Equestrian sports provide an alternative for investors seeking noncorrelated options for their portfolios.
Wealthy
individuals interested in the fast-growing sport of reining now can
invest in their passion through syndicates, which have been much more
common in the racing world but are increasingly being used for other
riding disciplines like eventing and show jumping.
Equine
syndicates are typically structured as partnerships or LLCs with
members who range from individual horse buyers and owners to
unaffiliated investors looking for something different. Like other
speculative investments, equine syndicates carry significant risk for
the reward. They are usually structured as private placements,
restricting them to the most sophisticated and qualified investors, and
with good reason: The investments are highly concentrated, often built
around just one or two horses, and highly illiquid with lock-up periods
ranging from a few years to a few decades. Most are not managed full
time, but loosely organized around key opportunities identified by one
of the lead investors. Other costs might include sharing monthly
expenses, such as training and entry fees.
There are, however,
some appealing characteristics for the seasoned investor including
little to no correlation with equity markets and the chance to be part
of a multi-billion dollar industry that shows no signs of shrinking or
slowing. Across all its disciplines, the equine business is thriving on
the support of its participants, fans and the large corporate sponsors
that supply feed, tack, barns, medicine and other associated products
and services on a worldwide basis.
Newer syndicates are
adopting a more traditional investment approach that utilizes research,
discipline and established methodologies as part of full-time
professional management that will help attract new investors to this
low-profile opportunity (see case in point below).
Capturing Emerging Growth
Reining
is one of the fastest-growing equestrian sports today. Sometimes
referred to as the “dressage of Western riding,” reining displays horse
and rider in a graceful yet exciting manner with a distinctly
hard-driving, sliding, spinning flavor. Its purpose is to show the
horse’s smoothness, finesse, obedience and attitude.
Like all
western riding sports, reining had its start on the ranch. Cowboys who
had to herd cattle, rope calves and ride long distances needed
reliable, agile and obedient horses. Unlike the cowpokes depicted in
the popular movie City Slickers, in the olden days riders did not
collapse by the campfire with a bottle of liniment when their work was
done. Instead, they engaged in riding sports, competing with one
another to see who had the fastest horse, who had the most obedient
horse and who could do the best tricks.
Out of these cowboy
contests came the elegant and high- energy sport of reining. Today, the
skills of the horse and rider are demonstrated in the riding of
patterns around an arena. These involve a variety of movements that
must be chained together in a graceful sequence with no observable
resistance on the horse’s part. The American quarter horse dominates
reining, just like the European warm blood breeds dominate dressage and
the Thoroughbred dominates horse racing.
Over the past 15
years, reining has experienced tremendous growth, largely due to
high-levels of interest from the international equine community.
Reining is the only Western discipline of the United States Equestrian
Team (USET) and its international counterpart, the Fédération Equestre
Internationale (FEI). Additionally, it is the only Western discipline
in the Pan American and World Equestrian Games. Thanks to the sport’s
groundswell of popularity, the 2010 World Equestrian Games for the
first time in its history will be held outside of Europe and in the
United States. As a result, reining is likely to be included in the
2012 Summer Olympic Games.
Taking Diversification To A New Level
The
international and domestic fascination with reining has caused a
tremendous increase in demand for quality reining horses. This has not
only resulted in an increase in the purses to be won in reining
competitions, but also increased the value of a champion-caliber
reining horse.
Reining horses are typically sold as yearlings,
2- and 3-year olds. At the December 2005 NRHA Two-Year-Old Prospect
Sale held in Oklahoma City, the average selling price for top horses
was $131,750, with the highest price hitting the $167,000 mark. Less
than 10 years ago, the average price investors and breeders paid for
comparable horses was in the $30,000 to $40,000 range. It is important
to note that at this age the horses are untested and considered purely
prospects. They have not begun their competitive careers yet and are
being valued solely on pedigree and earning potential. The most
valuable prospects never even make it to auction; they are sold in
private sales in the $200,000 to $300,000 range. With the coming World
Equestrian Games, and possibly the Olympics, these numbers could begin
to approach or exceed $1 million.
Historically, the
competitive life of a reining horse was over by the time it had reached
6-years old. As part of the World Equestrian Games, where horses must
be at least 6-years old to compete, and likely inclusion in the
Olympics, where the minimum allowable age of a horse is 9, a lucrative
aftermarket for proven champion reining horses has been created.
| THE MOST VALUABLE PROSPECTS NEVER EVEN MAKE IT TO AUCTION; THEY ARE SOLD IN PRIVATE SALES IN THE $200,000 TO $300,000 RANGE. |
Finding The Crème De La Crème The
United States is the only place reining enthusiasts and equestrian
teams can purchase both champion reining horses and the semen to
impregnate their mares. And as in all sporting events, reining has its
all-star players. These super elite horses are known as the “Million
Dollar Sires,” as they have been designated by the National Reining
Horse Association (NRHA). By definition, these are horses whose
offspring have accumulated more than $1 million in winnings from NRHA
competitions.
In the history of the NRHA there have only been
12 such elites, and all of the champion reining horses of today can
trace their bloodlines to one of these sires. Only seven of the Million
Dollar Sires are alive and breeding today, and all of them “stand” on
domestic soil—Arizona, Oklahoma and Texas, to be specific.
Luckily,
an investor doesn’t have to “bet the ranch” to take advantage of this
investment opportunity. Those wishing to participate financially in the
sport’s growing popularity can simply invest in a reining syndicate.
Knowing The Issues As
with any investment, an advisor and his or her client should consider
several factors before buying into a reining horse syndicate.
First,
the pedigree of the horses. It is all in the genes. Reining is a very
special discipline, and the horses that compete at the highest levels
are the equivalent of any Olympic athlete. As in all equine
disciplines, the horses are bred for the specific task. Many try but
few are chosen. At the NRHA Reining Futurity in Oklahoma City last
November, approximately 400 3-year-old reining horses competed for the
prize, but only 30 made it to the finals! We have all heard the story
of Seabiscuit, and long shots do happen—even in the world of
reining—but the odds are too slim to be sensible.
Second, the
trainer and rider. Great horses need a great trainer to bring out their
talent. Where would most of our superstar athletes be if it weren’t for
their coaches? In most equine disciplines, the trainer and rider are
two different people. But in the world of professional reining, they
are usually the same person. The level of communication that must exist
between horse and rider in reining is very high. The ultimate
trainer/rider needs time to develop the horse to his or her style of
riding and to cultivate the degree of synergy and attunement needed to
win competitions. This is why reining horses bred from the best
bloodlines command so much money before they have ever been in a
competition.
Third, diversification. Investors must be fully
aware that horses are living creatures and, despite their size, they
are very delicate; they are being trained to perform very strenuous
tasks, and injuries and other unforeseen events do occur. A horse might
be injured during a major competition, offspring might harm themselves
while in pasture before they have been fully trained or evaluated, a
mare in a breeding syndicate may be unable to conceive one season.
While every precaution is taken to avoid setbacks, many of these
scenarios are out of the hands of professionals and syndicate members,
which means investing in a syndicate clearly has uncontrollable risks.
This type of investment should probably be limited to no more than 15%
of an individual’s portfolio and, ideally, syndicates will invest in
multiple horses to further mitigate risk.
Finally, the
investment itself. Reining syndicates are unique in many ways—where
else can an investment be petted, fed and played with? So setting the
expectations of a new investor upfront can help prepare them for a
better experience. Participation is expensive, with single shares
ranging in price from $10,000 to $30,000. In addition, there are the
training fees, health costs and other expenses that syndicate members
may share equally with monthly capital contributions. These types of
investments are illiquid and priced only semi-annually, so an investor
may not know the exact status or value of his or her investment for
several months at a time. Profits are usually distributed on an annual
basis for the duration of the syndicate, and when the livestock is sold
the syndicate is liquidated.
CASE IN POINT: SILVER SPURS - By Hannah Shaw Grove
Silver
Spurs Equine LLC based in Cave Creek, Ariz., is one of the few firms
trying to raise the bar on equine syndicates. Staffed with
professionals from both the investment and equine fields, Silver Spurs
employs a more methodical and diversified approach to reining
syndicates than seen elsewhere. Drawing on the practices of asset
management firms that incubate mutual funds or hedge funds to determine
how a specific strategy will perform in actual market conditions,
Silver Spurs has established a proprietary training and evaluation
program for competition horses and breeding stallions.
The
firm turned to Bret Stone, a 26-time world champion and 1992 NHRA
Futurity winner, to direct their efforts. Stone and syndicate manager
Michael Miola apply a very critical eye to breeding stallions and
competition prospects, working together to identify and purchase the
strongest animals. “As the saying goes, garbage in, garbage out—by
restricting our efforts to only the highest quality prospects, we
increase our chances for success,” says Miola of their process.
Over
the past few years, Silver Spurs has systematically acquired what it
believes to be the best breeding and competition livestock with a goal
of creating a super-elite line of reining horses. Once achieved, they
will be able to control the supply and, in turn, the value of the
properties. Part of the strategy was implemented last September with
the purchase of Boomernic, the world’s 12th Million Dollar Sire and the
only living son of a Million Dollar Sire to become one himself.
With
a litany of honors, championships and earnings to his name, Boomernic
“will become the cornerstone of the Silver Spurs breeding program,”
says Stone. Ongoing searches for suitable additions have allowed them
to anonymously acquire through dealers the best Boomernic mares and
colts alive today, along with offspring of other Million Dollar Sires.
This means that all the offspring from Silver Spurs breeding program,
managed by Miola’s wife, Michelle, have the genes of Boomernic and
several of the other Sires. “Michael will make sure that all of the
great ones are eventually owned by Silver Spurs and our investors,”
Stone says with a smile, exhibiting confidence in both the strategy and
their ability to execute it.
Silver Spurs offers a variety of
syndicates with different investment objectives. A short-term
investment, for instance, is structured around 2- and 3-year-old horses
trained to compete in NRHA Futurity reining competitions. The objective
is to win as much money as possible during the available timeframe,
then sell the proven horses to equestrians to compete in NRHA events
for aged horses (4 years old and older) and, ultimately, in the 2010
World Equestrian Games where reining horses must be at least 6 years
old.
Conversely, their longer-term investments are focused on
breeding their Million Dollar Sire, Boomernic, to several proven
broodmares each year with the goal of creating an elite line of
champion prospects.
The syndicates do, however, share a common
exit strategy. As soon as the present value of a syndicate’s horses
exceeds the future earning potential— from competition winnings, the
market value of its livestock, or both—the syndicate is liquidated.
Most
syndicates focus on a single aspect of reining, but Silver Spurs is
active in breeding, training, sales and competition—a fact that
distinguishes them from their competitors. “There is a strong
probability that several of our prospects and offspring will become
tomorrow’s champions,” says Stone. But Miola emphasizes that counting
on the creation of superstars is foolish. “At the end of the day we’re
an investment firm, and we have to generate results for our members.
With diversification and careful management, we can deliver consistent
and reliable performance.”
Reining is all about having fun,
but the competitive spirit is alive and well at Silver Spurs where the
team shows up each day with every expectation of winning! |
