{"id":705,"date":"2012-04-20T16:26:11","date_gmt":"2012-04-20T16:26:11","guid":{"rendered":"https:\/\/kerryhannon.com\/?p=705"},"modified":"2012-04-29T21:17:55","modified_gmt":"2012-04-29T21:17:55","slug":"how-to-buy-a-racehorse","status":"publish","type":"post","link":"https:\/\/kerryhannon.com\/?p=705","title":{"rendered":"HOW TO BUY A RACEHORSE"},"content":{"rendered":"
\"\"<\/a>Read Published Article<\/a><\/div>\n
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This story appears in the Dec. 5\u00a0Investment Guide issue of Forbes Magazine. Click here for the full Investment Guide 2012 special report.<\/a><\/div>\n
\nTHE THRILL OF VICTORY<\/div>\n
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Thoroughbreds remain a bad investment overall. But a new breed of owner is trying to minimize the risk and maximize the fun.<\/div>\n
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Kevin Plank, founder and CEO of Under Armour, the sports-apparel company with $1 billion-plus in annual revenues, \u00addoesn\u2019t start something on a whim. The 39-year-old is all about winning. Right now he wants to win Thoroughbred racing\u2019s Triple Crown.<\/div>\n
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So he started big four years ago, scooping up an icon of the sport\u2019s glory days, 530-acre Sagamore Farm, outside of Baltimore. The farm was given to Alfred G. Vanderbilt II on his 21st birthday and produced such legends as Native Dancer, who is buried in the property\u2019s graveyard, situated between the training track and training barn. Plank plowed money into the dilapidated spread, installing 14 miles of whitewashed oak-board fence lines and a three-quarter-mile training track made from state-of-the-art synthetic material, including recycled Under Armour shirts.<\/div>\n
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A rich man\u2019s money pit? Not to hear Plank tell it. He expects his newfound passion to pay tangible dividends. \u201cI have a big philosophy in business. Everything we do has to make money\u2014not because it\u2019s a greedy, capitalist thing. It\u2019s because it\u2019s about winning. It\u2019s about success,\u2019\u2019 he says, adding that he\u2019s not interested in having to explain to the Internal Revenue Service why his operation lost money \u201cseven years in a row.\u201d (It\u2019s easier for a taxpayer to deduct horse losses if he makes a profit in at least two years out of seven.)<\/div>\n
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Four years into it Plank is surely still losing money. So far this year, in 51 races Sagamore starters have won $436,821, crossing the wire first ten times. Last year Sagamore starters earned $1,447,320 in 40 races. If he does make a profit, Plank will stand out from the horseflesh dabblers of yore.<\/div>\n
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The sport of kings, after all, is one of the answers to the classic joke about the best way to make a small fortune (start with a large one). For decades it\u2019s been a fun, glamorous and largely fruitless investment for most, especially as lotteries and casinos have devastated the pari-mutuel business. Plank is one of a handful of young, wealthy investors who believe they can defy the odds through diversification\u2014meaning owning lots of horses. Sagamore currently has 45, including 10 broodmares and 20 horses in training. VitaminWater founder Mike Repole owns 75 Thoroughbreds.<\/div>\n
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Meanwhile, outside that tiny group, risk and potential losses are being spread via racing partnerships run by \u00admanagement firms such as Team Valor, Dogwood Stables, Centennial Farms and West Point Thoroughbreds, which offer shares as small as 1%. That means investors can now become part of the racing elite for mere thousands\u2014plus ongoing expenses. The raucous scene in the winner\u2019s circle at this year\u2019s Kentucky Derby evidenced this strategy. As the wreath of bright red roses was flung over winner \u00adAnimal Kingdom\u2019s sweaty neck, his owners\u2014all 20 of them\u2014plus family and friends, scrambled and jostled for breathing space, laughing and crying as the renowned trophy was presented, along with a hefty check for $1,411,800.<\/p>\n

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A syndicate managed by Team Valor and its CEO, Barry Irwin, owns Animal Kingdom. \u201cSheikh Mohammed of Dubai has spent in excess of $150 million on horseflesh trying to win the Kentucky Derby. He\u2019s zero for eight, and I\u2019m one for one,\u201d crows Animal Kingdom partner David Dillon, 57, corporate director of finance at Kokua Hospitality, a Chicago-based hotel management company. (Sheikh Mohammed bin Rashid al-Maktoum is the world\u2019s biggest buyer of racehorses.)<\/div>\n
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Dillon is typical of today\u2019s new partnership investors. \u201cI don\u2019t own oil wells,\u201d he says. \u201cI\u2019m not rich. For a guy like me it gives me a chance to invest in something I have loved my whole life.\u201d As a child he went to the races on ladies\u2019 day with his mom, a die-hard racing fan, now 87. \u201cI was reading the Daily Racing Form at the same time as my Dick and Jane reader,\u201d he says.<\/div>\n
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What separates Dillon and similar investors from their predecessors in the racing game is their low entry price. In September 2009 Dillon paid slightly more than $8,000 for a 5% share in Animal Kingdom, a 20-to-1 Derby long shot. He also owns shares in two other horses with Team Valor and is realistic about his expected investment return. \u201cI do it for the pride of ownership. I do it because I love watching my horses run and going on the backstretch in the morning to watch the workout.\u201d<\/div>\n
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Interested? The size of syndicates and partnerships varies significantly among companies, but the length of the investment typically runs three to five years. As with many investments, it\u2019s key to know how much more money needs to follow the initial ante. For example, W. Cothran \u201cCot\u201d Campbell, president of Aiken, S.C.-based Dogwood Stable (the pioneer of the partnership concept), usually accepts only four partners per horse\u2014each gets 24%, with Dogwood taking a 4% management stake. The average initial investment is $30,000, plus expenses: Owners are billed quarterly for their percentage of an estimated $45,000 a year per horse for feed, stables, training, entry fees, farriers, insurance and transportation.<\/div>\n
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Team Valor\u2019s partnerships are set up as limited liability companies and accept more investors per horse, usually 13 to 16. Irwin currently manages 50 partnerships in this country, 20 in South Africa and half a dozen in Europe for a total client base of 250. The average investment ranges from $12,500 to $16,000, although it can run as high as $100,000. Annual costs, an estimated $60,000 per horse, are billed \u00adproportionally every two months. \u201cWinnings are returned in about seven days,\u201d Irwin says.<\/div>\n
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Be warned: Only half the horses that race ever make it to the winner\u2019s circle, and fewer than 1% win a truly elite race. \u201cIt is possible to make money at it,\u201d Irwin says. \u201cIs it likely? No.\u201d<\/div>\n
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By Irwin\u2019s account, Team Valor has about a dozen investors who make money regularly. \u201cThey pick the right horses,\u201d he says. \u201cThey\u2019ve got a good attitude. They roll with the punches.\u201d There are, he says, another two dozen investors who at least break even. The rest have lost money, he says matter-of-factly.<\/div>\n
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The key again is diversification. Irwin says he did a study a few years ago and found that investors who bought shares in as many as 23 horses did well. As he puts it: \u201cThe more chances you take, the better shot you got.\u201d Perhaps.<\/div>\n
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\u201cYou would be an idiot to get into a racing partnership strictly as an investment,\u201d drawls Campbell. \u201cIt\u2019s the kind of thing that could shoot the moon and have incredible returns, but you\u2019d better not count on it. The pleasure aspect has got to be strong. It\u2019s a speculative deal. It\u2019s something that might make money. It\u2019s got good tax benefits if it doesn\u2019t, and third, and maybe most important \u2026 it\u2019s a hell of a lot of fun.\u201d<\/div>\n
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Taxes, as Campbell suggests, remain key. The horse partnerships pass through a proportionate share of net income or losses and various other tax items to each investor\u2019s individual tax return, notes tax specialist Carl Gough, controller at the Thoroughbred Owners & Breeders Association. But since these are typically \u201cpassive losses\u201d an investor may not be able to claim all of them until his partnership interest is sold or terminated. \u201cComplications arise when at-risk rules and passive activity rules are brought into play,\u2019\u2019 he warns.<\/div>\n
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As the active owner of Sagamore Farm, Plank doesn\u2019t have to worry about passive loss tax nuances. He makes decisions with help from high school friend Tom Mullikin, who manages the operation. Most of the training duties for the farm fall to Ignacio Correas IV, while H. Graham Motion trains Shared Account, the 2010 Breeders\u2019 Cup winner.<\/div>\n
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Plank is quick to note that Under Armour remains his number one priority. Yet even while insisting he will eventually make money from racing, he acknowledges it is one of those rare investments that allow you to feel like a winner even when you\u2019re losing money. \u201cYou\u2019re probably not going to get rich,\u201d Plank says. \u201cBut there\u2019s nothing better than sitting in the winner\u2019s circle when they come home.\u201d<\/div>\n
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