaring upfront that billionaire would-be “owners” will receive only “the satisfaction of having a relationship” with Real Madrid. But if I were a socio, I would be afraid that seasoned investors might see their symbolic stake as just the first step in a longer-term plan. After all, most billionaires got to where they are today by being able to bury their emotions in favour of making a return.

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