Commentary

The genius of Jay Sugarman

Photo: PSP files

Jay Sugarman bought a Major League Soccer franchise in 2008 for a price of $30 million.

That to-be-determined team ended up becoming The Philadelphia Union, who were recently valued at $530 million earlier this summer.

That puts the Shield holders as the thirteenth most valuable franchise in Major League Soccer – and the figure is higher than the value of Ajax or Leicester City, as well as a rounding error away from the value of AS Roma.

Flabbergasted?

The reader might be, but the valuation is worth unpacking for two reasons, starting with the latter: whether or not it’s real (i.e.: the flabbergasting factor), and in either case, why (what is and how does one make money anyway)?

I would gladly pay you Tuesday for a hamburger today

The thing about money is – by itself – it’s worth less over time.

What the reader could have bought with a dollar in 2008, he or she would need $1.27 today for the same stuff – that’s inflation.

However, if the reader instead puts that dollar into something that increases in value, along with and beyond the rate of inflation, that dollar will buy at least the same amount or things as before – or a whole lot more. Options to achieve this outcome often include houses, companies, or debts.

That dollar becomes worth a lot more if it gets used to buy something other people don’t want at the time – but that becomes something really people want down the road.

Buy low, sell high, supply and demand, etc…

Jay Sugarman knows this – that’s why he invests in real estate.

It’s also why he invested in a professional sports franchise, in a city that wasn’t entirely on the radar of the league at the time (and there wasn’t a long line to get to the front of at that stage in the league’s growth). Also, consider the alternatives:

  • An investment in an inflation-tracking product would have made Jay’s dollar worth $1.27, as mentioned above
  • Putting that money into the average home in Point Breeze, a neighborhood in Philadelphia notorious for neck-breaking home price increases and IPA-fueled gentrification, would have made it worth a little more than $2.00 (between 2012 and today).
  • The good, old S&P 500? Almost exactly $4.00 since the team’s inception.

Jay Sugarman’s Philadelphia Union $1 is worth $17.67 dollars today.

That’s smart money.

Author’s note: There are myriad other factors that go into calculating Sugarman’s personal return, including the addition and subtraction of other investors, his own personal cash flow in and out of the club, expansion fees and how they were allocated, etc… 

Scarcity and the allure of conspicuous capitalism

Why do rich people buy soccer teams in the first place though?

Usually not to make more money.

In fact, there’s an entire chapter in the essential book “Soccernomics” entitled: “The worst business in the world: why soccer clubs don’t (and shouldn’t) make money.” In Europe, they do it for the same reason they buy expensive suits and “time-pieces” (not watches): they believe what they buy is an expression of who they are, and if they’re a soccer fan, owning a team becomes part of their identity.

The thing about buying soccer teams not located in the United States is this: there are a lot of them, literally tens of thousands. Even in the alleged birthplace of the game, one doesn’t have to be all that rich to get involved – Wrexham became property of the Always Sunny cast for a mere $2.7 million dollars. There are 92 professional clubs in that country, an island of only 55 million people: supply, supply, supply.

Author’s note: 92 is too many considering everyone in England is a Manchester Something fan anyway, and goes a long way in explaining why so many of these clubs play as many matches abroad as possible: to drive demand.

Because this supply is so endless, there will always be soccer teams to buy, and sometimes big and successful ones as even those are slippery footing: teams like Manchester City will face the reckoning of Financial Fair Play one day or another… maybe. More tangibly, Messi isn’t playing in Paris because he likes baguettes, he’s there because the ownership at Barcelona were so pathetically inept in managing money they had to let the most iconic player in soccer leave to keep the ship from sinking, and they’re still $1.3 billion in debt.

In a closed system like exists in the United States for all professional sports, this doesn’t happen – supply almost never outstrips demand. This restriction does the same thing to prices as scarcity in any other good: it drives them up.

Summary

Sugarman was in his box for last night’s match wearing his trademark white button down shirt.

Before that though, he and fellow co-owner Kevin Durant were cruising the Sons of Ben lot, shaking hands with their customers.

Even men of millions can still be men of the people.

25 Comments

  1. There is no doubt Sugarman made a great investment in buying the team. Maybe someone smarter than me could write an article about him getting a stadium/land for next to nothing or the team practicing in a public park for the first several years. Or maybe the lack of development around the stadium which is strange considering he’s the founder of a real estate company.

    .

    Sugarman’s a wealth guy and clearly pretty intelligent too.
    However, he’s like most wealthy people in this country… born wealthy and propped up by a political and economic system to guarantee he stays that way. I love the Union and enjoy the great content on here, but Sugarman’s nothing special. Just another rich guy at the right place at the right time.

    • el Pachyderm says:

      …. Lopezz. that’s a fizzy truth bomb you laid out there. LOVE IT.

    • Chris Gibbons says:

      We’ve done a few pieces on the Chester partnership, land investments and improvements, impact of the financial crisis, issues with and updates to the progress around the stadium, and the Opportunity Zone opening that was created by a tax change several years ago.

  2. You forgot to add that just spending money doesn’t mean success is a guarantee. Nor does buying every high priced player equal trophies. Some people don’t seem to grasp this.

  3. It’s almost like you have a background in finance

  4. John P. O'Donnell says:

    Stefan Szymanski Co-author of the book who told me on Twitter that MLS will fold without expansion fees and no pro/rel. He was a huge backer of the NASL and the Cosmos getting into MLS with promotion instead of NYCFC paying a record expansion fee. Then years later when Deloitte released their report for pro/rel.
    .
    Mark Abbott made a statement about the report that has been proven in my minds eyes to be true years later.
    .
    “With respect to the substance, the report ignores the really fundamental aspect of what is required to continue to grow professional soccer in the United States and that is the investment of hundreds of millions, if not billions, of dollars, in a wide range of programmes, infrastructure and initiatives, including player development, soccer-specific stadiums, marketing, the creation of high-quality broadcast and digital content to name just a few.
    .
    Jay brought into that vision and over a decade later is finally being proven it was the right move.

    • I have to guess that much of that $530 mil valuation comes from expansion fees – Charlotte apparently paid a $325 million fee to join. If accurate, that is stunning. But MLS cannot rely on expansion forever. Can it? I can see why MLS does not want pro/rel, at least now. First, who wants to be relegated after investing upwards of $300m. Second, why allow a team to be promoted when you can get someone to pay the league that sum?

  5. el Pachyderm says:

    I appreciate the article and enjoyed reading. It is a touchy subject for me in this place- which in year’s past (but not so much anymore because I let the sleeping dog lie) has brought some tremendous debates on the PSP pages.
    .
    My rebuttal, which is alluded to in your piece…but I intend on pounding home is….The supply of soccer clubs could be endless in America too but policy forces artificial scarcity which then hyper inflates the actual valuation of these MLS clubs —-all while sucking the life out of so many lower level clubs in lower level leagues with no real upward mobility that they ultimately just go away altogether.
    .
    The amount of folded US soccer clubs in the last 25 years is astronomical compared to folded clubs in any one of those footy countries– let alone all of them combined.
    ,
    There is a reason Wrexham sold for $2.7 million… and sits where is sits in Welsh soccer. I also happen to know in 3-5 years that club could be and will likely be back up in the Championship and worth $175,000,000 while promoting its way to the top and not being ‘told’ it’s value.

    • Jeremy Lane says:

      First, I will never defend rich people for being rich. We should be eating them.

      Second, I have no desire to debate the merits of pro/rel here. It obviously works in lots of places.

      However, I don’t think it’s ever been proven that it can work here. Especially since MLS is the first league to find sustainable success. Pro/rel grew organically out of a culture that was already in place. The potential costs of implementing it here have been gone over many times.

      One of the arguments people make in favor of pro/rel is that it is more democratic. Any club has a chance to move up. But that strikes me a bit like the lottery being democratic. Wrexham, if it moves up to the championship and increases its value, will only do so due to the large investments made by wealthy owners. Is that better than the wealthy owners paying an expansion fee? It’s probably cheaper for them, but what do fans care about how much money owners pay, whether it’s a lot or a whole hell of a lot?

      I’m intrigued by USL and the other lower division leagues implementing some version of pro/rel because it’s interesting and will test the theory of whether it can sustain professional soccer in America. But I also think grassroots/lower league soccer is doing just fine, all things considered, and that getting small clubs into the top echelon shouldn’t necessarily be the goal. Is the possibility of moving up leagues really the only thing that a club has to motivate its existence?

      The goal is growing the game here, and getting rid of pay-to-play strikes me as much more beneficial than pro/rel. Which, thankfully, is one of the reasons the Union Academy is doing good things; it’s free.

      Oh yeah, the other reason to have a soccer club in your town is because it brings joy to you and your community, and it doesn’t need to even be professional to do that, let alone in MLS or trying to get there.

      • el Pachyderm says:

        oh man, rubs hands together, smiles and begins by acknowledging the points you have made as valuable – then sets about arguing.
        .
        stops… and decides to address just two of the points.
        .
        At what time was pro-rel ever given the opportunity to be determined if it could work? The answer is never- which buttresses the entire scaffolding of why soccer in this country remains a ‘niche’ sport… and I could argue ad nauseum about how there was an inflection point in our country which hitched to oblong football over football but that is for another day. I’ll tell you it starts with CONTROL and ends with CONTROL.
        .
        Anyway, back to the original point, there are roughly 30 teams in MLS. 30 teams in USL Championship. 84 teams spread across USL 2. then NISA. then NPSL. then then then. and that’s not counting the untold number of clubs that have folded over the years.
        .
        infrastructure isn’t the problem. speaking of which, i do find it straange so many American investors and ‘investment vehicles’ with American $ have leveraged so many of the clubs in and around europe. Clearly there is interest and plenty of money to invest in a product that is not hyper inflated like the current single entity ponzi scheme propped up with catastrophic entry fees and totally arbitrary rules to gain entry.
        .
        Next, grassroots soccer in our country is not strong. It is an absolute quagmire…the top of the pyramid is humming along, as intended and deigned…. the bottom of the pyramid is not at all. P2P is not actually the problem… it’s only a symptom… and on and on and on and on but that argument would take about 2,000 more words.
        .
        Anyway… that’s why I let the sleeping dog lie, then Chris had to go and spend good time and energy writing a lovely piece about, The genius of Jay Sugarman… and well…. Lopez spoke beautifully to that… and I had to kick the dog becasue he’s been farting gain and I can’t stand the smell of egg, meat bone, and rawhide.
        .
        Appreciate the time and your energy to respond Jeremy. Catch ya later.

      • I offer this not in any disagreement, Jeremy, nor to debate the merits of pro/rel. I’d prefer pro/rel for added intrigue and opportunity, but I’m not religious about it.

        One has to wonder what the value of all the non-MLS clubs might be if the pyramid were opened. If any club, anywhere in the country could punch its ticket to the top division, it theoretically would attract investment in all these lower clubs. The counter, of course, is that threat of relegation would strike fear into the folks who are willing to cough up hundreds of millions to join MLS. If that’s the case, then MLS team values truly are predicated on a monopoly.

        I don’t know if any of this is knowable (shades of Donny Rumsfeld here), but it is very interesting. I think MLS has done a lot of good to invest in the game, but part of me wonders if there aren’t enormous opportunities being lost.

      • Jeremy Lane says:

        All in good fun, el P. I’m not wedded to the current system. I’m also no soccer historian, so I’m sure there was a point when soccer could have become more dominant. And I’m sure the current MLS owners have their fingers on the scale to maintain the status quo.

        My view boils down to two points, really:

        (1) I’m skeptical that there is really a base of demand for many, many more clubs, given the American sports landscape and the number of options sports fans have for their time, attention, and money. Not to mention I’m not convinced there is enough financial return for investors here in the US without the closed league.

        And (2), it may be the case that pro/rel would spur all the good things you think it would, but is there a way to transition there that doesn’t destroy what we already have in MLS, which, for all its warts, is the best, most sustainable soccer league the US has ever had?

  6. While there are 92 teams in the top 4 tiers of English soccer, there are more than 92 overall. Wrexham plays in the 5th tier – the Conference, a notch below the League tiers. Also, Wales is a country apart from England. Both are part of the United Kingdom. And unlike Scotland (also a separate country, and part of the U.K.) some Welsh teams play in English football leagues, as opposed to Wales’s own league.

    Sorry for being pedantic… the history major in me comes out once in a while.

  7. Isn’t it inaccurate to talk about how much the club has increased in value without discussing how much money Sugarman has invested in the club along the way? That’s like saying your house has doubled in value without making account of your property taxes, repairs, maintenance, etc.

    • Chris Gibbons says:

      Absolutely. The cash flow piece is crucial, but not public. We know some folks have cashed out and others have bought in, but know little else than that narrative.

    • Old Soccer Coach says:

      The Philadelphia Union’s Academy is “free” because the organization, in effect, “subsidizes” the tuition to make it so.
      .
      The organization is committed to the long haul with the academy, but ultimately has the goal of the Academy becoming self-sustaining.
      .
      The schoolhouse and the soccer pitch dimensions both cost a great deal of money. The organization is providing that money.

  8. Isn’t it inaccurate to talk about how much the club has increased in value without discussing how much money Sugarman has invested in the club along the way? That’s like saying your house has doubled in value without making account of your property taxes, repairs, maintenance, etc.

    Also, the hiring of Pyotr Nowak as the first coach, and whatshisname as the first GM, pretty well shoots the whole “genius” theory out of the water IMHO.

  9. Who gives a shit about any of this is why…?

  10. Ryan Dressel says:

    This is a soccer page. The article looks at the business side of soccer.

  11. Evildunk99 says:

    I think soccer-specific-stadiums was the biggest turning point for MLS. When that trend materialized, it allowed for a unique fan experience which has fueled growth and valuations to-date.

    The next phase will be TV deals and raising MLS salaries. Based on the recent CBA that was just signed, I think both will happen right after the 2026 world cup.

    Re: the pro/rel vs. closed system debate, I think both can work but if the recipe for success is working the way MLS drew it up, then let’s stick with it. If it means having a closed system with 60 clubs and no pro/rel, so be it!

    • 60 clubs with no promotion or relegation? The product will be sh!t.

      I see the benefits and drawbacks of both pro/rel and the closed system. But the league cannot rely on entry fees of $325mil indefinitely. There is no way MLS can continue growth solely based on entry fees. It needs to grow organically as well.

      • I think we’re beyond “Expansion Fees are the only reason the league works” Phase aren’t we?
        .
        $500mil doesn’t even cover the league’s roster cost for a year anymore.
        .
        Expansion Fees also covered the league for an era where we weren’t getting as much tv revenue. This next tv contract should be fairly substantive.
        .
        Good article, btw!

  12. Great read Chris! It’s a very interesting thing to hear praise on ownership. Most people in the tri-state area don’t have a nice thing to say about ownership. It’s great to think of the U as a team that has increased its value so handsomely! And all the points made above are valid and could make for pages of great debate! ( ok…mostly pro/rel). I have always enjoyed the debates here and even join in when I think I have a valid point to make. I don’t know the timeline of when American rules Football and Real Football would have seen one outshine the other but it’s clear the closed system became the dominant force for all sports in America. And as our big gray lumbering word Smith points out…its all about control!

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