In 2008, six friends formed a syndicate to buy a racehorse that was “built like a bulldozer,” each contributing AU$35,000. More than one of their spouses criticised this investment, no doubt aware of the old adage that the fastest way to make a small for-tune in horse racing is to start with a large fortune.
However, their critics were silenced and the syn-dicate went on to acquire a horse they affectionately named Nelly. In April 2013, Nelly retired from the track after 25 consecutive wins, having won more than AU$8.5 million for her owners and with over AU$45 million having been bet on her. Nelly became the only horse ever to grace the cover of Vogue magazine and had become the number two-rated racehorse in the world, but under her racing name of Black Caviar. She may have been “built like a bulldozer” but in the words of BBC racing correspondent Frankie Keogh, she had also “performed like a ballerina.”
This is the dream of all racehorse owners and the story is worthy of re-telling precisely because it is unusual. Yet racing (and other equestrian sports) remain perennially popular with the high net worth (HNW) community who invest millions into bloodstock every year. Indeed, the recent Knight Frank Wealth Report forecasts the amount to be invested in horses by HNW individuals (and in par-ticular those from the emerging markets) is set to rise in 2013: by 10% in the Middle East (2012: +3%), by 5% in Australasia (2012: +5%), by +4% in Latin America (2012:
Despite the risks, why does this interest remain? Most investors understand an investment in racing and equestrian sports is an investment of passion and they are prepared to pay such a cost in order to enjoy the lifestyle that surrounds it. There is a pride to be had in owning a high-performance racehorse, to watch it compete at world-class events and to stand and be feted in the winner’s circle by the media and other owners. Those that become more involved in the sport often dis-cover a passion for breeding horses and the opportunity to create a high-value, winning pedigree to compete in future races.
Breeding of successful racehorses can be a partic-ularly lucrative business and considerable sums are invested in studying the genetics (among other things) of winning thoroughbreds. For instance, Frankel, the five-year old British racehorse currently rated number one in the world, has been cautiously valued at £100m. As a stallion, he will stand at a service fee of £125,000 and cover 135 mares in his first breeding season. If he produces successful offspring, it will take him only six years to achieve his value for his owner, Prince Khalid Abdullah of Saudi Arabia.
These, of course, are the exceptions rather than the rule; such investments of passion are not without their risks, but there are means by which HNW inves-tors can enjoy their investments while managing their exposure to some of the riskier elements.
The first step is to engage an equine adviser who can consult on both the types of equestrian sport and the investment structures that may be most appropriate. These can range from shares in horses (syndicates), to direct ownership, to funds focused on bloodstock breeding and trading. For most investors, interest is primarily in racing as a spectator sport. However, there has been a growth of interest in polo and, since the 2012 London Olympics, in the participative sports of dressage, show jumping and eventing where well-bred, well-trained horses can achieve values on the international market ranging from hundreds of thousands to millions of pounds.
Furthermore, an interest in horses need not only be in bloodstock, but can also include direct investments into other equine assets such as real estate and going con-cerns (breeding establishments or training yards), or equine retail bonds. The UK Jockey Club was recently over-subscribed for retail bonds for a £15m fund for the redevelopment of Cheltenham racecourse: it offered a five-year, fixed term investment paying a total of 7.75% gross interest per year.
Syndicates
Many investors begin their equine career by joining a syndicate where the costs of ownership of a horse or horses – and any prize monies or profits from their sale – are shared. Most syndicates are run for up to three years and owners are either charged monthly fees or pay a lump sum for a straight shareholding. After three years, the horses are sold; the syndicate is wound up and the shareholders paid-out, with the benefit of attracting no Capital Gains Tax (GCT) on any profit from the sale.
Direct Ownership
Buying a young horse at auction, direct from stables or through private sale, will cost upwards of £20,000, depending on its pedigree, its form and its poten-tial. (This year, four days before Black Caviar’s final race, her half brother, an untrained yearling, was sold at the Inglis Easter Yearling Sale for AU$5 mil-lion). There are then ongoing training costs of circa £20,000 per year, but it is not uncommon for horses with a good performance record to be sold within that period for between three to five times their original value, particularly with demand for good bloodstock being driven by the Middle Eastern and Asia-Pacific markets. For investors with an eye on tax, it is possible to recover VAT on costs associated with the horse, while profits made on the sale of a horse attracts no CGT.
Portfolio Investment
Certain funds also allow investors to take an interest in portfolios of bloodstock assets. Specialist equine fund managers breed and trade high performance horses, including broodmares to produce foals that will be sold as yearlings, young horses acquired for training and resale and shares in stallions, which allow the owners to benefit from the value of a stallion’s “standing” services (breeding fees).
Furthermore, these funds can subscribe to the UK Enterprise Investment Schemes (EIS), so investors receive 30% income tax relief on their initial invest-ment with no tax on any gains; existing CGT can also be deferred if realised less than three years before the investment or less than one year after it. (There are currently discussions with HM Revenue & Customs to launch a similar scheme for racehorses).
Funds such as these are likely to increase in the future. There is strong demand for British and Irish-bred racehorses from the Middle East, Asia (Hong Kong, Singapore and Japan), Australia and the USA: in 2011-12, the British Horseracing Association registered the sale and export of 3,633 racehorses from Britain and Ireland to overseas investors, a number that has increased consistently since 2007.
Demand is also unlikely to decrease, particularly as China’s interest develops. Horse racing was legal-ised in the Peoples’ Republic in 2008 and within three years the country recorded the second highest number of racehorses in the world after the USA. To date, the Chinese government has awarded permits to create five world class racetracks on the mainland. This includes the $2 billion Equine Culture City in Tianjin which has two racetracks and will house some 3,000 horses and where racing is due to start next year (the Year of the Horse). With such serious investments into the racing industry set to continue, for many this may be the time to consider equine investments of passion.
