Thoroughbred syndicates have hidden fees

Hidden fees and high markups continue to plague thoroughbred syndicates, here’s why it’s holding back our entire industry and how to fix it….

Most people credit Cot Campbell for structuring the first widely promoted thoroughbred racing syndicate with Dogwood Stable in the 1970s. Since that time, this innovative model of shared ownership has been responsible for bringing many new owners into the business. Today there are a number of racing syndicates available, from “mom & pop” groups offering shared interest in a couple of modest priced horses to large, well known syndicates selling shares in high priced yearlings and two year olds, complete with sophisticated marketing teams and an army of commissioned salespeople. While the exact structure of each syndicate obviously varies, the basic format hasn’t changed much since the 1970s. Virtually all syndicates are based on the premise of selling marked up horses to clients. In other words, they buy a horse at a sale (or privately) for one price and then sell shares in it to the public for a much higher price. Markups usually range from 50% - 200% +. Obviously, while there are some additional expenses for the syndicator besides the purchase price, $150,000 in markups per horse pays for a lot of ads, marketing, and commissioned sales people. If someone buys a horse for $100,000 and are able to sell 10 shares for $25,000 each, they end up with no skin in the game and a very nice profit long before it reaches the racetrack, so not surprisingly, syndicates with large markups have been the standard in our industry for the last 40+ years.

People are absolutely entitled to be compensated for the time, effort and risk involved in finding a good horse at public auction or privately. Anyone who has done it knows it’s a lot of work!  However, the current syndicate model is an outdated structure that requires a fresh, more buyer-friendly approach. The problem is, race purses tend to barely cover training costs and the vast majority of horses are ultimately sold for far less than their initial purchase prices (many are given away to good homes upon retirement since virtually no male horses and only a small minority of fillies have any residual breeding value upon retirement). Few investments of any kind have an economic structure that can support layering on the size of markups many well-known thoroughbred syndicates charge.

Beyond the cost of markups to the buyer, there is a pressing need for better and clearer disclosure of all fees and charges involved with thoroughbred syndicates. This must include a statement in bold letters on all sales material and at the beginning of the legal documents people sign of exactly how much the syndicate initially paid for the horse and where, when and from whom it was purchased. A syndicate is entitled to charge whatever the market will bear, as long as they are clear and upfront about what they initially paid for the horse, what markups are included (many syndicates not only mark up the initial purchase price of the horse but also pad the training, vet, and/or other bills), and tell potential buyers, at least generally, what percentages of their syndicated horses make money or return any part of the purchase price at all.  Sadly many syndicates fail to disclose what they paid for the horses and what kind and types of markups they are charging. A buyer can determine that for themselves, at least for horses purchased at public auction, but it takes time and research they should not be forced to do just to understand the basic facts. Syndicates that fail to offer these disclosures not only do our entire industry a huge disservice, but risk falling afoul of both state and federal securities regulations, which apply to thoroughbred syndicates as much as they do to private placement offerings of real estate, equipment leasing, oil & gas drilling, etc.

Some would argue that the primary reasons for owning racehorses are other than economic. Obviously there are easier ways to make money than thoroughbred ownership and most people understand that a large majority of horses ultimately lose money. That said, when someone purchases a horse for a reasonable price at a sale, they do with the reasonable expectation that if the horse turns out to be a quality runner they at least have a shot to make money, and if the horse goes on to win graded stakes they can end up with a dramatic profit. As difficult as it may be to come up with a really good horse, there must be the possibility of a big economic return to look forward to when you do. A sizable markup decimates the return to syndicate purchasers no matter how well or poorly the horse performs on the track, so much so that even a horse that goes on to win multiple graded stakes will frequently end up to be a significant money loser for the syndicate buyer.

Let’s look for example at Hip #106, purchased for $50,000 from the recently concluded OBS March 2016 two year old in training sale, with a 5% share offered for $9750.00 by a well-known syndicate, and Hip #253 from the same sale, purchased for $185,000 with a 5% share offered for $22,250.00 by the same people. The sales price includes training and vet expenses through the end of 2016, but even with 9 months of expenses included, these appear to represent markups of 200%+. There is no mention in any of the sales literature of where these horses were purchased, the initial price paid for them, or what the actual markup is. It’s even tougher when a horse is purchased privately rather than at public auction. A different syndicate offers shares in a filly named Queen Blossom, a group III stakes winner in Ireland. They are valuing her at $850,000, with 10% shares offered for $85,000 and 5% shares offered for $42,500. What did they actually pay for her? Impossible to know, because they purchased her privately and the purchase price isn’t mentioned in any of the sales literature here either. You can purchase some really nice grade/group III stakes winning fillies for $150,000 - $400,000 in many cases. Each horse is an individual of course; perhaps they paid a lot more and perhaps she’s worth every penny, but aren’t potential buyers entitled to know the numbers going into the deal?

Let’s look at what markups do to the bottom line. Take as an example an attractive colt purchased for $100,000 at public auction, which happens to be exactly the median sale price at the OBS March sale where two of the marked up horses referred to above were purchased. Assume $40,000 a year in total training expenses (will obviously vary by track and trainer, but a reasonable average). Now let’s say it races three years, winning a maiden special weight race with a $50,000 purse, three allowance races with $60,000 purses, a listed stake with a $100,000 purse, a grade II stake with a $200,000 purse, and is finally claimed away from the owners at age 5 for $50,000. Obviously that’s an exceptionally successful horse by any account, far less than 1% of all horses from each foal crop end up with this kind of record. Here’s the numbers with and without a 150% markup.

In this example, the markup has turned an $84,400 profit into a $65,600 loss! You can adjust the numbers anyway you like but it’s obvious that even with such an exceptionally successful horse, the buyer of a significantly marked up share has virtually no chance of breaking even, let alone making money. If the horse had been injured at some point and retired without being claimed the numbers would have been a lot worse, since a colt has no residual breeding value unless it’s a major grade 1 stakes winner. A well bred filly with these racetrack results would have significant residual value as a broodmare prospect, but even there the markup would eat into the bottom line dramatically.

The above demonstrates how tough it is to make money with a racehorse. $100,000 represents the median price from OBS March in 2016 and is considerably less than the $158,923 sales average, yet even paying $100,000 means you need a pretty nice horse to come out ahead. For the 99% + of horses who aren’t successful as the grade II stakes winner described above, without the markup you’d stand a pretty good shot at coming out roughly breakeven if the horse were to turn out to be an upper priced claiming – allowance horse that earned $100,000 over the course of a couple of years and was claimed-sold for $50,000, whereas with the 150% markup you’d be looking at a near total loss of your entire investment. People pay $500,000+ for many horses at leading yearling and two year old sales, and the numbers show paying that much even without a markup gives you virtually no chance to come out ahead unless the horse wins a Triple Crown or Breeder’s Cup race, but that’s another story.

Just as the full service brokerage model that existed to purchase stocks and bonds for decades was turned on its head by upstart discount brokers offering online trades for under $10 in the 1990s, thoroughbred racing needs an updated shared-ownership model with clear disclosure of all fees and costs and without the markups that make it virtually impossible to break even, let alone make a profit, with even a highly successful racehorse. Kenwood's Co-ownership program including our trademarked “Taste of Thoroughbred Ownership” offers buyers a one-time payment including all bills and expenses, clear disclosure of all costs, and no markups or hidden fees. We offer the details of the structure of this program free of charge to everyone, hoping other syndicates will emulate it. We make a lot less money without the markups, but our goal is to bring new people into the business the right way. We believe it’s an excellent format that we hope to see become the industry standard over time, but the point is not to promote our particular program. Whatever the structure and whoever offers it, our goal as an industry must be a less costly more user-friendly ownership model with clear disclosure of all fees to become the standard for syndicating racehorses. When the present overpriced syndicate model catches up with the times and reflects the economics of thoroughbred ownership, syndicates will have more customers, far more repeat business, and we will all benefit by attracting the new owners we desperately need to revitalize thoroughbred racing.