Betting on horse races can be great fun. But does it make financial sense for investors to consider moving from the stands to the stables as owners?
Although racing is the more visible aspect of the sport, investors can also participate in the breeding business.
“Some operators and investors do both, and some just breed for commercial purposes, that is, to sell their foals to racing owners and operators,” says Steve Zerda, managing partner of Z Thoroughbred Racing LLC in Seattle, Washington.
“But, the breeding business requires broodmares and acreage to keep the broodmares and raise the foals to at least what’s called a weanling age, nearly one year old or more, (or) typically a yearling age, where they’re over a year old where they’ll sell in an auction to racing operators,” he explained.
Going Solo vs. Partnerships
There are different paths to horse ownership. Direct ownership, solely or with a few partners, provides increased control.
Owners can select their own trainers, veterinarians and training facilities, pick their races, set their own breeding fees, and so on. The drawback is that unless the investor is an expert who can afford to own multiple horses simultaneously, it’s a classic case of a highly concentrated position.
Ownership partnerships or syndicates offer an alternative pooled-ownership structure. Investors have fractional ownership and leave the training and racing decisions to the general or managing partner.
That approach limits investors’ risk and gives them to time to learn the racing business, says Zerda: “In addition, it will allow you to invest in multiple horses at a lower investment amount. The racing of thoroughbreds is a numbers game in that you’re looking for a good horse and to buy one or two lowers your chances.”
Going in 100% on one horse is certainly possible, he adds, but the learning curve can be steep and the owners’ losses can be large if they do it that way. Investing in partnerships can enhance the learning process, as well.
“A partnership also allows you to develop relationships with other partners, with trainers, with operators and get to know the folks that can help you along the way should you go out on your own and purchase 100 percent of a racehorse,” he adds.
On his website, Zerda provides ownership-cost projections for a racehorse stabled at Emerald Downs in Auburn, Washington.
Quarterly expenses include hiring a trainer ($4,950), farrier ($225), veterinarian ($1,200 but variable) and providing transportation ($300, also variable). That amounts $6,675 or $223 per month for a 10% owner.
The investment can pay off with winning horses, though.
Citing Zerda’s numbers, “a winning racehorse will earn 60% of say, a $20,000 purse or $12,000. Trainer and jockey will collect 10% each, with 5% to ZTR LLC (Zerda’s company). So 75% of a winning horse’s earnings, ($9,000 in our example), will be distributed to the partners.”
There’s also a chance at additional gains when the horse is sold.
The majority of the financial return for fillies and mares is their residual value as broodmares. “Winning, say, a graded stakes race for a potential broodmare can increase their value by $200,000 per race won,” he said. “So, along with the purse monies that are won, a graded stakes winning broodmare can get you, at an auction, a price of a million dollars or more.”
Choosing a Partnership
Partnership investors face the same due diligence requirements as securities investors considering hedge funds and other pooled products.
Structures vary: some groups use limited liability corporations while others are partnerships. Investment minimums and revenue- and cost-sharing arrangements differ, as well.
The horses’ location is another important consideration, says Zerda, because many partners like to attend their horses’ workouts and races.
“Apart from the location, you want an organization that employs the top tier of trainers at the track that you’re operating in,” he stated. “You want both a decent win percentage, which is 20% or higher.
Plus, investors need “a barn that has a good staff and assistant trainers, because the training barn is a key part of the success of your horse,” Zerda explained. “You also want a partnership where the folks managing it understand where to place the horse to give it the best chance of winning, and what race you place your runners in is critical to success.”
Potential investors also need to consider the industry’s overall levels of wagering and racing, both of which have been trending lower. According the Daily Racing Form, total betting peaked at $15.18 billion in 2003 vs. $10.55 billion in 2014 and races run in December 2014 vs. December 2013 fell by 11.6%.
— Related on ThinkAdvisor: