Monday Musings: Real Madrid’s Youth Transfer Policy has been a Resounding Success

Matt’s Monday Musings: A series with no rhyme or reason — just consistent thoughts on all things Real Madrid released every Monday. Some weeks may be long form, others just short anecdotal thoughts. Either way, I’ll be posting reflective content on the current, past, and future on-goings of the club:

“It’s harder to stay on top than it is to make the climb,” Patt Summit a former NCAA women’s basketball coach once told reporters after achieving an 8th Championship title. It’s true of any profession. Just look at the historical makeup of the Fortune 500. Only 10.4% of the Fortune 500 companies in 1955 have remained on the list during the 67 years since, and nearly 89% of the companies from the 1955 list have done one of the following: gone bankrupt, merged with, or were acquired by, another firm, or they still exist but are no longer a part of the Fortune 500. In an ever-evolving competitive world, few things stay the same.

The same is true of the professional football world, where a marker was laid in the summer of 2017 and the perception of the transfer-market was made new. Valuations of players that were once scoffed at became reality. State-funded clubs, like PSG and Manchester City, had transformed the competitive landscape. Paris Saint Germain sent a message to all of Europe: money was no object. The Qatari-funded club would go on to pursue the best players in the world, regardless of transfer fee or salary demands. After the record-breaking €222 million acquisition of Neymar Jr from Barcelona, and the arrival of 18-year-old Kylian Mbappe for €180 million - where the Parisian club beat Real Madrid to the punch - the transfer market was never the same. The minor revenues generated in comparison to the likes of Real Madrid, Barcelona, and Manchester United meant very little to these entities. Instead, PSG and City could now tap into the seemingly unlimited financial resources of the countries that now owned them.

The playing field had changed. Once titans of the transfer market, Florentino Perez and Jose Angel Sanchez quickly recognized that a new recruitment strategy was needed to compete with the football world’s new reality. The same summer Neymar and Mbappe signed for PSG, Real Madrid secured the signature of a 16-year-old boy from Brazil by the name of Vinicius Junior. Madrid paid €45 million, a figure that was considered an outrageous fee for a player who had not even featured at the professional level.

While the outside world thought it blasphemous to spend millions of dollars on an unproven teenager, those at the club felt they had paid pennies on the dollar. Real Madrid were resolute in their new strategy and made a conscious decision to pivot from signing the world’s best players, with transfer fee valuations now rising in excess of €100M per transaction, to signing the best young prospects in the world.

In some sense, Madrid would operate like a venture capitalist or an “angel investor”; funneling their recruitment capital towards players under the age of 21 that have been deemed to have high growth potential. Many of these firms or investors place big bets on anywhere from 20-80 companies, knowing that the majority may fail but the two to three success stories can bring mouth-watering returns, far exceeding the initial upfront investment.

There was already visible proof that the policy could be a success: the Galacticos of the three peat included the likes of Sergio Ramos, Marcelo, Raphael Varane, Karim Benzema, Dani Carvajal, Isco, and Casemiro — players who had been signed by the age of 21 and due to tenure and performance became legends of the club. The club had living proof that the policy worked, whether consciously or unconsciously implementing in the past, and would go on to double down on their new ideology.

Fast forward two years after the summer of 2017 and Real Madrid had secured 18 high potential U21 players to long term deals. The name Juni Calafat soon became synonymous with the youth project at Real Madrid. The scout scoured Europe and South America, securing deals for Fede Valverde, Rodrygo, Militao, Lunin, Reinier and many others.

Before delving into the sporting expectations of this new “gamble” on young people, let’s look at the economics. If we add Reinier Jesus, Eduardo Camavinga, Vinicius Tobias, and Aurlien Tchouameni to the above tweet from October 2019, the overall transfer fees paid for 22 players was around €460 million. If Madrid conservatively assumed a 15-20% success rate on their prospects, they would then have up to 3-4 players as part of the Real Madrid first team. Like the hypothetical situation listed in the tweet above mentions, if you had 1 Balon d’Or podium level player, 1-2 starters, and 1 rotation player — does that make the hefty investment worthwhile?

The answer is a resounding yes.

Without factoring in inflation, a Balon d’Or podium player at the 24-26 age range would fetch ~€200M (if not more). A Real Madrid starter with the same age profile probably averages between €60-80M, so we can use €70M. Then for the squad player, let’s use €35M as their price tag. Total value of those 4 players: €375.

That’s a delta of (€85M) from the initial investment with conservative numbers. When you factor in the sale of the other 18 players (let’s use an average of €15M per player) that’s €270M total from player sales. So in the end, Real Madrid makes a profit of €185M while having a Balon d’Or level player, two Real Madrid starters, and a strong squad player.

That model makes a lot of sense. It makes even more sense when you factor in the average 6 year deal that is agreed upon with these young players, amortizing their transfer fees over longer periods of time. If we look at player sales strictly from an amortization standpoint, the departures of Odegaard, Achraf, Theo, Reguilon, Oscar Rdoriguez, Marcos Llorente, and Mateo Kovacic saw Madrid only pay €64M in transfer fees and profit €185M.

From an investment standpoint, although a player like Tchouameni cost €80 million, he is likely only costing the club €20 million a year. By dividing his transfer fee (€80 million) by the length of the contract (6) and then adding his wages per year (an estimate: €7 million), you get a total of €20 million (bonuses excluded). This allows Madrid to “keep their powder dry” and retain enough cash flow to run the operations of the club, pay salaries, and expend further capital on player acquisitions.

Now for the sporting front, the expectation from many - including those at the club - was that the young talent would truly blossom by the 2023-2024 season. It appears those projections were too conservative. Real Madrid secured the league and Champions League double this season, ushering in a new era before a previous had truly ended. The game winning goal in the Champions League final came from a 21-year-old young man by the name of Vinicius Junior. He is widely touted to be among the top 5 in the Balon d’Or votes this season. Two other players scouted and secured by Juni Calafat started the game: 23-year old Fede Valverde who provided the assist on the game-winning goal, and Eder Militao - the 24-year-old center back who had to work his way into the team after two years of limited game time. On the rotational front - 20-year-old Rodyrgo Goes and 19-year-old Eduardo Camavinga - were vital in Real Madrid’s path to the final and each featured in the game vs Liverpool. Both are expected to be at Madrid for the long haul and both are expected to eventually start for the club. Real Madrid’s youth policy has already exceeded expectations.

Like any great strategy, the project will soon be mimicked by many of Europe’s other elite clubs. Valuations for young players may soon inflate due to the competition. Change is inevitable, and Real Madrid will again have to implement another variation to their recruitment policy. The club has already started to make tweaks to this strategy by moving quickly on “market opportunities” like David Alaba, Toni Rudiger, or Thibaut Courtois to supplement the youth project.

In the interim, expect Real Madrid to continue making bets on various young people in expectation of finding a few gems to mark an era at Real Madrid. The likes of Jude Bellingham, Endrick, Matheus Nascimento, and Fabrica talents like Sergio Arribas, Miguel Guttierrez, Borja Iglesias, and many others have already filtered on to the clubs agenda for future seasons. Florentino Perez and co. have managed to stay one step ahead of the competition due to their foresight and recognition of a changing market. That awareness and critical thinking it is what is required of leaders to stay on top. As Patt Summit eloquently revealed, staying on top is harder than the climb, but Madrid have found a new formula to keep their place at the summit.