Meanwhile, outside that tiny group, risk and potential losses are being spread via racing partnerships run by management 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—plus ongoing expenses. The raucous scene in the winner’s circle at this year’s Kentucky Derby evidenced this strategy. As the wreath of bright red roses was flung over winner Animal Kingdom’s sweaty neck, his owners—all 20 of them—plus 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.
By adminaj on April 20, 2012
This story appears in the Dec. 5 Investment Guide issue of Forbes Magazine. Click here for the full Investment Guide 2012 special report.
THE THRILL OF VICTORY
Thoroughbreds remain a bad investment overall. But a new breed of owner is trying to minimize the risk and maximize the fun.
Kevin Plank, founder and CEO of Under Armour, the sports-apparel company with $1 billion-plus in annual revenues, doesn’t start something on a whim. The 39-year-old is all about winning. Right now he wants to win Thoroughbred racing’s Triple Crown.
So he started big four years ago, scooping up an icon of the sport’s 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’s 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.
A rich man’s money pit? Not to hear Plank tell it. He expects his newfound passion to pay tangible dividends. “I have a big philosophy in business. Everything we do has to make money—not because it’s a greedy, capitalist thing. It’s because it’s about winning. It’s about success,’’ he says, adding that he’s not interested in having to explain to the Internal Revenue Service why his operation lost money “seven years in a row.” (It’s easier for a taxpayer to deduct horse losses if he makes a profit in at least two years out of seven.)
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.
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’s 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—meaning owning lots of horses. Sagamore currently has 45, including 10 broodmares and 20 horses in training. VitaminWater founder Mike Repole owns 75 Thoroughbreds.
A syndicate managed by Team Valor and its CEO, Barry Irwin, owns Animal Kingdom. “Sheikh Mohammed of Dubai has spent in excess of $150 million on horseflesh trying to win the Kentucky Derby. He’s zero for eight, and I’m one for one,” 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’s biggest buyer of racehorses.)
Dillon is typical of today’s new partnership investors. “I don’t own oil wells,” he says. “I’m not rich. For a guy like me it gives me a chance to invest in something I have loved my whole life.” As a child he went to the races on ladies’ day with his mom, a die-hard racing fan, now 87. “I was reading the Daily Racing Form at the same time as my Dick and Jane reader,” he says.
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. “I 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.”
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’s key to know how much more money needs to follow the initial ante. For example, W. Cothran “Cot” Campbell, president of Aiken, S.C.-based Dogwood Stable (the pioneer of the partnership concept), usually accepts only four partners per horse—each 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.
Team Valor’s 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 proportionally every two months. “Winnings are returned in about seven days,” Irwin says.
Be warned: Only half the horses that race ever make it to the winner’s circle, and fewer than 1% win a truly elite race. “It is possible to make money at it,” Irwin says. “Is it likely? No.”
By Irwin’s account, Team Valor has about a dozen investors who make money regularly. “They pick the right horses,” he says. “They’ve got a good attitude. They roll with the punches.” There are, he says, another two dozen investors who at least break even. The rest have lost money, he says matter-of-factly.
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: “The more chances you take, the better shot you got.” Perhaps.
“You would be an idiot to get into a racing partnership strictly as an investment,” drawls Campbell. “It’s the kind of thing that could shoot the moon and have incredible returns, but you’d better not count on it. The pleasure aspect has got to be strong. It’s a speculative deal. It’s something that might make money. It’s got good tax benefits if it doesn’t, and third, and maybe most important … it’s a hell of a lot of fun.”
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’s individual tax return, notes tax specialist Carl Gough, controller at the Thoroughbred Owners & Breeders Association. But since these are typically “passive losses” an investor may not be able to claim all of them until his partnership interest is sold or terminated. “Complications arise when at-risk rules and passive activity rules are brought into play,’’ he warns.
As the active owner of Sagamore Farm, Plank doesn’t 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’ Cup winner.
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’re losing money. “You’re probably not going to get rich,” Plank says. “But there’s nothing better than sitting in the winner’s circle when they come home.”