At the beginning of 2023, Marcio Carlomagno was all concerned about the debts of his favorite team. An executive at São Paulo Futebol Clube, he was given the task of renegotiating the obligations that Tricolor had with several banks, such as Bradesco, Daycoval, Rendimento and Tricury, from the team’s president, Julio Casares. With bank loans alone, financial liabilities were around R$240 million.
And the solution came from Faria Lima. Instead of sitting down with the banks, or considering a SAF, the club took a more sophisticated, and less orthodox, path: it set up an investment fund.
São Paulo was in a hurry.
Two-thirds of the debt would mature within 12 months. The remaining third needed to be paid within 18 months. In addition to being short, the debt was expensive. “The average was CDI + 9%, CDI + 10%. We ended up getting CDI operation + 11%”, said Carlomagno to InvestNews. The loans served different purposes, some very typical of football teams, such as buying athletes. “But this was causing us to struggle financially”, he acknowledges.
The first plans for the financial restructuring of the Morumbi team involved frustrated attempts to renegotiate with creditors – “first we knocked on the doors of the banks that, theoretically, are our partners” –, which even included an attempt to syndicate the debts. It didn’t come to anything. In addition to conversations with banks, São Paulo had sought family offices and investment funds.
The situation only progressed after months of conversations with the Outfield manager, specialized in business in the sporting world. The company has experience in operations involving Football Societies (SAFs), but São Paulo did not want to sell part of its assets to an investor, as other teams in financial difficulties have done in recent years – Cruzeiro, Botafogo and Vasco, to stay in the most known.
“We designed a series of formats and approached Galapagos Capital, (another company in the financial market) with whom we have a partnership in credit vehicles”, says Pedro Oliveira, founding partner of Outfield. Together, the two companies set up a Credit Rights Investment Fund (FIDC) of unprecedented proportions in Brazilian football.
The FIDC works as a kind of condominium of investors who lend money to one or more beneficiaries – in this case, just São Paulo – and keep shares. This loan is guaranteed by receivables, which include broadcasting rights, sponsorships, contributions from SPFC members, naming rights and even revenue from the sale of players.
With this structure, São Paulo is raising R$240 million to eliminate bank debt. In practice, it is exchanging a short and expensive debt for a cheaper and longer one, which should free up budget for other areas of the club. Remember that CDI+11%? The FIDC rate should be at CDI+5%, a much lower cost thanks to the reduced risk of receivables.
What’s new?
FIDCs and Brazilian football have already crossed paths at other times, but the circumstances were very different.
“Paulo Nobre even used a FIDC to restore Palmeiras’ debt, but he used his own capital, he was almost a patron. São Paulo itself had already had the experience of a FIDC, but it was only transferring receivables to advance resources, it did not have a debt restructuring bias”, recalls Andrea Di Sarno, partner and manager at Galapagos Capital.
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Andrea refers to the loans granted by the then president of Palmeiras to the Barra Funda club between 2014 and 2016, which were later absorbed into a FIDC of R$100 million – with Paulo Nobre himself as the sole investor. The “patronage” was evident by the absence of a premium in the rate of return, limited to the CDI.
In 2019, São Paulo raised R$40 million with a FIDC constituted by Ouro Preto Investimentos. In addition to the much lower value than the current fund, the big difference is the absence of financial and governance obligations – the covenants. Keep that word, it is important to understand this story and you will see more details later.
“The great turning point Here, São Paulo saw the FIDC as an instrument to assist the club in financial restoration. There is nothing similar in football” argues Di Sarno.
Galapagos and Outfield searched their clients’ pockets for the money that feeds the fund tailored for the moment and for São Paulo’s plans. To convince the owners of the money, the managers made technical adjustments to the FIDC’s design that reveal its originality – and also how football businesses are viewed with caution by investors.
São Paulo retained the subordinated shares, which represent 40% of the FIDC. This is an exceptionally high percentage for this type of financial product. In practice, they function as a protective cushion for investors who hold senior shares – those who actually put money into the fund.
In the event of financial problems at the FIDC, subordinated shares absorb losses first, protecting investors’ capital. The loss, then, would be concentrated in the club.
Tidying up the house
Os covenants – remember the little word? – these are restrictive clauses negotiated between the managers that created the FIDC and São Paulo, the sole beneficiary of this specific fund.
Due to the FIDC, São Paulo will be subject, from 2025, to the following rules:
- Football spending limit: São Paulo will have a limit of R$350 million per year for spending on professional football, including player salaries, coaching staff, and other related costs. In the last three years, São Paulo spent more than R$350 million on football.
- Limit on administrative expenses: The club’s administrative expenses will also be limited by a pre-established ceiling.
- Financial surplus: São Paulo is obliged to generate a financial surplus in all fiscal years until the deadline for the fund’s shares. This means that the club will not be able to spend more than it earns, ensuring long-term financial sustainability.
- Debt limit: The FIDC also imposes a limit on the club’s debt, preventing it from taking on new debt beyond a certain level.
From the point of view of those who invest in the FIDC – that is, those who “lend” to São Paulo –, the operation is less risky due to the fact that São Paulo is willing to comply with fiscal and governance rules which, if not respected, result in creditors have the right to redeem the amounts invested. This would greatly weaken the club’s finances, in addition to affecting São Paulo’s credibility with banks and possible creditors.
Just in case, it’s best to follow all the rules, right?
The big turnaround
With the third largest fan base in the country, São Paulo is one of the few teams in Brazil capable of betting on a product like FIDC to catalyze an economic change that puts it on the same level as teams like Palmeiras and Flamengo, currently well ahead of ahead of other clubs when it comes to financial capacity – and accounts up to date.
In other words, a FIDC is for those who can, not for those who want.
Because it is supported by the expectation of future revenue, it is a mechanism that is only available to teams that have proven revenue generation capacity, solid guarantees and professional management. And, even in the case of São Paulo, it was only possible because in 2016 there was a reform in the club’s statutes that allowed for improved governance.
The team’s political situation also helped. The FIDC was approved by the SPFC board with 82% support at a time of special political strength for President Casares – the team had just won the unprecedented Copa do Brasil title, in 2023.
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The good internal climate paved the way for a financial arrangement that will require discipline and austerity. If everything goes well, it will be completed by 2030, the year of São Paulo’s centenary.
The goal is to arrive at the event earning R$1 billion per year, 30% more than today, and with a balanced debt profile. Today, São Paulo owes around R$700 million, which generates annual financial expenses of R$90 million – three times what the Morumbi team invests in training athletes.
It’s a complicated situation, but one that the team decided to face with some ingenuity and, thus, avoid the SAF, already adopted by over 60 Brazilian clubs.
“We cannot outsource our problem, we need to do our homework because São Paulo is capable of being self-sustainable”, argues Marcio Carlomagno, the team’s executive. “It’s time for us to lead. We need to have solutions to our problems at home.”
