Julian Mihov of PwC on the development of sports law & business in Eastern Europe - Episode 70
In this interview Sean Cottrell interviews Julian Mihov, Business Development Director Southeast Europe at PWC. Julian has more than 20 years of experience both in the Big 4 companies environment and in the professional sport business. Throughout his career he has served as tax, legal and business advisor to a number of sport federations, football clubs and professional athletes, as well as has acted as tax advisor to large corporations regarding their involvement in sport as sponsors.
In this interview Julian describes the development of the sports industry in Eastern Europe over the last 20 years and explains what this means for the sports sector and sports lawyers in this region.
We thoroughly enjoyed the interview and took a lot away from it. We hope you do the same.
The host is Sean Cottrell (@spcott), founder and CEO of LawInSport.
Transcribed by Andrew Owens, Notre Dame Law School, and Aaron Caputo, Cleveland-Marshall College of Law
Sean: [00:00:00] Welcome to this LawInSport podcast with me Sean Cottrell, the founder and CEO of LawInSport. On today's show, our guest is Julian Mihov. He's the director for business development for Southeast Europe for PWC. I met Julian at a conference put on in Zurich by a friend of ours called Samuel Haas who's a wealth manager, and he put on this event to try to bring together some lawyers, wealth managers, and finance people. And at that event, Julian was giving a fantastic presentation on the economic, political, and governance developments that have taken place in sport within Southeast Europe. Now, I think it's particularly relevant for those of us working in international sports law. I think there are some very interesting insights, some legacy issues that Julian describes, and it’s super important as always if you a sports lawyer to understand the economic and political environment in which sport operates. I hope you get out as much of this interview as I did. Thank you for tuning in. Remember, you can follow us on @LawInSport or me @spcott on Twitter, that’s @spcott on Twitter, Facebook, or on LinkedIn. As always, thank you for your support. Thanks for tuning in. If you enjoy it, please share it, tell people about it. I hope you enjoy the show.
[00:01:29] Sean: Thank you so much for taking the time out.
[00:01:30] Julian: Thank you for inviting me.
Sean: I know you’re over here for some really cool stuff that is outside this podcast in terms of development of business in Eastern Europe generally. I had the absolute pleasure of listening to you give a presentation, which I said to you earlier, and I really mean it, I refer to it a lot now when I'm talking about development of sports law. And, the background behind that is the development of sports business, the sports business industry, and sports markets, particularly with Eastern Europe and the former communist blocs, or USSR countries. [It’s] something that I hadn't give much thought to previously. [It’s] something that I was aware of from my sports science days, but [I] hadn’t been given any sort of background to it, and it’s something that over the last…I think it was a year ago so.
Julian: Almost a year ago.
Sean: [00:02:19] Yeah.
Julian: Back in Zurich.
Sean: [00:02:27] I wondered, and I thought it would be beneficial to our listeners and to the readers of LawInSport and our members if you give a background into how the sports market, say particularly over the last 50 years or so, has developed in Eastern Europe? And, we’ll come onto later as to what that means in terms of the role of lawyers within sport.
Julian: Well, that’s an interesting evolution or revolution I would rather say because the way sport has been developed in all the former socialist countries and Eastern and Central Europe was a very centralized approach managed by the government. Sport, and particularly elite sport, was a kind of special area of the government that the Communist Party was focusing on because they took it as a way of doing their propaganda, which meant that they heavily invested both in infrastructure and financing the activities and operations. It was very common, and I do remember it from my childhood, that a lot of people were trained and prepared to be really very good coaches in terms of identifying kids who are capable and had the potential to develop. And, this culture has really spent time with its people to really develop their talent. Just to give an example-- one example from Bulgaria and one from Romania-- I recently had attended a conference in Bucharest, which was attended by the head coach of their gymnastics team, and when he stood up in front of the audience, basically literally everybody who stood up [on their feet] and started applauding him. This guy's a national hero. The same with the former head coach of the weight lifting team in Bulgaria, although he was a bit of a contradictory figure, because on one hand he developed a completely new concept of weightlifting as a sport [and] as a way of developing humans’ bodies, which was a combination of physical science, chemistry, what and how people should eat, and because of the result-- initially it was Bulgaria but then some other countries-- where he was transforming his knowledge and experience, [he was] argumentatively alleged of using drugs to receive some of their gold medals at the Olympics and at the World Championships. I mean his glory was a bit…
Sean: Tarnished in some way.
Julian: Yes, indeed. But, these two gentlemen are really an illustration of what the state did 50 or 40 years ago. And unfortunately, some of the greatest results and achievements of the sport in the countries in the former communist bloc are due to that policy. Now, back in 1990 when the changes went through all the former communist countries, there were so many problems that the government literally took aside sport and didn't pay any attention at all, and then came the interesting time for professional sport because the government basically disappeared, providing no support, no funding, and the gangsters actually took over the sport. And, this was the case in many countries in Central and Eastern Europe. I'm not talking only about Bulgaria, but we see that in Romania with the famous case of Salva and its president who is still in jail for tax evasion. The same thing [has] happened in some other countries.
Sean: [00:06:28] You can say globally that there's been organized, whether it’s the mafia in Italy or America or organized crime in the U.K. in boxing and other sports.
Julian: [00:06:38] Well, I'm not sure that this is the case in the other countries, but particularly in Bulgaria, that was a strange coincidence. Almost all the gangsters were formerly elite sportmen, either in wrestling or weightlifting or…
Sean: That makes sense if they're strong individuals and they’re doing something…
Julian: Well, they had a lot of people from the rowing team in Bulgaria, which was doing pretty well. I mean, the latest gold medals we had were back in 1992 [at] the Olympic Games in Barcelona. And, right after that, some of these people were just left on the street, so they had no other choice but really to go to the other side of the battle. And, there were some sport administrators and sport directors who had to confess, in the late 90s [and] at the beginning of this century, that in fact in some of our countries it was thanks to the gangsters which helped the sport to survive because I mean there were some very bad practices like corruption, like match fixing, but on the other hand, they really were spending their money…
Sean: And, no one else was, right? So, I guess you can't deny history, and yet that's because there was a vacuum as you said from the communist government.
Julian: I think that will be the right word. There was really a period of vacuum, where someone had to fill this vacuum, and they were the only ones who really took the opportunity. Now, 15 to 20 years ago, the situation started changing considerably, and finally the governments decided that it was high time to put some efforts on developing corporate governance-- whatever they understand as corporate governance in sport. So, the first changes in sport legislation started occurring. I think that currently probably Poland would be the best example. We can show up and say, “Okay, this is what a reasonable sport actually looks like. Bulgaria's making an effort [and] trying to change the law now, and the current minister of sport is now pushing this new draft law to go through to parliament. As far as I know, Romania's working in this direction.
Sean: [00:08:56] How far are they going with this? Are they trying to establish models of governance? Are they are looking at vetting procedures—I’m trying to think of the word off the top of my head-- yeah, vetting I guess would be the one way of individuals who are in official positions or…
Julian: I would say it is probably a blend of everything. So, we have real corporate governance measures like preparing and applying strict provisions and regulations as to how to license sport organizations [and] what is required, and it really makes a lot of sense when you read the regulations. Poland has made a step forward and basically officially proclaimed as part of its Sport Act that there is a professional sport, so therefore, there should be a separate body other than the sport federations governing the competition, which are done professionally. So, that's why Poland introduced the concept of sport leagues, who should run the professional tournaments and professional competitions. [This] would make a lot of sense from my perspective. Then we have [a] clear distinction on state financing— so, when governments should give money to sport, defining clear focus on grassroots, and financing sports who are producing results.
Sean: This is similar to what we’ve got in the UK with the code for sport governance. As they say, they're investing public funds, [so] they want to make sure there is a return investment.
Julian: Yeah. And, the other thing which I would say is still on attempt rather than reality is—and I think that the good example that the UK can share with the other countries in the EU-- is how you actually use the money collected from betting or from gambling business and reinvest it in sport. But, Bulgaria is a good example of trying to make a revolution in this direction because there is a state sport betting company, but they're also quite a lot of private, including international ones, which are now licensed to operate in Bulgaria either online or physically. And, the current minister of sport is willing actually to spread the umbrella above all these organizations and ask them to contribute for the development of sport [and] make contributions out of their revenue. As you would imagine, he's facing severe objections, surprisingly even by the Minister of Finance, so this is currently on hold. But, still retaining the 70 percent contribution, which the state betting company is making to the budget of the ministry of sport, is still quite substantial, and it is helping a lot to finance leading sport organizations and sport teams in Bulgaria.
Sean: [00:12:09] And, when you were giving your presentation last time, you were talking … [with] a particular focus on football. And, you were talking about some of the issues around infrastructure with stadiums and also some of the challenges—maybe you can go into this—some of the challenges for potential investors within football, why there has been a reluctance maybe to invest, and some of the dynamics of the pull away of the vacuum being created by the lack of state support in relation to football. Because I think—for me—I think it is replicated around the world—I don’t think it is a problem just to these former socialist countries. And also, I think it highlights to me a lack of vision more than anything about the opportunity there is if the people—I use the Premier League an example all the time, but I look at the Premier League as the prime example of a league that they are gunning for.
And that may be where they are going, but that may be the reality at the moment. And, it seems to me that is what they wanted to leapfrog as opposed to developing some level of sustainability. Maybe you can just describe what is going on. Maybe give light to some good examples and then some of the problems that are facing that region.
Julian: Well, across Central and Eastern Europe you have I would say three major models of running football clubs. On one hand, they would have-- probably the best example currently on the map would be Poland-- where privately held clubs, which are run really professionally, all of them transform into joint stock companies. This means [that] they need to be in a position to have a sustainable business model and a business plan, which [they] need to turn ideas into actions. I think a great push for the development of the Polish football was hosting Euro 2012, where a lot of sport infrastructure, particularly folks in football, developed and the clubs were really given quite a bit of momentum. And, this momentum seems to be taken over by some good investors. A number of the leading Polish clubs are being taken over by good practically orientated, private individuals, who put their money into the business and they really consider it as a business.
Sean: Are they domestic investors or international investors or a mixture?
Julian: Particularly in Poland, these are primarily either operating locally or Poles who came back from abroad, which was the case of Legia Warsaw, for example. People with international experience and international exposure, some of them former investment bankers. But again, I think the major turnaround was that they realized they need to run the football clubs as businesses, and that that was the key starting point. Bulgaria and Romania are other interesting examples of this model because Bulgaria was probably the first country in Central and Eastern Europe which changed its legislation back in the mid-90s, and at that time there was introduced a mandatory rule that all professional clubs need to get transformed into joint stock companies. The argument being there must be clear transparency [in terms of] who owns the clubs, where the money is coming from, their financial statements to be audited because all joint stock companies are subject to mandatory statutory rule under the Bulgarian domestic legislation. Unfortunately, in reality, there are only two or three clubs which currently you would say are doing things as these should.
Sean: That’s a shame I was going to say because in theory that sounds like a great idea.
Julian: Yeah, and many of the ruling parties who are having their ministers in sport made a step backward by changing the law and first of all changing this rule, and then introducing the opportunity [for] NGOs actually to be the owners of the clubs, or simply said from a legal perspective, the clubs to be again set up as NGOs, as civil partnerships. On one hand, the purpose of that was that they could allow a wider number of people [to] get involved into the business of the club. Secondly, the reason was that in many cases, the local authorities of the municipalities started financing the operation of these clubs, and they couldn't do it ex lege if that was a joint stock company-- that's simply not allowed. But again, I would say that so far I haven’t seen this model really working in reality…
Sean: But I guess that only works though if you have got one true backing and focus, and then no doubt that is down to the political whims of whoever is in power in the local authority at the time.
Julian: [00:17:24] Yeah, indeed. And, that is one of the major objections which the sport business analysts have against this model is that it is very easy to see a case where a sport-dedicated mayor steps down from power and his successor who may not be at all interested in sport simply says, “I have other priorities. I will not give any more money for our local football club, and I don't care if it is in the Premier League.
Sean: Thanks for that. And, I was thinking—there was an example you gave, and I can’t remember. I think it was in Bulgaria—where there was an investor who came into a club and literally turned it around completely…
Julian: This is Bulgaria. It's the current champion, Ludogorets. Probably, that is the good example [that] we can be proud of.
Sean: [00:18:18] There is a rich individual who is very successful in business. Is that right?
Julian: Indeed. Yeah, I mean the current champion. Actually, it's champion of Bulgaria for the last six years in a row and quite successfully performing in the Champions League and Europa League, so every year they play in the Group phase in one of these two UEFA tournaments depending on how they perform in the qualification rounds. But seven years ago, a wealthy individual and his brother, who have a very successful business in the pharmaceutical industry, decided to support a small club based in the southeastern part of the country. This small initial injection of, if I am not mistaken, $200-$300 thousand, basically got the club promoted to the second division. And, the next year they got promoted to the first division. Then he said, “That’s not a joke anymore.” So, he said, “Okay, if this is going to be a business, we need to do it as a business.” They set up the club as a—well, [it] transformed rather into a joint stock company with a single shareholder, and he started actively financing, following a clear vision and a business plan. So, they signed a contract with the municipality. Initially, this started with the long-term lease of the stadium. Now the stadium has been concessioned to the club, and they really have managed to completely refurbish a third stand and the last one is coming next year.
Sean: [00:19:52] And I think they get quite good attendance, and it is not a very large stadium. Is that right?
Julian: [00:20:00] Absolutely. Yeah, it is an eight-thousand seater. But, what this club got famous for was that they started selling the most expensive tickets, and they still managed to get all crowded home games. Last week, we had Bosnia-Herzegovina playing a friendly match against Bulgaria on the stadium and the Prosinečki, who is the manager of Bosnia-Herzegovina right now, gave an interview where he was just really speechless [when he] was trying to explain how satisfied he was with the terms and conditions being offered because Bosnia arrived three days earlier before the games, and it was a very snowy week in Bulgaria. So, irrespective of the snow, irrespective of the cold weather, they got perfect conditions for training, recovery, [and] access to fitness or other facilities because in addition to the to the main pitch to the stadium, this club developed a really top quality training base, which is used both by the first court and the academy. They have nine training pitches to each other. And, I think they have one or two with artificial turf as well, so they can really train 365 days a year.
Sean: [00:21:30] And, the key takeaway though—and you’ve given us a snapshot of what you said in the presentation because I remember there being some questions that were asked around this—but the key thing here was that you said they treat it as a business, they make their decisions sensibly, they invest, and they get local support. And, I remember when you were talking about this, I remember thinking, “This is something I always talk about when I'm speaking to people in football is that sometimes you know if you were to talk about some of the huge potential fan bases that are coming domestically to five thousand, six thousand people every two weeks in England and Scotland, and you were to say to an investor, ‘Hey, I’ve got this amount of people coming every two weeks, they’re in this facility, and I've got a database of 20,000 people,’ that’s a hugely attractive proposition.” Obviously, you have the relegation/promotion issue, but nevertheless, if you engage with those people properly, it seems like a sensible business person could do a very good job. So, given that you have got one or two examples, and you have got things improving in a place like Poland, what are you seeing in terms of how many of these organizations use lawyers? How many of them have got in-house lawyers? How many of them do you think could benefit from having that? I'm talking in a broad sense of governance, regulation, and on the commercial side.
Julian: Well, based on my personal experience, what I've noticed is that Poland is again leading by example. You can either have in-house lawyers in some of the clubs or you have external legal counselors. Some of these people got trained abroad; they even attended some of the UEFA courses or they have sports management degrees even, so they do realize the importance of having good advisers. The case with the Bulgarian champion is very interesting. It is one of these examples where you may say that it is a bit contradictory because on one hand, having all the power concentrated in one single owner is a good thing because you know that all the funding is secured, the management is in place, [and] there is a business plan, but on the other hand, keeping everything within one single business group sometimes may be risky. So, this club is using the army of the entire groups’ in-house lawyers team, but nevertheless, whenever they feel uncomfortable, they are not afraid of confessing that they are not knowledgeable enough, and they go on the market and buy expertise. So, they are ready to pay big force consultancy fees, [and] they do that from time to time, especially when they do a bit more complicated transaction or more sophisticated ones like back to back financing with debt financing involved…
Sean: [00:24:28] So, can you just explain to those people who are not, and myself, exactly what you mean about back to back financing? Do you mean rolling debt?
Julian: There was some cases—yeah, well basically they were collateralizing their receivables from the UEFA funds, which they were entitled to receive, but because of the payment structure which UEFA applies, some of this money comes later. So instead of going to borrow under standard commercial terms and overdraft, they [would] basically go to the groups bankers, they collateralize their receivables and they get very good rates-- some working capital financing.
Sean: [00:25:10] That makes sense. And so, we were talking about this in terms of-- so you have got organizations like that and in Poland where you have got some in-house [lawyers] and what we are really talking about is some of the developed markets where there is more of a commercial offering sport. In some of the other markets, are you seeing what I would see in other markets and what we saw here, where there may be one or two small number of sports lawyers who are first into the market, but there is not a general awareness or understanding as to what the role of a lawyer could be, how useful it can be, but also, how to instruct or say [generate] concerted efforts to encourage lawyers to look into sport as a potential industry to grow?
Julian: Well, I am a strong believer that the example which England and the UK overall are giving to the sport world [in terms of] how important the sport lawyers are and that they should be really given the credit for the efforts they make for the development of the professional sport and sport overall should be followed by the countries in Central and Eastern Europe. There are individuals who are really stars, who know what they are doing. The fact that you have a number of members on the in the appeal board of UEFA coming from Central and Eastern Europe is a good indication [that] these people really know their job. Unfortunately, there is a kind of monopoly of keeping their own territory [and] not allowing competition to step in. [This is] probably to some extent because of the smaller size of the market. Poland would be one of the good exceptions because it is really a big market. But overall, I think [this is similar] to the situation with the transfer agents, where these people are very much cooperative, they work with each other, they tolerate the best practices of their competitors, and they try to follow them. So, the “lead by example” principle works pretty well in this direction. I don't see why this should not be the case with these poor lawyers as well.
Sean: [00:27:23] Well, I think the issue becomes—well, that is a whole other discussion about intermediaries and agents-- but taking that aside, I think there is an interesting… again if you are the first into the market, you are maybe taking a risk… and I always say that there is opportunity for people there, if they are to truly win in the market, then they need to grow it and make it more sustainable. So, it is all well and good if you are advising one or two clients, but if the whole market bottoms out or if there's mistrust in the market because of bad governance, bad commercial deals that are done and are not properly reviewed, then it undermines the whole thing, and therefore, you will not get government investment [and] you will not get a commercial investment. So, it seems to me, that there is some work to be done there in Central and Eastern Europe in terms of helping the current players that are in the market but also growing it out-- I know there are some really top quality lawyers who actually are trying to build up national associations of sports lawyers and work with them to do that. So hopefully… I wish them all the success with that.
Julian: [00:28:28] Yeah, probably the example I gave with the football transfer agent is actually… well, there are two sides of the coin because on one hand, there is a good example, but on the other hand, that is an issue because that is really limiting your knowledge and experience only to one single sport. And, I think what the good lawyers-- and why they are good-- is because they can really spread their knowledge and experience on any sports issue irrespective of what the sport is, and different sports have different issues.
Sean: [00:29:02] Anytime you need to understand the sporting context, the terms, and any market forces that may be involved, but really you are looking at it objectively and saying what the outcome is that people are looking to create from a governance perspective, you know, having transparency and accountability is this widely recognized anyway as a good idea.
Julian: It is critical.
Sean: At least we would agree on that. I am not sure if that is widely agreed across sport, but internationally that is widely recognized as the best practice, and I think having good lawyers who have good legal backgrounds obviously—more so they understand the context in which they are operating in and can be objective about it—is crucially important. I also think there is a real opportunity, and I hope that we get more engaged in this discussion. I know these discussions do take place globally, and if you look at the Champions League as an example, there is more cross dialogue between different countries, but I still think particularly given the background you have described earlier, I think there is an opportunity as well for us--say in the more developed sports markets-- to reflect and actually have some learning—two-way learning-- in terms of us educating them as to what we have done, but also them reflecting on some of the market forces and economic and social environments in which these sports teams or governing bodies or lawyers for that matter are operating within.
Julian: [00:30:25] I fully agree with you, Sean. Indeed.
Sean: [00:30:28] That’s exactly what I wanted you to say.
Julian: No, but I really believe it.
Sean: Thank you so much for taking the time out.
Julian: Thank you for this opportunity.
Sean: [00:30:38] And thanks for the presentation last year. It really spiked my consciousness in terms of thinking about some of the market forces. Normally, I describe the development of sport through people who have done a very good job over the years of articulating like Jack Anderson and Mark James talking about the industrial revolution or settle of the elite who participate in sports like polo, horse racing, and athletics, and stuff, and then the Olympic movement, and then obviously the American commercial model, and you have given this fourth strand, which is this government-funded, socialist type background, which is then the legacy of which has caused that vacuum that caused the criminal to get in. I think it’s fascinating and also helps us get a better understanding of global sports and global sports governance because obviously, all of these countries and all of these organizations have representatives that go and sit at an international federation or input into government and then set policy. So, I think it is very relevant and very important to understand this.
So, thank you for sharing that. It was really insightful at the time, and I still learned a lot from this podcast. I really appreciate it.
Julian: Yes, thank you as well.
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