Taking the Bit

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 fortune in horse racing is to start with a large fortune. However, their critics were silenced and the syndicate went on to acquire a horse they affectionately named Nelly. In April 2013, Nelly retired from the track after 25 consecutive wins, having earned more than AU$8.5 million for her owners, with over AU$45 million having been bet on her. Nelly became the only horse ever to grace the cover of _Vogue_ magazine and rose to become the number two-rated racehorse in the world — 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 also “performed like a ballerina”. This is the dream of all racehorse owners and the story is worthy of retelling precisely because it is unusual. Yet racing (and other equestrian sports) remain perennially popular with the high net worth (HNW) community, which invests millions into bloodstock every year. Indeed, the recent _Knight Frank Wealth Report_ forecasts that investment in horses by HNW individuals — particularly those from emerging markets — is set to rise in 2013: by 10% in the Middle East (2012: +3%), by 5% in Australasia (2012: +5%), and by 4% in Latin America. Despite the risks, why does this interest remain? Most investors understand that an investment in racing and equestrian sports is an investment of passion and are prepared to bear the cost in order to enjoy the lifestyle that surrounds it. There is pride in owning a high-performance racehorse, watching it compete at world-class events, and standing in the winner’s circle, feted by the media and fellow owners. Those who become more involved in the sport often discover a passion for breeding horses and the opportunity to create a high-value, winning pedigree to compete in future races. Breeding successful racehorses can be a particularly lucrative business and considerable sums are invested in studying the genetics, among other factors, of winning thoroughbreds. For instance, Frankel, the five-year-old British racehorse currently rated number one in the world, has been cautiously valued at £100 million. 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 would take only six years for him to realise his value for his owner, Prince Khalid Abdullah of Saudi Arabia. These, of course, are exceptions rather than the rule. Such investments of passion are not without risk, but there are ways in which HNW investors can enjoy them while managing exposure to some of the riskier elements. The first step is to engage an equine adviser who can advise 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 lies primarily in racing as a spectator sport. However, there has been growing interest in polo and, since the 2012 London Olympics, in participative sports such as dressage, show jumping and eventing, where well-bred, well-trained horses can achieve international market values ranging from hundreds of thousands to millions of pounds. An interest in horses need not be limited to bloodstock. It can also include direct investment in other equine assets such as real estate and going concerns (breeding establishments or training yards), as well as equine retail bonds. The UK Jockey Club was recently oversubscribed for retail bonds issued to fund the £15 million redevelopment of Cheltenham Racecourse, offering a five-year fixed-term investment paying total gross interest of 7.75% per annum. **Syndicates** Many investors begin their equine career by joining a syndicate, where the costs of ownership — and any prize money or sale proceeds — are shared. Most syndicates run for up to three years, with owners either paying monthly fees or a lump sum for a straight shareholding. At the end of the term, the horses are sold, the syndicate wound up and shareholders paid out, with the benefit that no Capital Gains Tax (CGT) is payable on any profit from the sale. **Direct ownership** Buying a young horse at auction, directly from stables or via private sale will cost upwards of £20,000, depending on pedigree, form and potential. (Four days before Black Caviar’s final race, her half-brother — an untrained yearling — sold at the Inglis Easter Yearling Sale for AU$5 million.) Ongoing training costs are typically around £20,000 per year. It is not uncommon for horses with a strong performance record to be sold within that period for three to five times their original value, particularly given demand from Middle Eastern and Asia-Pacific markets. From a tax perspective, VAT may be recoverable on certain costs, while profits from the sale of a horse are exempt from CGT. **Portfolio investment** Certain funds allow investors to gain exposure to portfolios of bloodstock assets. Specialist equine fund managers breed and trade high-performance horses, including broodmares producing foals sold as yearlings, young horses acquired for training and resale, and shares in stallions, enabling investors to benefit from breeding fees. Some of these funds qualify for the UK Enterprise Investment Scheme (EIS), allowing investors to receive 30% income tax relief on the initial investment, with no tax on gains. Existing CGT can also be deferred if realised less than three years before, or one year after, the investment. (Discussions are currently underway with HM Revenue & Customs regarding the introduction of a similar scheme specifically for racehorses.) Funds of this nature are likely to grow. Demand for British- and Irish-bred racehorses from the Middle East, Asia (including Hong Kong, Singapore and Japan), Australia and the US remains strong. In 2011–12, the British Horseracing Authority recorded the sale and export of 3,633 racehorses from Britain and Ireland to overseas investors — a figure that has risen steadily since 2007. Demand is unlikely to diminish, particularly as China’s interest develops. Horse racing was legalised in the People’s Republic in 2008 and, within three years, China recorded the second-largest racehorse population in the world after the US. To date, the Chinese government has awarded permits for five world-class racetracks on the mainland. This includes the US$2 billion Equine Culture City in Tianjin, featuring two racetracks and capacity for 3,000 horses, with racing due to begin next year — the Year of the Horse. With such substantial investment flowing into the industry, now may be the time for some to consider equine investments of passion.