Tuesday, May 27. 2008
From racing aficionados to casual viewers who happened to catch this year’s Triple Crown races, Big Brown’s incredible athleticism as he outstripped the competition has captured the country’s imagination.
The Thoroughbred’s performance at the venerable Kentucky Derby, in which his powerful strides propelled him from the twentieth position to the head of the field, set tongues wagging, while an equally commanding display in the Preakness has racing fans agog over the prospect of seeing the first Triple Crown winner in thirty years.
The fact that Big Brown hails from a relatively unheralded bloodline has only fueled the media frenzy.
Big Green
But there’s more to this classic underdog story than Big Brown’s
extraordinary ability and pursuit of racing glory; the horse’s
dominating performances have also drawn attention to his majority
owners, former Wall Street insiders Rick Iavarone and Richard Schiavo,
and the business side of horse racing.
Between Big Brown’s $2.7 million in purse money, a lucrative marketing
deal with his namesake United Parcel Service (UPS) and a rumored $50
million for his breeding rights, the two investors have more than
recouped the initial $2.25 million they forked over for a 75 percent
stake in the wonder horse.
These impressive returns, coupled with Big Brown’s well-publicized
success on the track, have served as an ideal launching pad for the
duo’s International Equine Acquisitions Holdings (IEAH), an audacious
effort to wed the profits of the hedge fund to the excitement of the
racetrack.
With a maximum of 100 well-heeled investors ponying up a total of $100
million for a corresponding share in IEAH’s stable (excluding Big
Brown), the group expects to have the wherewithal to purchase proven
winners for its portfolio.
IEAH’s team of seasoned experts, ostensibly the same ones who
recognized Big Brown’s potential, will identify horses that have the
best chance to succeed on the racetrack and command the most money as
breeders further down the line.
An independent appraiser will evaluate IEAH’s holdings at the end of
each quarter; based on the stable’s overall value, individual investors
can decide whether to cash out their share or let their money run
(literally).
For its efforts, the firm will collect a 2 percent management fee, plus 20 percent of the net profits.
Aside from its portfolio of Thoroughbreds, IEAH expects to line its
coffers with revenues from a state-of-the-art equine hospital that the
firm is constructing near BelmontPark, the famed site of the final
Triple Crown race.
Big Risk
Of course, it’s important to remember that the profits earned by Big Brown’s majority owners are atypical.
Not only is purchasing, training and caring for a Thoroughbred
capital-intensive, but future success is also far from guaranteed—few
horses make it to the track and even fewer are successful.
Rather than focusing on Big Brown’s success at the Kentucky Derby,
potential investors would do well to remember the fate of the
second-place runner, Eight Belles, a filly who was euthanized on the
track after severely fracturing her two front ankles.
For all their majesty and athletic prowess, today’s Thoroughbreds are
fragile creatures and one misstep away from a career- or even
life-threatening injury.
The majority of investors who become involved in horse racing typically
don’t expect to make boatloads of money—in fact, most would be content
to break even.
The payoff for these racing enthusiasts is instead the thrill of
competition and the excitement of participating in the sport itself.
Picture the glee on the faces of Big Brown’s owners when their horse
crossed the finish line at the Kentucky Derby and the Preakness.
Despite all their talk of transforming a notoriously capricious
investment into a steady business, it’s difficult to imagine these
former Wall Streeters jumping for joy solely over their cash windfall.
Many first-time investors become involved in the sport through racing
syndicates and partnerships, where individuals purchase shares in a
specific horse or diversify their risk by spreading the investment
across a group of horses.
The partnership format allows racing enthusiasts to become closely
involved in the Sport of Kings without necessarily paying a kingly sum
to purchase, train and maintain a competitive racehorse.
Such partnerships typically turn a profit by marking up the horse’s
value before selling shares, retaining an ownership share for
management and collecting a certain percentage of any winnings.
Participants enjoy the thrill and camaraderie of co-owning a
competitive racehorse, while the investment structure reduces the
sticker shock of the initial capital outlay as well as recurring
expenses for food, veterinary care, transportation and storage.
Although the basic premise of racing partnerships—pooling money
contributed by a group of investors to finance the development and
upkeep of a racehorse—applies across the board, each stable’s
philosophy, objectives and structure can differ widely.
Before entering a racing partnership, investors should evaluate their
own expectations and seek out a group that best matches those goals and
budgetary constraints.
The Thoroughbred Owners and Breeders Association’s (TOBA) Web site
offers sound advice on the business of horse racing as well as links to
its state chapters, while trade publication Blood-Horse Magazine
features a searchable online directory of stables that offer
partnerships.
When evaluating these organizations, prospective investors should
examine the partnership’s general characteristics—for instance, the
level at which its horses compete and the extent to which it focuses on
racing and/or breeding.
A partnership’s structure is also important. The differences between
limited and general partnerships will affect your expense liability and
the degree to which you can contribute to certain decision-making
processes.
It also pays to evaluate the partnership’s track record as well as the
experience and qualifications of the partnership’s management, trainers
and other essential staff.
Perks such as special accommodations on race days, access to the stable area and training runs should likewise be considered.
On the financial side, investors must examine how management is
compensated for their time and expertise as well as the specifics of
expense allocation and income distribution.
Unquestionably, the most important aspect of choosing a racing
partnership in which to invest is ensuring that the organization shares
your definition of success.
Whether you seek earnings, participation in prestigious races or an
opportunity for socialize and network, to make the partnership worth
your while you should have a passion for the sport itself.
*This "lifestyle piece" was unceremoniously lifted from the website of
Personal Finance, an investment and financial newsletter whose pages
typically feature work with a more serious bent.*
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