 Tapit, standing at Gainesway Farm for $15,000 LF.High risk and lucrative are the two words that come to mind when discussing stallion investments. Jockey Club figures regarding mares bred in 2005 show that 126 different stallions bred 100 mares or more. Four Coolmore stallions bred over 200 mares in their North American division. One can figure on an average live foal percentage of 75% from total mares bred. Since most contracts are on a live foal basis one can calculate gross revenues easily enough since the stud fee and number of mares bred is public knowledge. A handful of the top stallions are producing $20-30 million per year in revenue. A $10,000 stud fee stallion breeding 135 mares and yielding 100 (75% of mares bred) live foals can generates $1,000,000 in revenue; a $100,000 fee would yield $10,000,000 under the same scenario. Thus top stallions are cherished revenue producers that can also affect the value of the mares they breed while producing top runners.
It is easy to see why everyone would want a good stallion; how you come by one is the quest we all desire to accomplish. As in all equine endeavors spreading risk is a very important fundamental. It is a proven fact that 85% of the young stallions that attempt to become proven in the marketplace fail to do so. Many of the top prospects command a huge price when retired from racing. Fusaichi Pegasus was valued over $50 million and Smarty Jones was valued at $39 million last year when he was syndicated, just to name a couple of recent top of the market deals. These deals are structured where an investor has a chance to recover the majority of his purchase price over the first four breeding seasons. After this period the racing prowess of his offspring will set the price.
There are only a handful of players when stallion prospects command prices over $10 million and we are currently not one of them. One still has to be able to spread the risk no matter what level you play. There are more of us watching young racehorses that might become stallion prospects and many of them start getting pricey after winning a race or two if they have enough pedigree. These may only command a $3-5 million price tag depending on what races they are winning. A loss or two will dry up demand for a young horse as well so this has a bit of risk to it. We see this scenario a lot in the spring of their three year-old year while on the Triple Crown trail.
Participating is a Syndication by taking a share and being one of 40 or 50 shareholders with the right to breed one or two mares each year to the stallion is the most common way for us to participate. We can afford to spread the risk in this manner as we are only putting up 1/40th or 1/50th of the total syndication price. The basic economics of trying to get as much of your investment back before the offspring reach the races is the same as owning the whole horse. As breeders we have a mare base to support a stallion which makes us desirable partners for the syndicate manager. We may also recover our entire investment by selling one good yearling if we get lucky. Last year we invested in Tapit and Champali in this form.
Creating stallion prospects through racing would be the ultimate party. Our analysis yielded a business model that would require a capitalization of $5 million per year for 5 years to give one a reasonable chance for success. It would require purchasing and managing ten colts with an average purchase price of a half million per horse each year for five years. This would give us enough diversification to have a reasonable chance for success; we calculate the odds at between 5-10% per horse with top personnel in place. Thus running 50 prospects through a top program over 5 years should yield three or four stallions, a lot of fun racing and a big chunk of depreciation.
IN SUMMARY, stallion creation requires:
1. Create them through racing
2. Buy them after they have shown some talent
3. Buy them at the end of their racing career
4. Participate in a syndication
High risk and lucrative are still the words that come to mind.
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