Owning The Ponies

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Last year, two big Wall Street brokerage houses -- Drexel Burnham Lambert; and Donaldson, Lufkin & Jenrette -- put together an unusual partnership. Bertram R. Firestone, a Virginia racehorse owner and breeder, wanted to sell a substantial interest in his farm's entire crop of two-year-olds, and he approached the two brokers about finding buyers. No trouble, they said, and assembled some 100 well-heeled investors, who kicked in a minimum of $50,000 apiece. The deal -- a limited partnership dubbed Catoctin Thoroughbred Partners I -- raised some $7.5 million. Now Firestone plans to repeat the arrangement for each year's crop of horses.

Other brokers are lining up at the post, too. Advest Inc., a Hartford brokerage firm, is marketing partnerships developed by Centennial Farms Management Co. of Boston. Hilliard-Lyons Bloodstock Inc., a subsidiary of the Kentucky-based brokerage firm J. J. B. Hilliard, W. L. Lyons Inc., is marketing a private placement limited partnership known as Hopeful Racing Partners. And one big Wall Street firm is putting together the largest horse partnership yet assembled to raise capital for two Kentucky breeders. Although Securities and Exchange Commission regulations prevent the company from discussing details of the plan, industry sources say the partnership is shooting for $20 million.

Thus have the packagers and sellers of investments discovered what horse breeders themselves have known for some time: Even investors who don't know a filly from a furlong find something appealing about putting their money into thoroughbred racehorses. In the past, horses that weren't owned by individuals were usually syndicated for sale to a few acquaintances or celebrities in a privately arranged deal. Now, with big brokerage firms getting into the act, an accountant in Albuquerque can own a piece of horseflesh as easily as can a Kentucky colonel. Provided, that is, that he or she is a very successful accountant. Buying into racehorses is not, as one breeder put it, for those who "go through life nursing every nickel." Minimum investments are rarely less than $50,000, and brokerage firms like Drexel and DLJ typically require hefty annual income and net worth qualifications before they will let you buy in.

For those who have the price of admission, the payoffs can be immense. Any horse fan, for example, can recount from memory the story of Seattle Slew. Sold as a yearling in 1975 for only $17,000, he won racing's Triple Crown (the Kentucky Derby, the Preakness, and the Belmont Stakes) in 1977. Then his breeding rights were syndicated and sold to 40 investors for about $12 million, an average investment of around $300,000 each. Recently one of these investors sold his share (without 1984 breeding rights) for $2.9 million. In effect, the sale raised the horse's value to about $116 million.

For every Seattle Slew, of course, there are dozens of nags who never make it out of the paddock. Worse, even the best-looking horses can't guarantee investment results. Devil's Bag, purchased for $325,000 as a yearling, looked for a while like another Slew. The top two-year-old of 1983, he was syndicated for breeding for $36 million before his three-year-old racing season. Then, in March, he lost the Flamingo Stakes in Hialeah, Fla., not only marring his hitherto stellar career but also casting a shadow over his value as a stud.

Both the appeal and the uncertainties of thoroughbred investing reflect the changing nature of horse racing itself. Last year, more than 50 million Americans visited a track, betting a total that exceeded $7 billion. Net purses -- the prizes and stakes shared by the winners' owners -- hit $480 million, up 3.3% from the previous year's total. This year, the figures are likely to climb still higher. On November 10, for example, NBC will telecast live the first Breeders' Cup races, to be run at Hollywood Park in California. Purse money for that day's races alone will total $10 million, and race organizers plan to contribute $10 million more toward increased purse money at other races in the following 12 months.

All that prize money, though, goes to a remarkably small number of horses. According to a study by Killingsworth Associates Inc., a Lexington, Mass. consulting firm, only 354 thoroughbreds brought in more than $100,000 in North American earnings in 1982, and only 11 of these earned more than $500,000. This sharply graded earnings pyramid has created an equally skewed market for yearlings. Each year, the 500 or so top-quality yearlings are sold at two annual auctions: the Keeneland Select Sale in Lexington, Ky., and the Saratoga Select Sale in Saratoga Springs, N.Y. In 1983, the average selling price for horses at these auctions was $393,079, while the average price for yearlings sold elsewhere was $20,590. Betting on a likely winner, in other words, is expensive.

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