Fractional and full investment opportunities in racehorses
Today we’ve got an awesome (and timely!) issue exploring the world of investing in race horses.
As you may have heard, the Kentucky Derby took place over the weekend. As punters around the world sipped their mint juleps and honed their quinellas, we were busy examining the racehorse investing landscape through a full ownership, fractional, and syndicate lens.
It turns out that while owning a race horse outright is out of reach for most people, fractional investing and syndicates are options available for those interested in investing in thoroughbreds. There’s more to race horses than throwing your money at a betting agency. Investors can make a pretty penny through race horse investing — both directly and indirectly.
History of investing in race horses
Horse racing goes way back. As early as 3500 BC, nomadic Central Asian steppe people were already breeding and racing domesticated horses. These groups, from the Scythians to the Mongols centuries later, are still among the greatest horse riding cultures in history.
In the late 1700s and early 1800s, completely driven by interest among the rich, horse racing spread around the world. Wealthy elites would purchase horses, race them, and then reap their prize winnings. So in that sense, investing in race horses has been around for a couple hundred years.
Fast forward to today, and horse racing is now a mass-publicized, mass-televised event that is enjoyed by people from all social statuses and classes. Part of this is due to the legalization of gambling, defeating the monopoly on bookmakers, and allowing pundits to get fair odds on races. Nowadays, anyone can turn up at a racetrack, wear a ridiculous hat, and watch their favorite horse do what they do best, usually while enjoying a glass or two of champagne.
As horse racing has become modernized, so too has the investment process. Reflecting a shift in the sport’s demographics, race horse investing is no longer limited to those with millions to spare.
How does race horse investing work?
Who buys race horses?
Owning horses outright is still mostly limited to the wealthy and those already in the industry. Though anyone with enough money can theoretically invest in a race horse, you would be hard-pressed to find many owners that aren’t huge fans of the sport.
A major reason for this is the due diligence required for a horse. Much of the ROI is based on the horse’s track performance. Those knowledgeable about the sport, including trainers and breeders, have a much greater chance of success.
A few high-profile owners include:
- Steven Spielberg invested in AtswhatImtalkinbout in the 2003 Kentucky Derby.
- MC Hammer owned multiple horses (Lite Light and Dance Floor) throughout the early 1990s.
- The Queen of England, along with much of the royal family, regularly attended races across her reign and owned several successful thoroughbreds up until the 80s.
- Sir Alex Ferguson, best known for his tenure with Manchester United, has been involved in horse racing for a very long time. One of his horses, Can Des Obeaux, won the King George VI Chase in 2018.
How do horse owners make money?
Prize money is the most obvious way to earn a return. A super successful horse can rake in millions of dollars through prize money alone.
The yearly prize pool for horse racing continues to climb, with approximately $3.5 billion on offer per year. Australia, a country that is obsessed with horse racing, has a big cup each year called the Melbourne Cup. In 2020, with Covid in the rear-view mirror, The Melbourne Cup offered a purse of AUD $8 million, eclipsing the 2021 Kentucky Derby’s purse of $3 million. And the Saudi Cup has a whopping $20 million purse.
But most horses don’t win millions. For an average-performing horse, the margins can be rather slim, and owners may look to other means to spin a profit.
One such method is horse breeding (through a stud). Owners make money breeding the horse with female suitors, a practice that can actually end up being far more lucrative than purse winnings. Not only do breeders get a cut of each mare sold, they are also entitled to something called Breeder’s Awards, which entitle the stud’s owner to a percentage of the horse’s winnings. (Kind of like a horse ISA.)
Finally, investors can make money by pinhooking horses, where they buy them young, train them and then flip the horse once they are race-ready. (Kind of like flipping a starter website.) This has the inherent risk of buying a foal (young horse) or yearling (“teenage” horse, at least 1 yr old) that doesn’t handle the rigors of training very well, or is unfortunately just straight-up slow.
However, if you make the right decision, the profits can be very appealing with only a year or two of illiquidity before racing begins. The average age at which thoroughbred horses commence racing is three years, though in Australia, some horses start their racing careers as two-year-olds, a controversial issue.
Horse investing returns
The average time horizon for race horse investment depends on the method of realizing profits, and the purchase age of a horse.
In spite of their relatively lengthy lifespan, a horse’s career on the track is pretty short — an average of just 2-4 years. A lucky owner might make a million dollars within their first month of ownership, while another may wait 3 years until the horse’s retirement without winning enough to turn a profit. But either way, returns aren’t really expected beyond the duration of the horse’s racing life.
Pinhooking and breeding have different return scopes. For example, buying a horse as a foal and flipping it as a yearling is a definitive one-year period where an investor’s money is locked up. Meanwhile, a healthy stud can reap a return for as long as it can continue breeding — which is often over 20 years, though the quality of the offspring may deteriorate over time.
Some stud fees can earn an immediate return, with race horse Galileo reportedly commanding $700,000 for a one-night stand, while others may never see a profit. It’s important to remember most studs will only become desirable post-racing career, which means even if the horse becomes a stud (most don’t) owners will have to wait up to 6 years from purchase to start seeing revenue.
In a nutshell, if your horse is winning races, it can be a double-whammy. Since only successful race horses become highly paid studs, good investments can go through the roof, while bad investments go absolutely nowhere. Which brings us to the next question…
What are the risks with buying a race horse?
Race horses can be a very risky investment, no matter whether you plan to race, breed or pinhook the thoroughbred.
First of all, there is the looming possibility that the horse is just not very fast. In the cruelest & most capitalistic terms, this renders the horse valueless, and is the easiest way for an owner to lose their money. Not only will the horse be unfit for racing, but the market is unlikely to be interested in a horse that loses dramatically at every field event.
Even if the horse shows great athletic promise, winning is hard. The distribution of prize money is very, very top-heavy. In the 2013/4 season, only 50 out of 30,000 horses (0.16%) earned over $500k. Of those, 18,000 horses didn’t win a single race, and the vast majority earned under $100,000. While 100k sounds good, when you factor in the costs of horse ownership (see below), it’s far less appealing.
Then there’s everything else that can go wrong. Injury is a huge issue in both training and racing, with many horse’s careers (and sadly, even lives) being tragically cut short. Vet fees can become extreme or studs may become infertile or only produce stillborns. Just like humans, some horses have difficult-to-deal-with personalities.
There are a lot of risks with race horse ownership that investors must consider before jumping in the deep end.
How much does it cost to own a race horse?
The reason investment can be so risky is the sheer cost of ownership. Horses are almost always sold at auction, and the average sale price of a race horse is around $40,000, but this figure depends on the region and pedigree of the horses up for auction. The most expensive horse ever sold was Fusaichi Pegasus, which fetched $70 million at an auction in 2000.
After that comes maintenance, which can be another $40,000 per year. The primary expense is hiring a trainer, whose rate will vary depending on their experience and track record of success. Beyond that, you’ve got expenses like food, housing, vet visits, dental treatments, chiropractor sessions, horseshoes, and jockey commissions.
What is a horse racing syndicate?
Okay, so we’ve established that it’s damn expensive to own a race horse outright. Most don’t have a few hundred grand lying around, that’s where syndicates come in.
A horse racing syndicate is a cheaper form of investment in a race horse between a group of people, each of whom gets a percentage stake in ownership. Individual ownership shares usually vary between from 5-10%, but there’s no exact limit. It all depends on the structure and on how many people are in the syndicate.
Syndicates are a de-risking mechanism. While a sole owner would have to front the entire management costs of a yearling, a syndicate has the advantage of splitting it among investors. While this does mean the yields are similarly split, it is far less risky than buying a horse yourself.
Anybody can get involved in horse syndication if they’re just selling to friends and family. But if you want to publicly advertise race horse shares for sale, you’ll likely need to get government-approved license.
The syndicate manager (or business) will often retain majority control over the day-to-day operations and investment of funds. This means it’s important to avoid sketchy syndicators and perform extensive due diligence on those distributing stakes. This can be done through directly communicating with the syndicator, researching past performances of their horses, and assessing reviews online. You could even contact the relevant government body that is responsible for overseeing syndicates in your country.
Horse racing syndicates are very popular and are not exclusive to yearlings or ready-to-race thoroughbreds — in fact, breeding syndicates for retired stallions (uncastrated male horses) are also becoming common.
How to buy a race horse
So now you know a bit about how the industry works. So how do you actually go about buying one of these majestic animals?
Race horse marketplaces
Online marketplaces & auction sites allow new investors to stake ownership. While some allow for fractional investing, others sell race-ready thoroughbreds or stallions at stud.
My Horse Dealer
MyHorseDealer is an online marketplace focused on North American race horse investors. Listings include a wide range of horse pedigrees from all over the globe, including the UK and Europe.
The site’s goal is to connect some of the greatest European race horses with North American buyers and allow them to get involved in the sport. A review system for buyers and sellers allows new investors to develop a sense of trust with one another and reduces the chances of being scammed.
BloodstockAuction is the first digital marketplace to accommodate transactions of race horses. Started in 2009, Bloodstock was one of the first companies to offer the ability to auction thoroughbreds online.
Working out of Australia, their platform offers one of the widest available variety of horses, from tried horses to weanlings (between 6 months to 1 year old). It operates as a one-stop-shop for budding owners, breeders, trainers and syndicates.
GavelHouse is another online horse auction platform that has modernized auctions of thoroughbreds (as well as standardbreds). Based in New Zealand (another country where horse racing is extremely popular) they host monthly auctions to increase efficiency and accessibility of race horse ownership and breeding.
Each month GavelHouse releases a catalogue, where sellers can list their horses, and potential buyers can undergo whatever due diligence processes they desire. After a week, there is an auction day, where buyers can assess the candidates and bid on the horse.
Fractional race horse marketplaces
Similar to forming a syndicate, fractional investment in race horses has a slightly different investment process.
While syndicates are formed between a group of like-minded individuals operating as a singular body, fractional investment is more personalized and has parallels with investing in the stock market.
There are typically no management fees for the horse’s upkeep and it isn’t split evenly among a group of people — investors can buy as much or as little ownership as they please. With micro shares starting at 0.01%, this is a newer method of getting involved in horse racing with an attractively low entry point.
MyRaceHorse is one of the most popular fractional investment platforms for Australian race horses accessible globally. Offering up to 10,000 shares per runner, investors can secure a stake for as little as $50. They are classified as a Management Investment Scheme (MIS) which pool funds from various parties and used to acquire and cover fees relating to the horse’s management. This means that there are no additional fees post-investment.
The investment process is simple: MyRaceHorse purchases a part-stake in a race horse, and then distributes that ownership among its user base. Their goal isn’t just a financial one. They aim to “enrich the horse racing experience.” From providing updates on the horse’s training, race day events and parties as well as the potential for mounting yard access, MyRaceHorse is perfect for those with a keen interest in the sport.
Two things that make investing through Commonwealth so compelling are a) You can invest from anywhere in the world, and b) You don’t need to be an accredited investor. (Our European & international readers often ask about new fractional opportunities — well, this is one of them!)
Commonwealth works very similarly to MyRaceHorse. The company acquires budding race horses after extensive research and talent identification from their world-class bloodstock team, before offering equity to investors via their platform.
Their first set of offerings fluctuate around the $100,000 mark, with shares starting from $50. It’s an accessible entry point for those just looking to dip their toes, as well as investors that want a larger portion of race horse ownership. If the offering doesn’t completely sell out, investor shares are fully refunded. They bake 18-24 months of care and training costs directly into each of one of their offerings, so unlike with most syndicates, investors don’t have to worry about upcoming bills or ongoing fees.
The detail they provide on each thoroughbred is excellent, giving investors plenty of information on the horse’s race history, pedigree and trainer. Of course, it’s always a good idea to get research from a third-party to avoid bias. You can even hire specialized race horse consultants to look into race form or the trainer’s track record.
If your horse wins (or when your horse wins.. c’mon, let’s be positive here!),you receive a percentage of their winnings based on your stake. But it doesn’t stop there. After purchasing shares of a horse, their app gives you ongoing text, photo and video updates. So you get to experience every step of the horse’s journey from the stable to the winner’s circle. Not only will you get to experience things, you’ll learn all about racing, training and more. Best of all, if your horse does reign supreme, you’ll be able to soak it up in the winner’s circle with the actual trainer, jockey and other shareholders!
CEO Brian Doxtator is an avid race-watcher and has been involved with numerous entrepreneurial endeavors, demonstrating a history of innovation and a strong managerial spirit. He loves the experience of horse racing beyond the investment side, and wants to bring the joy of the sport to other like-minded people. This means you aren’t just getting a random stockbroker managing your assets — you’re investing with someone who truly cares.
In the coming weeks, they’ll be adding five more horses to their offering as part of their partnership with WinStar Farm. They’re also developing an Android app, which they plan to have ready in the second half of 2021.
Keep a close eye on these guys. ????
Zed Run: Investing in digital race horses
The world is opening up to new, fully accessible methods of fractional investment. Where owning a race horse once used to be the stuff of wealthy dreams, it’s no longer out of reach. It’s a reality.
But what comes next?
Well, it’s time to look at something called ZED RUN.
Zed Run is a platform for investing in virtual race horses. Yeah. For real.
Launched in Sydney, Australia in 2019, Zed Run is the fusion of NFTs, video games and real live gambling.
You breed them, raise them, groom them, buy them, race them, and sell them. All in ETH. The highest price paid for a horse so far is 9 ETH ($25k). It’s like Tamagotchi pets meets Robinhood meets Tron.
Operating on the blockchain, everything about Zed Run is virtual. The horses you buy, the studs you breed, the races you watch. This doesn’t mean it’s randomized though; due to the way the site’s algorithms work, it stands as a legitimate investment.
You can start off by purchasing a horse directly through their marketplace (which is unfortunately sold out right now) or via a third-party such as OpenSea. As you build up your ‘stable’ you can begin to submit your horses to simulated races (often with an entry fee of around $5) with the winnings distributed to the owners.
There also exists a stud farm where prodigious horses can breed, providing owners with a dividend of sorts. As per actual race horse investment, the more successful your stable, the more expensive the stud fee for your horse as you go about creating a legacy.
Each horse’s prowess is determined by a few factors — Genotype and bloodline. The rarer the pedigree, the faster the horse (and the more expensive the ownership). The first generation of available horses were known as the ‘Genesis’ breed, and only 38,000 of them were put into circulation.
There are four bloodlines, each with a different level of scarcity, influencing the cost of investment, the potential winnings and the likelihood of an impressive stud fee. Finally, each individual horse has genotype, which is kind of like a serial number on an NFT trading card. The closer to 1 it is, the more pure and valuable the digital horse.
This space is evolving extremely fast. Heck, there’s already multiple websites dedicated entirely to what’s happening on Zed Run. The Zed Gazette contains comprehensive Zed Run News, guides, and a community.
While still in its infancy, Zed is one of the single most interesting investment opportunities available. Mirroring the rise of esports and virtual crypto casinos, this platform for digital race horse ownership may be a beacon to the future, directly appealing to a younger generation of investors.
Where does this all end up? Who knows. I could be biased on multiple levels, but I think this is the start of something enormous.
In the meantime, check them out if you’re feeling lucky. Or just settle in and head over to their Twitch to catch a few virtual races.