The Takeover: The Knighthead MO

Prospective new owner of Birmingham City Tom Wagner was featured on a Bloomberg “Masters in Business” Discussion on Youtube on Thursday, talking with other hedge fund founders about how the business works.

Wagner and Pals

The hour-long round table featured Wagner talking briefly about the acquisition of Birmingham City and I think offers some insight into the way they are looking to run the club.

Before I go any further, I need to make it clear that I’m very much an amateur at understanding this kind of stuff; I have to use resources like Investopedia to understand some of the jargon used and I recommend that people watch the video if they can to help make their own minds up.

A Structured Loan

One of the first things I picked up on what Wagner said was about how Knighthead are actually acquiring the club.

… the investment that we made in the football team in the UK was structured as a secured loan with the ability to eventually gain full control. A lot of the investing we have pursued has been structured in that way…

Throughout this whole takeover saga, there has been a lot of talk about how any would-be new owner would be able to complete the separation of BCFC from BSH.

We know that the deal on the table will give Knighthead a 45.64% stake in Birmingham City via their Shelby Companies Limited investment vehicle, and that per the terms of the deal they will get complete management and financial control over the club.

However, as long as I’ve seen this tranche-style deal, I’ve wondered how a company can force BSH into selling the remaining chunk.

My fear has always been that no matter how many punitive legal penalties one puts into a deal, there has always been an outside chance that BSH would decide to unilaterally take action to break with the deal and shrug their shoulders at any attempt at legal recompense that was sought.

We’ve already seen this to a degree.

During their abortive attempt to buy BCFC, Maxco Capital put a shade under £8m into the club. The club accounts state that the money was “provided” to the club by Maxco, which to me implies that there is no intention to give that money back.

Without access to all the internal documents it’s difficult to know the full story but the rumours I’ve heard seem to imply that Maxco provided that money as a loan and now have to try to seek some kind of legal remedy to get their money back.

Knighthead are doing something similar in that they too will be putting money into the club via a loan; however, the way they have done is different and I believe much more secure.

The key difference in the deal that Knighthead have made is that they’ve declined to take the ORI tranche without the first 24% from BSH included as part of the deal.

While that means that Knighthead have to go through the full HKSE approval procedure as well as EFL approval to get their feet under the table, it’s also meant that they can structure the loans for operating funds so that they are secured on the club.

This is smart, because as we know from the huge amount of money that the club owes BSH, the club almost certainly aren’t going to be in a position to repay a huge loan any time quickly.

Although it seems simplistic, what I think will happen is that Knighthead will use that outstanding loan to take the rest of the club from BSH’s hands rather than any further complex agreement.

That would also mean that BSH will know that they only have a set period of time to do what they need to do should they wish to keep their listing on the main board of the Hong Kong Stock Exchange.

In short, rather than burying the club in debt, the loan is set up to force the rest of the deal through.

Growing the Carcass

Another fear I’ve seen expressed from some of the more cynical fans is the possibility that a new owner will look to take on Blues as a distressed asset, strip it of value it has and dump the rest.

It’s certainly a fear that I’ve seen attached to hedge funds, as the common MO of many is to get a return on investment quickly.

However, something else that Wagner said gives me a lot of hope that this is not at all how Knighthead operate.

… distressed debt funds went off the rails in the last fifteen years. The way that they operate is they look at a business as a carcass, and then approach it to fight over the carcass.

We look at a business that might be a carcass, and say “can we revive that thing?” Cos if you can, the pie that you’re fighting over grows, and that’s a lost art for a lot of investors in turn-arounds.

Like there aren’t any real turn around experts anymore, and that’s the way you make tons of money.

My take from this is that Wagner doesn’t see Blues for the potential to flip for a quick buck; but more as a project with a lot of room for growth that can then be worth a lot more than he put into it.

While I’m very aware that football is a money pit for many, I think we are starting to see owners who understand that there is more to owning a Championship club than throwing money at it and hoping for a Premier League promotion payoff.

The trick realistically is to look outside the box, and to see a club as more than just the football team.

Rather than just concentrating on what monies can be made directly from the club succeeding on the pitch, it’s important for the club to give fans and commercial entities a reason to spend money at the ground.

Likewise, I think proper investment in ancillary features at grounds like conference space, hotels and leisure facilities can help turn a football club into more of a year-round business.

It’s scary for many investors as it potentially means a large capital outlay on infrastructure as well as the team, but the rewards can be huge and continuing.

Not only that, but higher revenues into the club allow it to spend more under FFP regulations, loosening Blues from some of the constraints it seems to perpetually seems to be fighting.

All the indications I’ve heard since Knighthead’s involvement in the takeover was first known seem to show that they agree with these thoughts.

This is part of the reason I’ve tried to make the point that we as fans need to change our mindset to a more positive viewpoint; what the club can do rather than just “typical Blues”.


While Wagner went into proper business jargon, he also made a good point about how Knighthead works.

As per the Bloomberg video, it was stated that US$4Bn of Knighthead’s capital is in an insurance company, while a further US$2.5bn is in a “draw-down fund”.

The insurance company is Knighthead Annuity and Life Assurance Company (KALAC), which owns 72% of Shelby Companies Limited.

This bit is important, because as Wagner confirms these companies have no timelines for returning capital to investors.

“…one of the drawdown funds, the investor is a really like uber-wealthy family. When we draw the capital, we never have to give it back. Now, we don’t get paid until we give it back, but we don’t actually have to give it back.”

For me this removes one of the main issues I have with hedge fund ownership of a football club; the need for return on investment (ROI).

If Knighthead are in a position where they have investors who are happy for Knighthead to own investments for a long period of time, then that is really good news for Blues as it confirms that Wagner and Knighthead are not just looking to flip Blues.

Wagner goes on to explain how Knighthead get paid, and this is where it gets very technical.

As I understand it, there are two ways that hedge funds calculate the value of a business.

The first is IRR – Internal Rate of Return. This is a formula which works out how much money can be returned on an investment taking into account that money can also earn interest elsewhere.

The higher the IRR, the higher value the investment product value would have to be to match investment in a given company.

However, Wagner prefers something called MOIC – Multiple on Invested Capital.

This is much simpler to understand, as it is basically the ratio of the value of a business versus what has been put into it.

MOIC requires a longer-term approach, especially when considering Wagner’s comments on how he wants to “grow a carcass” rather than fight over it.

Part of me wonders if Wagner has looked across the expressway at how Wes Edens and Nassef Sawiris have worked with that particular distressed asset, especially from the viewpoint of how much they have put in and how much it is now worth.

I appreciate there is a lot to take in and that as football fans, we shouldn’t need an MBA in business administration to support our club.

However, I think it’s important to recognise the potential this takeover has for success.

While it’s going to be a little while yet until we see and hear more specific plans for the club, it’s nice to be able to listen to Wagner and understand how he operates rather than scratching around the Chinese parts of the internet for even a picture of the big boss.

I’m looking forward to a time when I can be proud once again of Blues – and I think that time is coming soon.