[In this week of the Melbourne Cup, where Lloyd Williams made history by becoming the first owner to win five times, and total prize money of over $6 million, many will be caught up in the exciting potential. Here’s a reality check, reprising an article first published in July 2015].
Australia is unique in the thoroughbred racing world in that ownership of horses is spread across a broad spectrum of Australians and is not just the province of royalty, the rich and famous. Indeed, there are some 100,000 owners or part-owners in Australia. Australia holds the second largest number of races per annum in the world after the U.S. and allocates the third most prize money (in excess of $500 million per annum) after the U.S. and Japan.
There are about 360 race tracks in this country. Each year there are around 36,000 racehorses (excluding steeplechasers and hurdlers) of which 30,000 are race starters racing on average six times a year at over 2,700 race meetings. So there is plenty of opportunity to be a participant and, you would think, be a profitable player somewhere in the value chain.
Before you jump in and decide a portion of your hard-earned could be invested in a Group 1 winner, maybe the Melbourne Cup, or even more profitably to breed and race a colt who wins the Golden Slipper and goes on to fantastic success as a stallion, let me provide a few insights which provide a reality check on your dreams of fame and fortune.
To attempt this in a short discourse I will necessarily restrict comment to some key statistics that drive the economics of the business, and some aspects of how to view risk and return in the main elements of the racehorse value chain.
(For the uninitiated, a male horse is born as a colt, and at four years old, becomes a so-called ‘entire’, or a stallion if he goes to stud. A female horse is born as a filly, and becomes a mare at four years old).
Industry and participant drivers
Prize money is rising steadily over time and although some major races are being allocated ever-more generous amounts, it is also being spread across regional and country race meetings.
Of the $500 million in prize money, $140 million goes to the 580 so-called ‘black type’ races, of which 72 are Group 1 races attracting nearly $70 million. Prize money for Saturday races in the major Eastern State cities ranges from around $40,000 to $85,000, mid-week city around $20,000 to $40,000, down to $10,000 to $30,000 for regional and country meetings. Prizes are skewed strongly to winners, falling to modest amounts if the horse runs 5th.
However, the numbers of horses being bred and raced is, somewhat surprisingly, falling steadily over time. Horses bred have fallen by a third over the past two decades; the breeding mare population is now around 23,000 of which 21,000 are mated. Although foal success rates have improved somewhat, the number of foals born is 14,000 a year. The number who go on to race have to be registered and in 2013/14, this was over 12,000, of which 9,000 were registered by age two, around 2,500 by age three and the balance (900) older. The number of foals sold at auction was around 4,000, with the surprisingly larger balance retained by breeders and owners for racing or breeding.
Even more starkly, the number of registered stallions has fallen over the past two decades from 2,090 to 670. Only about 100 might be regarded as significant players, of which 40 shuttle between Australia and northern hemisphere countries.
In 2013/14, of the 30,000 race starters:
- 4,200 did not earn any prize money
- 15,000 earned $1,000 to $10,000
- 10,200 earned $10,000 to $100,000
- 700 earned $100,000 to $500,000
- 50 earned greater than $500,000.
The bulk in each category, especially the larger amounts, were at the lower end of the distribution range. In earning these amounts:
- 18,000+ did not win a race in the year
- 7,000+ won one race
- 3,000+ won two races
- less than 2,000 won 3 or more races.
The ages of these horses ranged from nearly 3,000 running before age three, just under 8,000 each for under four and five, 5,500 under six and around 6,000 above six.
The above clearly demonstrates winners, and especially winners of valuable races, are very much in the minority and their time in the racing headlines, unless a tough, durable stayer, is around three or four years. Being the highly-refined athletes they are, they need a good deal of time to first learn the whole process of what racing is about, then achieving and retaining race fitness.
There will also be times they are injured. If healthy, they generally have two or three race campaigns a year where the aim is to run four to seven times and more as the horse matures with each campaign. Many never race for a wide variety of reasons.
The economics of racehorses
To appreciate why racehorse numbers are falling necessitates an examination of the micro economics of racing. While the purchase price of a yearling (the most common entry point for buyers) varies enormously from a few thousand dollars to occasionally in multiples of millions, studies around the world suggest the most profitable racehorses tend to cost between $70,000 and $250,000. The average sale price of yearlings sold in 2013/14 was $70,000, with the median at $35,000.
The intending buyer has the obvious choice of buying a filly or a colt. There is a positive bias in the price of colts, especially those with athleticism, pedigrees, conformations (correctness of bone structure), sound X-rays and dispositions which, if successful runners, may ultimately lead to them being stallion candidates. However, as seen above, the realisation of this dream applies to well under 1% of the racing population.
Conversely, a sound gelding can have a materially longer career. Fillies with similar attributes are also in demand, but generally their racing careers stop at ages of four to five years.
Our analysis, therefore, needs to distinguish between time in racing and the potential residual value a horse retains when it ceases racing. While there are material differences in purchase prices and later, nomination fees for horses running in the big prize money races, the actual costs of racing a horse are reasonably standard.
Assuming a horse costs $100,000, the aim is to progress from regional tracks to mid-week and then Saturday metropolitan class races and above. Budget to spend around $40,000 to $50,000 from purchase date to the time it first runs. In addition, there will be around $25,000 to $45,000 per annum in training fees, spelling charges, vets, farrier and chiropractic services, transport etc, depending on whether the trainer is city or country based. If you own a percentage of a horse, the above costs break down in the same proportion.
As a rough rule of thumb, if a horse can generate prize money of an average of $5,000 per race, implying sound regional and possibly mid-week city class, it is a horse which covers both its costs and has a good chance of paying back the purchase price. Earning an average of $10,000 per race is a Saturday city class horse and, if it stays sound, may double the initial investment. At $20,000 average per race, the horse is a probable ‘black type’, and $50,000 per race is exceptional and fortunate.
The probabilities of having a horse that fits each particular earning category is something I guesstimate as around 15-20%, 8-10%, 4% and 1% respectively of the population. Profitable investment is highly skewed to outliers.
When investing in most other asset classes (property, shares etc), the most you can lose is your principal. Unless you are disciplined and are prepared to cut your losses early, if you persist in racing your horse without success, you will ultimately lose a lot more than your principal. Even if you make an early call, and especially if you have a slow gelding or an average-looking mare whose family is not progressing, the selling price might well be less than $10,000, often for country trainers to try their luck in weaker company.
With these considerations in mind, the market is becoming more highly bifurcated – horses with the athletic carriage, looks, pedigree etc are being increasingly sought after, whereas the greater population of more unimposing and average pedigree are increasingly lacking appeal.
It doesn’t mean the latter can’t be highly successful runners. It is a game of probabilities but buying prices are fundamentally driven by buyers’ imaginations of future glories of their glamorous purchase, including the horse’s potential residual value after racing. Regrettably, buying a piece of a $1 million colt is also no guarantee of success. Conversely, but equally frustrating, if you happen to have a champion racehorse mare, history shows such mares don’t always prove to be as successful as broodmares.
The obvious insight here is that returns from investing in racehorses are not normally distributed like most other asset classes. Buying a portfolio of ‘average’ horses will most likely result in significant losses. The search is for the few valuable outliers to pay for the rest (even here there will be significant volatility of returns from year to year).
Types of racehorse buyers
How racehorse buyers approach this lop-sided skew is significantly influenced by which group they derive from, including:
- wealthy individuals who are prepared to outlay large sums of money essentially in the pursuit of glory
- large horse studs which are focussed on breeding and acquiring their future champion stallion and broodmare lines which sustain their businesses
- family and other more boutique studs aiming for reliable broodmare lists
- famous trainers, ranging from those who have up to 180 horses in their stables, down to the country trainer with a handful of horses, all of whom have loyal clients with widely-ranging amounts of funds to outlay and who are repeat buyers of shares in the trainer’s selections
- race syndication groups, where in order to avoid the impracticality of having to offer a prospectus, ASIC provides exemptions for racehorses purchased by 10 or fewer legal entities and 40 or fewer owners of a stallion. The target price range for the syndication groups tends to be $50,000 to $150,000.
The spread of ownership tends to be more widely distributed where the primary motivation is buying to race. Where the ownership is spread, after their race careers are finished, race mares are then sold privately or via public auction to the various breeding groups to dissolve the partnerships.
Residual value considerations
When investing in racehorses, due consideration needs to be given to whether the horse will have residual value after it ceases running. A stunning colt with an outstanding pedigree and key Group 1 wins can attract bids from the big stallion studs of $10 million to $30 million. Likewise, an outstanding mare with the right family and strong ‘black type’ race record can also attract $500,000-$1 million plus on sale.
A colt has a 99% chance it will ultimately be gelded to improve tractability (manageability) and behaviour, keep its weight under control and generally extend its potential race career. After racing, geldings are virtually giveaways to people who want hacks.
For stallions, first year stud fees are pitched at what the stud manager judges the market will bear. Recently, fees have ranged up to $60,000 per ‘service’ but generally around half this or lower. Once the stallion’s progeny start racing, fees will quickly skew materially as results start to flow, to upwards of $100,000 or drift back to $10,000 to $20,000 as experience and new sexier entrants emerge. With 150 to 220 matings possible in a domestic season and a possible northern hemisphere season as well, a successful stallion’s career can extend until they are over 20 years old, and be highly profitable to the owners.
A filly’s potential value for breeding after racing will be driven by her general looks and conformation (musculature, body proportions, bone structure, etc), her race record and that of her immediate family. However, this potential value will only be known after probably her third or fourth foal has been racing for a year or two, or five to six years later!
In the interim, if you select the right stallions and the filly produces attractive foals, the market will be prepared to pay a premium for her progeny, until race results come through and her then remaining residual value will move strongly up or down.
The productive life of a mare can extend until their early 20s, and if fertile and has few misses, can produce as many as 15 foals. The average is probably eight to 10. Pregnancies run for 11 months and 10 days, so you get one foal a year, with a likelihood of the mare not being mated for various reasons every four to six years. The most successful progeny tend to be the first four foals, but keen buying interest will be sustained if one or more of these early foals win ‘black type’ races.
Assuming you buy a mare for $100,000, and pay $30,000 for the stud fee, you can expect to pay an additional $30,000 to $40,000 for the foal by the time the foal is sold as a yearling. So, to recover the investment in your mare you need to average $100,000 for the first three foals ie payback takes five years plus.
Again, experience shows that in addition to a number of mares in your portfolio not falling pregnant, occasionally the mare will lose the unborn foal, or it will be stillborn. More frequently, the foal can be lacking in stature, or has conformation or X-ray issues with their legs. A mature horse weighs around 500 kilograms. Horses with deficiencies in their bones or the way they move will be much more likely to break down when racing and some features can be genetically transmitted, so as a consequence, will be severely marked down by buyers.
The probability of a stream of yearlings from the same mare which attract keen buying interest every year is low. The prices fetched for a portfolio of mares have a similar skew to racehorse performance: a few stars overcompensate for the rest.
The large studs with their greater numbers and ready access to their own stallions can spread their overheads and steadily build the depth and consistency of their broodmare lines via their portfolio strategies. The smaller broodmare studs have greater year to year variability of returns.
The need for investors to recover the cost of their outlays as soon as practicable has driven the Australian thoroughbred industry relentlessly towards breeding sprinters, primarily because these types mature earlier and hence race earlier.
Ironically, some races which attract the biggest prize money are staying races such as the Classic Oaks/Derbies, Cox Plate and Caulfield and Melbourne Cups. Stayer-type stallions are not in vogue. Indeed, the stocks of local stayers is so threadbare that investors have been trundling off to Europe in droves to find staying-types who might do well under Australian conditions and tactics. Buying a partly-tried stayer has much faster payback potential than having to wait for your yearling to be four or even five before it runs.
Limit outlays while learning the game
Investing in racehorses is not for the faint-hearted, especially if you really cannot afford the losses and the associated ongoing costs of racing or breeding. If your primary interest is the general thrill of being a participant, budget for the potential losses and regard this as your entertainment spending.
If you see the industry as a potential high risk but also high return possibility, then you have to be clear as to how you propose to approach the risk and high failure rates. I have made comment about the outlier nature of the profit skew. Investors endeavour to address this by investing in smallish shares of a portfolio of horses. Small shares in more expensive horses are more likely to give a more balanced risk/reward outcome than owning outright one or two cheaper punts.
While luck does play a critical role, the luckier ones seem to be those who have been in the game for long periods and have learned the hard way what is more likely to be a good horse. Black Caviar raced and won 25 times – she won most by several lengths, but in reality she often won by less than a second or two. So the difference between a champion and an also ran is very small.
To have the best you must associate yourself with the best. Before plunging in, find out who (trainers, bloodstock agents, syndicators) have earned the market’s respect for their judgments, what their modus operandi are, and limit your outlays until you better understand the game.
Garry Mackrell is a former member of the Executive Committee of the Commonwealth Bank, now ‘retired’ and an optimistic mare stud owner as the proprietor of Bell View Park Stud. Most of the broad statistics quoted in this article are derived from the 2013/14 Australian Racing Fact Book.