Galloping along for love and money

Financial Times, October 28 2006

The odds of winning are low, says Kathryn Tully. Active part-ownership is all about fun

Next Saturday, King of the Roxy will join the starters in the $2m Breeders' Cup Juvenile race at Churchill Downs in Louisville, Kentucky, at one of the four biggest horse racing meetings in the US calendar.

"He's a very mature, terrific looking horse and he keeps improving," says Barry Irwin, principal of Team Valor, and the man that bought him. "If you go by speed figures, he's one of the top two or three horses in the race. The only question mark with him is that because he's so fast, and he's bred on his sire's side to be fast, it's just a wonder whether he'll be able to stay the distance."

The two-year-old colt is not owned by Irwin, but by a small group of individuals who each own a percentage stake. One of them is a stockbroker; another an agent for a rap singer. Team Valor, and other US partnerships like it, buy young horses at auction, offer groups of individuals percentage ownership stakes in that particular horse, often forming a limited liability company for that animal, and then stable, train and race it for those owners.

The racing partnerships will keep in regular contact with owners to tell them how their horse is doing. But the fun lies in partners taking a more active interest and being on the rail during the race to see their horse thundering down the straight. They might even end up in the winner's enclosure after a classic such as The Kentucky Derby, Preakness, The Belmont Stakes or The Breeder's Cup Classic.

If this sounds unlikely, it is, but partnerships have won big races before. The six-year-old gelding Funny Cide, winner of the 2003 Kentucky Derby, was bought just the year before by a stable set up by a group of high school friends from Sackets Harbor, New York. Back in 1995 they decided to put in $5,000 each to have a go at thoroughbred ownership. Funny Cide is still running and has netted more than $3.4m in winnings.

Afleet Alex, who won the Preakness and the Breeders' Cup last year, is also owned by a partnership - a group of five friends from Pennsylvania and New Jersey. During his career the horse earned his owners almost $2.8m. The four-year-old is now at stud and his first foals are expected to arrive soon. For each live foal born, he will earn a stud fee of $40,000. Such is the popular appeal of these horses that they have their own websites.

Yet those that run professional racehorse partnerships say that the odds of a win or place in any race, let alone a classic, are pretty low. "If you're successful, you win two out of 10 times," says Terry Finley, president of West Point Thoroughbreds, a New Jersey-based company that has 50 to 80 horses in training during the year.

Many thoroughbreds never have a win in their racing careers. And even with the best horse in the race, the best trainer and the best jockey, a lot of things can still go wrong on race day. "Horses can have a bad day. Sometimes the fillies don't eat, or the colts get distracted. The jockey could have had a fight with his girlfriend."

So buying into horseracing partnerships should be seen as a fun interest that could be profitable, rather than a tangible investment. "You can make money at it, we try to make money for you, but you can't take your seed money and buy a horse if you're going to expect it to grow," says Irwin at Team Valor.

"We had a guy that part-owned one of our horses that won the Santa Anita Handicap. We won a $1m race with a horse we had syndicated for $100,000. The guy came to my house and said he was about to retire and he was going to take all his retirement money and continue to buy horses. I laughed and said 'you'll be back at work in about a year'."

This extreme dedication to the cause is one thing, but most new investors in partnerships are intoxicated by the sport. If you are not a horse racing fan in the first place, Finley says there is no point getting involved. "We're racing a horse in Kentucky today, who is owned almost exclusively by a group of investors from Wisconsin. The main investor flew the group to Kentucky in his jet. They will go to the race, have dinner and then be home by midnight."

Some get even more hooked. Participation in a partnership allows you to avoid the enormous amount of time and knowledge, not to mention hundreds of thousands of dollars of spare change needed, to run a horse yourself, but some partnership members go on to buy their horses.

One of Team Valor's former partners, the ex-Mattel CEO John Amerman, went on to own a horse that won the Breeders' Cup distaff in 2003.

Partnerships such as Team Valor and West Point have been in business for many years and have long track records. But this remains an unregulated industry, and there are hundreds of different partnerships available in the US. How should investors choose the company?

"As with any major business decision, ask questions, get references, make sure you get full disclosure about the costs and whether there is any type of management fee," advises Dan Metzger, president of The Thoroughbred Owners and Breeders Association. The non-profit trade organisation, based in Kentucky, manages a website that provides information for would-be owners,

The minimum investment in the partnership world is about $5,000 to $10,000, but this can vary. Issues to consider are: the minimum upfront investment and percentage share you can take in a horse; how many other partners will be involved in that animal; whether things such as management fees, training, stabling, vet, blacksmith, transport, accounting and tax preparation and even mortality insurance for the horse are included in the upfront cost or charged on an ongoing basis.

The average investment in a Team Valor horse is between $12,500 and $22,500, depending on the value of the animal. Each syndication tends to attract two or three new investors. There is a minimum investment of $10,000 and Irwin likes to have about 15 investors in each horse, buying a maximum of 10 per cent. "We don't like anyone to buy more than 10 per cent of a horse, regardless of the price, as we want people to spread their risk and buy into other horses." Owners are billed for ongoing costs on a quarterly basis and any prize money is paid to owners within a week.

It is perhaps fortunate that losses incurred by buying into partnerships can be deducted against US taxes. Investors must show the Internal Revenue Service that they participate in horse racing actively to deduct racing expenses from non-racing income; passive investors have to wait until the venture is wound up before they can claim money back. "That's why we stay away from the word hobby. To deduct losses against tax you have to prove that you're trying for a profit, whether or not you realise one," Finley says.

Whether you turn a profit can be affected by the purchasing strategies of the partnership, which vary. Some will buy unraced horses, others those that have run a few times. West Point mainly buys two-year-olds at the main thoroughbred sale of the year at Keeneland, Kentucky, and at the specialist two-year-old sales in Florida, Kentucky, California and Maryland. "We follow the circuit to see where the best talent is." Team Valor does not just buy, train and race horses in the US, but all over the world, although it usually buys females.

So why did Irwin buy King of the Roxy? "He's a horse that we just got lucky on." Hopefully, that stroke of luck will continue at the Breeders' Cup in November.

Copyright The Financial Times Limited 2007