FROM THE FIELD OF Horse investing continues to generate high risk, high drama

planned initial winning horses in the U.S. and Canada Apublic offering all together total more than $1.2 billion. that aimed to raise $24 2003 champ While the cost of maintaining a cham- million for ownership is owned by a pion can be substantial, shares in portfolios group of friends who pooled an animal that finishes in the money at of racehorses was put their money to start a breed- all three events in the Triple Crown can out to pasture this past ing operation. be valued at up to $50 million. With so ROBERT summer. much money at stake, there are many DARWELL The investment industry experts who make a living vehicle, headed by rac- picking and grooming winning horses. SEAN FAUSSETT ing industry veteran Relying on such an expert buyer can Frank Stronach, was help increase the chances of investing to launch six public companies, each of in a winning horse and mitigate some which would back 20 horses. As the fil- of the risks. Ownership is found at all ings with the Securities and Exchange income levels, with the largest group Commission explain, the new ventures making less than $50,000 per year. would have offered “a broad range of The allure, or mania, of investing in investors the opportunity to participate racehorses has attracted governments in the enjoyment and excitement of as well as starry-eyed investors. For an equity investment in thoroughbred example, the Irish parliament spent racehorses at a minimum level of in- $700,000 in 1953, or the equivalent of $5.6 vestment [$100] commitment that is sig- million today, on a racehorse from the nificantly lower than ordinarily accom- Agha Khan in an effort to jump-start panies such opportunity.” However, the the Irish horse breeding industry. The IPO was scratched due to the complexity move, decried by critics as lunacy at the of the SEC rules and the state regula- time, has paid off in the long run. Ire- tions governing the offering of shares land is now the third largest producer and horse racing in general. of foals behind the U.S. and Australia, Instead, the venture will go forward and the industry is around $1.5 as a series of private partnerships, billion to Ireland annually. Similarly, which is common in the world of horse the economic impact of horse racing in racing. For example, the winner of the the U.S. is not to be ignored. According 2011 Kentucky Derby, , to a study commissioned by The is owned by a partnership of 20 people. Club, the sport contributes billions an- The 2003 standout gelding Funny Cide is nually to the U.S. economy and provides owned by a group of high school friends jobs to nearly 1 million people. who pooled their money to start a breed- For the , investing in racehorses ing operation. GETTY IMAGES has all the excitement, romance and There are many different vehicles for bred racehorses is a speculative activity offset the losses incurred by the others. drama of investing in a film, fine wine getting off and running in the world of and the most frequent financial outcome The regulation of horse racing and or any other exotic commodity. Even for horse racing, but owning an individual from ownership of a thoroughbred other forms of gambling has traditional- those with financial acumen, the steep horse is considered one of the most risk- racehorse or an equity interest in a ly been left to the states. This approach learning curve and substantial role that laden. Horses are typically purchased thoroughbred racehorse is the partial and the multitude of differing state laws luck plays in the sport will give any in- a few years before they are set to race. or total loss of invested capital.” Even makes any IPO for shares in a horse vestor a run for the money. With horse During this time, a horse can become among sophisticated investors with racing endeavor infinitely more compli- racing, it is surely the love of the sport lame, frenzied, diseased or simply fail to decades of experience in horse racing, cated. As Stronach’s prospectuses high- that keeps investors climbing back into turn into a winner. Horses can produce such investments are essentially about lighted, “[m]any of these regulations the saddle. n ancillary income after retirement by en- the excitement and the pride of owning are subject to differing interpretations Robert Darwell (darwell@sheppard- tering the breeding market, but most are a champion, as opposed to the potential- that may, in certain cases, result in un- mullin.com) is the chair of Sheppard simply a losing investment. ly massive but risky financial upsides. intended consequences that could - Mullin’s Entertainment, Media and Tech- In a survey of the four most-expensive Given the volatility of racehorse for- rially and adversely impact the effective nology Practice Group and splits his time horses sold at auction, three of them tunes, many investors have seen the wis- operation of our business.” among Los Angeles, New York, Nashville have resulted in massive write-offs — dom of investing in a stable of horses. Regulatory uncertainty aside, the and Buenos Aires. Sean Faussett (sean. each in the tens of millions of dollars. Much like investing in a slate of films value of available race winnings, or [email protected]) is a third-year stu- As the SEC filings from Stronach’s IPO or a mutual fund, the hope is that the purses, has remained stable over the dent at Loyola Law School and served as acknowledge: “[I]nvesting in thorough- winnings of some breakout animals will past decade. The purses available for an intern at Sheppard Mullin.

12 ❘ OCTOBER 29-NOVEMBER 4, 2012 www.sportsbusinessjournal.com ❘ Street & Smith’s SportsBusiness JOURNAL