Saturday, December 13, 2008

Why Isn't Racing in Line for a bailout?

Let's see.  Thieves on Wall Street are getting $700 billion, apparently without having to make any promises at all on how they'll use the money. (Well, all right, they probably can't use it for lavish spa getaways, though they can pay out dividends, obscenely huge salaries and bonuses.)  And the auto companies, after three decades of making the wrong cars for the wrong market, are getting at least $14 billion to put off their inevitable trip to bankruptcy court.

So, why shouldn't racing get a piece of the pie? I'm really disappointed that Mitch McConnell, the Senator from racing (oops, make that Kentucky), hasn't yet made sure that his constituency gets its place at the trough.  Just in case ole Mitch is paying attention to what we say here, I've come up with a plan that'll hardly cost the government anything at all. In fact, we could do a very nice bailout package for well under $5 billion over a three-year period.  That's hardly a rounding error in the grand scheme of things. (Disclosure:I started this post tongue-in-cheek, but, looking at the figures, I've almost convinced myself)

So, how would it work? If we look at who's losing money in racing, the outlines of a bailout practically reveal themselves.

First, the folks who actually race the horses.  Last year, there were some 67,000-plus horses in training, if you define "in training" to to mean every horse that made at least one start during the year. (All the statistics in this post come from the inestimable Jockey Club Fact Book.) To make a very rough estimate, let's assume that the average cost of keeping one horse in training for the year is $25,000 -- it's much more, of course, for a horse that spends a whole year in New York or California, much less for a horse that races at a minor league track and spends a good part of the year on the farm.  That's a total cost of about $1.675 billion just for maintaining horses. Add in the amortization of the cost of buying or breeding those horses and getting them to the races, and we're probably talking about another $675 million, or a total cost of $2.35 billion to acquire and keep the horses that provide the product.

Purses generated $1.18 billion last year; it'll probably be a bit less this year, taking into account the recent cuts by a number of tracks.  Of that, at least 20% never reaches the owner, going to jockey and trainer percentages and assorted deductions by the tracks.  So let's say that net purses going to owners are on the order of $950 million. That's barely 40% of the $2.35 billion it cost owners to acquire and keep their horses in training.

I know, I know. What about all that money that the owners will get at the end of a horse's racing career when it goes to stallion duty or becomes a broodmare? Sure, Big Brown was valued at $50 million, and Curlin at $20 million, but the Keeneland November sale showed what the rest of the market was like.  Let's be generous and say that total residual value for a year's worth of horses coming off the track is perhaps $500 million.

Add all those numbers together and we still have a shortfall of about $900 million a year for owners.  That loss is, of course, very unevenly distributed.  A few owners, who are rich enough or lucky enough to get the year's best horses, do very well.  The rest of us make do, while we are writing endless checks to trainers, vets, etc. and wondering where the money for the next check will come from, with the psychological satisfaction of watching our lovely horses run.

But, in this post-liberal age, let's not worry about fairness or equity in distributing the bailout money. After all, the banks got part of that $700 billion whether they needed it or not, so why not horse owners?  Just take the $900 million, divide it equally among the owners of every horse that raced in the past year, and we get about $13,400 per horse.  Enough to make the difference between profit and loss for many of us.

Next, we need something for the beleaguered race track owners.  Magna has lost some $600 million over the past few years; NYRA is just emerging from bankruptcy and hasn't made a eal profit in more than a decade; and Churchill is showing a profit, but that's largely due to its off-track internet wagering system, which earns money by low-balling the horsemen over the split of wagering revenue.  Calder, suffering under the Churchill bean-counters' ownership, just canceled three graded stakes because it couldn't afford to put up the purse money. As for the smaller regional tracks, I have no idea how they'd survive were it not for slot-machine income or casino supplements.  So again, just to throw around some rough numbers, let's say that US tracks are losing some $200-250 million a year on racing operations.  That's 1/2800th of the financial system bailout.  Just give them the money.

And then there are the breeders, who are certainly hurting, after declines of 20% or more at the yearling sales and 40%-plus at the bloodstock sales.  The solution for them, though, like that for the auto industry, needs to be coupled with some requirements for changes in behavior.  Luckily, we already have a good precedent for how to solve the breeders' problem: just pay them not to breed more horses.
That's the way the US agriculture program already works for many crops, so why not extend it to horses?

As late as the mid-1960s, the annual foal crop was about 20,000.  To be sure, those were the days when stallions generally covered only 40 mares per season. In the current decade, the foal crop has been in the mid-30,000's, and stallion owners, eager for quick cash flow, book their horses to hundreds of mares per year.  Of course, since average starts per horse has declined from 11 to 6 per year in the same period, I guess one could argue that we need all those additional foals just to fill the same number of races. (In fact, average field size has declined from 9 to 8, notwithstanding a decline in the number of races run and the increase in the size of the foal crop.) If the 1950's and 1960's were the glory days of racing, why not go back to the number of foals we had then?

So let's pay breeders not to breed horses above the 20,000 limit.  How much would that take? I'd bet that we could find 15,000 volunteers at, say, $15,000 each in return for refraining from breeding.  That'd cost $225 million -- just a drop in the bucket.  Of course, we'd need some kind of enforcement mechanism, but if it works for other crops, why not for horses?

To sum up, we need $900 million for horse owners, $250 million for race tracks, and $225 million for breeders.  Rounding up, as Washington tends to do, let's call it $1.5 billion for the whole industry.  That's per year, of course, but, what the hell, let's make it for three years, to give everyone time to figure out a new business model or else retrain themselves for all those new jobs in solar energy that are just around the corner.

So, for a mere $4.5 billion, we could save an industry that employs more than 200,000 people across the country. Such a deal!

How about it Sen. McConnell?

Friday, December 12, 2008

Black Friday

We've been watching as handle has declined and sales receipts have fallen through the floor for the past few months.  But today seems to be when those ongoing causes caught up with racing in a way that none of us in the game could avoid noticing.

Not necessarily in chronological order:
  • The Breeders Cup announced that it's canceling its national stakes program, which provided supplemental financing for 121 races around the country this year;
  • Calder canceled three graded stakes from the current Tropical Park meeting and announced another cut in overnight purses;
  • The Blood-Horse announced plans to lay off 10% of its staff; and
  • The Washington Post, formerly home of Andy Beyer, fired its racing reporter and will drop daily racing coverage.
The elimination of the Breeders Cup National Stakes program probably has the biggest impact of today's events.  According to the Blood-Horse, Breeders Cup staff expects their revenue -- which comes primarily from stallion and foal nomination fees, to decline by up to $10 million in 2009, as fewer foals are nominated (though the cutback in actual numbers in the foal crop is likely to be much more severe in 2010 than next year) and as stud fees, on which stallion nomination fees are based, decline somewhat from recent high levels.

At the same time, the Breeders Cup put nomination and entry fees for its fall championship races up by 20%, from 2.5% of the purse to 3%.  That's $30,000 to get in one of the $1 million races.  By way of contrast, the typical stakes nomination and entry fee for a stakes race at most tracks is 1.1% or so of the purse.

Both these changes put the added burden of declining revenue on only one segment of the industry -- the people who buy or breed to race.  The breeders don't take any of the hit, which I guess one should expect, since it's called the Breeder's Cup.  But that extra $50,000 or so, available 121 times over in the BC national stakes program, might well make a difference for an owner who happens to get a good, but not great, stakes horse. And an extra $5,000 or $10,000 in entry fees may not deter many from entering the Breeders Cup itself, but I just wonder why it is that the race horse owner, who we know is already losing money, has to bear that burden.

At Calder, which is owned by Churchill Downs, Inc., They've canceled the Grade III Stage Door Betty and Frances A. Genter stakes, both scheduled for December 27th, as well as the Grade III Tropical Park Derby, an important turf race for brand-new three-year-olds, scheduled for January 1st. Churchill management, of course, tried to put the blame on the horsemen, who've been involved in a bitter dispute over the division of advance-deposit wagering receipts.  For whatever reason, handle at Calder is down very significantly, and I wonder how many of the longtime owners and trainers who put on the show there every day will be able to make it through another year like this.

The cutbacks at the Washington Post and the Blood-Horse, while not of the scale of the race track-related cuts, are another sign of decline.  The Post has now joined such other papers as the Los Angeles Times, the New York Times and the Philadelphia Enquirer in eliminating daily racing coverage.  Putting together two troubled industries -- racing and newspapers -- seems to be a recipe for disaster. If it weren't for racing meta-sites like the Paulick Report, Equidaily and the Thoroughbred Bloggers Alliance,it would be just about impossible for the committed horseman or racing fan to keep up with the news.  But, valuable as those sites are, they're not going to create new racing fans the way that having Secretariat on the cover of Sports Illustrated would.  For the record, the last race horse on the cover of SI was Smarty Jones in May, 2004.

Sunday, December 7, 2008

Downturn Continues as Handle, Purses Drop

Unlike the 1930's, when racing was a relatively bright spot in an otherwise very dreary economy, thoroughbred racing in 2008 is not immune to the general economic malaise.

The latest figures from Equibase, reported yesterday in the San Diego Union-Tribune, show that nationwide handle was off 9.7% in November, compared to the same month last year, even though the total number of racing days at tracks across the country was up by more than 5%, from 440 in 2007 to 465 this year.

For the first 11 months of the year, through November 30th, total nationwide handle (on-track, at OTB's, and through ADW outlets) was down 6.17%, to $12.8 billion. purses were down 0.6% to $1.1 billion, and the number of race days was down 0.67%, to 5,764.

In some ways, these numbers are good news.  Most US industries are doing a lot worse than racing.  Auto sales, for example, are down 30-40% compared to last year, so perhaps we should be grateful that racing is down only in the single digits.  And for those of us who own and race horses, the tiny decline in purse money is even better news, at least in the short term.  Any business whose revenue is more or less flat this year shoulod probably consider itself verey lucky indeed.

Or at least that would be true but for some very worrisome facts.  First, it's true that purse money always lags behind handle, and if handle continues to decline, cuts in purses can't be that far behind.  Already, at Aqueduct this winter, we're racing for pretty much the same purse levels as last year; the big boosts in purses for the high-prestige Belmont and Saratoga meets have vanished, as the high-profile trainers and their horses head south.

Second, a significant section of the betting public consists of retirees with a few extra dollars to spend -- the guys, for example, who hang out in the Man O' War Room at Aqueduct, betting a few dollars and enjoying the camaraderie.  If these folks' retirement accounts are taking the same kind of hit from the stock market that mine is, I'd expect them to have a lot less to spend on the frivolity of racing.

At the same time, I don't see any decline in the cost of owning and racing thoroughbreds.  Trainers' day rates continue to close in on $100 in New York -- and that's if you're not using Pletcher, Mott, etc.  The recent declines in auction sale prices are a small sign that economic rationality may be returning to the bloodstock market, but we're still a long way from a situation in which one can buy a horse to race with a decent expectation of breaking even, much less earning a profit.

Slot machine revenue, comning soon to New York and Maryland, may help out in the short run.  In the longer term, we still need to figure out how to make our game accessible, relevant and popular.

Thursday, December 4, 2008

Why Won't Churchill Do the Right Thing?

Thanks to Terry Bjork on the Derby List for alerting me to how far Churchill Downs, Inc. and the Churchill horsemen are from agreement on sharing the revenue from internet betting.  As reported in the Louisville Courier-Journal, Churchill's last offer to the horsemen was to give 5.5% of internet (ADW) handle to purses, while at the same time eliminating any "source market" fees that would otherwise have gone to purses. (Don't ask me to explain source-market fees, but they compensate tracks for bets made online from locations near a track).

In contrast, the recent settlements with horsemen in California and Louisiana apparently give horsemen 7% of the internet/phone wagering handle, in a combination of source-market fees plus a percentage of the takeout.  That's in line with the goal set by the Thoroughbred Horsemen's Group for an equal one-third division of ADW revenue between tracks, ADW companies and purses.

Comparing Churchill's 5.5% offer to the 7% goal, there's still a long way to go.  I hope Marty Maline of the Kentucky HBPA is right that chances are good for an agreement before Churchill's spring meet, but the deal isn't done yet.

Wednesday, November 26, 2008

Magna's Latest Scam

Frank Stronach may have thought that he'd avoid too much press comment by putting out a press release on his latest chimerical reorganization plan the day before Thanksgiving, but, unfortunately for him, the media and the markets were still wide awake.

The plan, in the unlikely event it's actually completed, would leave Stronach firmly in control of the race track company Magna Entertainment, and would take another Stronach entity, MI Developments, and its unhappy minority shareholders, out of the business of sinking ever more money into Frank's flawed vision. But it's a long way from putting out a press release to realizing the plan in practice.

Even though the press release only appeared online at 11:26 this morning, it's already been well reported by, among other, Ray Paulick, the New York Times,the Thoroughbred Times and the Toronto Globe and Mail.  Generally, the story has been presented as a way for the minority shareholders in MI Developments, who have been mightily aggrieved as that company continued to throw good money after bad in Magna Entertainment, to get out and limit their exposure to the race track business.  The stock market reacted very positively, with Magna Entertainment shares up over 40% for the day and MI Developments gaining almost 20% as well.

But in fact, when one starts to look more closely at the plan that Magna announced, it becomes clear that the chances of the reorganization plan's actually happening are virtually nil.  Let's look at the plan in a little more detail and see why that's true.

Step 1 of the plan is for MI Developments to lend even more money to Magna Entertainment, on top of the $310 million or so that it's already lent.  The plan calls for a new $50 million loan for working capital, plus up to $75 million additional to pursue a slots license for Laurel Park in Maryland and build an interim casino if the license is approved.  So MI Developments would be on the hook for over $400 million in total.

And there's no assurance that, in fact, Laurel will get the slots license.  Maryland politics is nothing if not Byzantine, and Stronach may not have the right connections. According to the plan disclosed today, the $75 million for Laurel slots would be guaranteed by Maryland Jockey Club assets (Laurel and Pimlico) and would be repayable immediately if the license is denied, but where would the cash come from at that point?

Magna also convinced the Bank of Montreal to extend the due date on its $40 million loan to the end of March, 2009, in exchange for a $1.75 million fee.  If one adds up all the fees that Magna Entertainment has paid for multiple extensions of this loan, one might well conclude that it would have been cheaper to get the money from the nearest loan shark. At the same time, MI Developments has extended the due dates on its various loans to Magna Entertainment, totaling some $300 million-plus, to the same end of March deadline, in exchange for yet more fees. And, to conclude Phase 1 of the plan, Magna Entertainment made a cosmetic proposal to use "commercially reasonable efforts" to sell some of its reace track properties.

So, all of Phase 1 is actually about pumping more MI Developments money into Magna Entertainment.  Good for Frank, perhaps not so good for other shareholders.

Phase 2 of the plan is where things start to get problematic.  For this phase, approval by MI Developments shareholders is required, but, since Stronach controls MI developments, that's virtually assured.

In Phase 2, MI Developments, which is basically a real estate company, promises to buy Magna Entertainment's non-race track land in Aventura and Ocala, Florida and Dixon, California, plus the land underlying the Gulfstream Park hotel-shopping-condo development, at fair market value.  Wonder who's going to determine what that value is in a free-falling real estate market?  The Magna press release values the land at $100-120 million and says the proceeds will be used to retire the Bank of Montreal debt, but who knows? In addition, MI Developments would extend the due dates on its outstanding loans to Magna Entertainment to December, 2009 and would allow Magna Entertainment to pay off the loans not with cash but with -- surprise! -- Magna Entertainment stock.  Just what the dissident shareholders in MI Developments most wanted for Christmas. In exchange for agreeing to the loan extension and the ability to pay off the loans with possibly worthless stock, MI developments would get a promise from Magna Entertainment that it wouldn't ask for any more money from MI Developments unless the new loan was approved by the minority shareholders in MI Developments.  Such a deal!

In Phase 3 of the plan, we get to the wholly imaginary.  That phase would begin when Magna Entertainment pays off some $295 million in convertible subordinated debt.  Where the money to make those payments, due in 2009 and 2010, would come from is completely unclear, but only if those payments are made would Magna Entertainment pay off its debt to MI Developments (presumbly in stock rather than cash), issue new shares to Stronach and spin off Magna Entertainmnt shares now held by MI Developments to the MI Developments shareholders, who would presumably dump them as fast as possible. At that point, in some parallel universe, MI Developments would be out of the race track business, and Magna Entertainment would be directly controlled by Stronach.

Tech entrepreneur and would-be race track owner Halsey Minor has already criticized the proposed deal as "preposterous," pointing out that Magna entertainment can't possibly pay off the subordinated debt. At that point the whole deal falls apart and MI Developments is left with an even bigger, and unrepayable debt due from Magna Entertainment.

Minor had previously offered to buy up the MI Developments loans to Magna Entertainment, presumably with the intention of foreclosing on the race tracks. MI Developments ignored his offer, and today MI Developments CEO Dennis Mills failed to show up for a scheduled meeting with Minor in Baltimore.  Bad move.  As a review of Minor's career shows, when angered he becomes very tenacious.

Much more to come, I'm sure, but it's late, and I've already found more than enough reasons to conclude that the latest Stronach deal is just more smoke and mirrors, postponing the inevitable.

Sunday, November 23, 2008

Dead Heat at Aqueduct - But Everyone Gets the Same Payoff in the Exotics

Nothing all that unusual about a dead heat in racing. But I suspect there were a lot of Pick 4 and Pick 6 winners at Aqueduct today who were thinking that something was a bit amiss when they saw the payoffs.

Here's what happened: Yield Bogey, at 6-1, and Blues Street, at 15-1, dead-heated for the win in the ninth and final race at the Big A.  The win payoffs were a predictable $7.80 for Yield Bigey and $15.00 for Blues Street; remember, the payoffs are calculated by first subtracting the takeout, then setting aside enough to repay the amounts bet on the winners, then dividing what's left into two equal pots which are then allocated among the winning tickets for each horse, so bets on the horse going off at higher odds will get a higher payout. Similarly, there were two different payoffs for the exacta, tri, superfecta, late daily double and Pick 3, in each case reflecting the different amounts bet.

But when it came to the Pick 4 and the Pick 6, there was only a single payoff.  If you had either horse on top, you got $8,619 for the Pick 4 and $59,832 for the Pick 6.  Nothing to sneeze at, for sure.  But if I had a ticket with 15-1 Blues Street on it, I'd be pretty annoyed.  If the payoffs had been calculated separately for each horse, based on the size of the pools, it's likely that tickets with Yield Bogey on top would have paid something like $5,700 for the Pick 4 and $40,000 for the Pick 6, while the (smaller) number of tickets on Blues Street would have paid perhaps $11,500 for the Pick 4 and $75,000 for the Pick 6, assuming that the pools were divided in roughly the same proportion as the win pools.

I don't know if the Pick 4 and Pick 6 payoffs were mandated by state regulation or were the result of NYRA's own rules.  Whichever is the case, they should be changed to conform with the rest of the exotic bets.  I know NYRA's computers can make the calculations, so it's merely a question of someone having the will ton do it right.

Monday, November 17, 2008

Magna Update: A Shorter Leash

In yet another sign that time is running out for Magna Entertainment, the company announced today that it had secured one more extension of its $40 million revolving credit loan from the Bank of Montreal.  But the real news was that, instead of the one-month extensions that Magna had been able to get the past few months, this one was for only 11 days, until next Friday, November 28th.

For those few days of grace, Magna had to pay another $250,000 in fees, as they have each time the loan has been extended recently. Looking at their balance sheet, I'm not sure where they were able to find even that much spare cash.

Everyone knows that Magna doesn't have the cash to pay off the loan, to say nothing of the $200 million-plus that Magna Entertainment -- the race track company -- owes to its parent, MI Developments.  My guess, and it's only a guess, is that Magna Entertainment's new bankruptcy advisors, Miller Buckfire & Co., have found some asset that they think they can sell off, albeit at a fire-sale price, in the next 10 days.

In a related development, brought to my attention by Terry Bjork on the Derby email list,  the Fort Lauderdale Sun-Sentinel reports that Forest City Enterprises, Frank Stronach's partner in developing what is supposed to be some 70 stores, 500 condo units and a 500-room hotel in what used to be Gulfstream Park's lovely paddock area, is seeking a $2 million tax rebate from the city of Hallandale. Unless the city forks over the cash, the newspaper reports, the development would be "a rather ordinary entertainment center."  Hell, that's better than most things Stronach touches.

Stay tuned.

Sunday, November 16, 2008

Churchill Downs Inc. v. Magna -- By the Numbers

I'm not particularly a fan of Churchill Downs Inc.; their take-no-prisoners war with the owners and trainers over the division of online wagering revenue hurts horsemen and chases away potential bettors.

But, in contrast to the other major players in racing, one has to give Churchill credit for knowing how to run a business.  Compared to NYRA, just emerging from bankruptcy, and Magna, whose every financial report brings it closer to collapse, Churchill has a solid balance sheet, enough cash on hand so that not only can it be sure of opening the doors every day, but, mirabile dictu, there's even a profit for the shareholders. However, the way that Churchill earns its profit makes an important statement about the state of racing today.  Increasingly, Churchill's profits are coming not from live racing but from internet wagering and slot machines.

To see how profits are shifting, we need to loook at some numbers from Churchill's latest quarterly financial report, filed with the US Securities and Exchange Commission on November 5th. Along the way, I'll make some comparisons with Magna, whose quarterly report, about which I've already commented in some detail, was filed two days later.

Churchill owns and operates four major tracks: Churchill Downs itself, Calder, the Fair Grounds, and Arlington Park. That gives the company a solid, though by no means overwhelming, presence through the spring, summer and fall, but Churchill takes a bit of a back seat to Magna in the winter, when the latter has the prime meets at Gulfstream and Santa Anita. In addition, Churchill operates 21 OTB locations in Kentucky, Illinois and Louisiana, and slots and video poker in Louisiana. Over the past few years, Churchill has sold Hollywood Park and two minor-league tracks, Hoosier Park in Indiana and Ellis Park in western Kentucky. And, most important for its future, Churchill operates Twin Spires, Inc., an advance deposit wagering (ADW) system that has absorbed BrisBet, WinTicket and TSNBet, along with the handicapping-data operations of Bloodstock Research (BRIS) and TSN.  It appears that the accountants, lawyers and marketers in charge of Churchill (only four of the company's 12 directors, and none of its principal executive officers are what one would call racing people) have decided that their future lies in these internet businesses. One suspects that corporate management regards its live racing operations as nothing more than a necessary evil -- something that exists only to supply "product" to the online world.

Let's start with Churchill's balance sheet.  In contrast to Magna, which hadliabilities equal to 78% of its total assets as of September 30th, Churchill's total debt was equal to only one-third of total assets.  That's a pretty healthy ratio for any company. In fact, over the past 12 months, Churchill actually paid down some $31 million of long-term debt.

Churchill's total assets as of the end of last quarter were $609 million. As is true of most balance sheets, however, not all of that is real stuff that could be sold. Included in the $609 million  is some $115 million in "goodwill," which basically represents the excess of what they paid to acquire other companies over the fair market value of those companies' assets.  That goodwill is about evenly divided between race track properties and the online operations of BRIS and TSN.  By way of comparison, Magna's balance sheet reports $110 million in "racing licenses," which are pretty much comparable to goodwill, in the sense that, if a track ceases to be a going concern, its license isn't worth much.

With regard to earnings, it was a tough quarter for Churchill, as it was for the entire US racing industry.  But, unlike Magna, Churchill did report a quarterly profit -- and a bigger profit than a year ago -- $2.5 million, compared to $818,000 in the same quarter of 2007.  For the nine months to September 30th, Churchill's corporate profit was $32.6 million, well up from the previous year's $21.9 million.

The 2008 profit figures, by the way, represent improving profit margins compared to revenue.  Net revenue for the third quarter of 2008, in fact, was slightly lower than for the same period in 2007, but Churchill nonetheless managed to triple its profit.  For the nine months to September 30th, revenue increased only 8%, but profits jumped by 50%.  Churchill has found a way to wring more profitability out of essentially flat revenue.

Thanks to what little remains of government regulation, we can see where the profits are coming from and what's driving Churchill's profitability.  Churchill, presumably at the direction of its outside accountants, has divided its financial report by business segments: (1) racing, (2) online businesses (i.e., Twin Spires), and (3) gaming (slot machines and video poker).  While all those segments were profitable this year, the growth is all in the online business and in gaming.  Here are the details:

Net earnings from racing were $4.7 million in the third quarter of 2008, down from $7.7 million in the same period last year.  Churchill, like most other racing entities, began to feel the country's economic crisis seriously in that quarter. For the first nine months of 2008, racing earnings were $61.1 million, up from $51.6 million in the same period in 2007. But the trend in racing earnings is downward. 

In contrast, Churchill's online operations recorded a profit of $2.1 million this year, up from $724,000 last year.  More striking, online profits for the first nine months of 2008 were $4.4 million, compared to a loss of $1.5 million in the same period last year.  And gaming operations produced a $4.4 million profit in 2008's third quarter, compared to $1.9 million in 2007, with gaming profits for the first nine months of 2008 at $13.8 million, more than an 80% increase over the same period in 2007.  Now that the permanent slot machine facility is in place at the Fair Grounds, with video poker terminals in Louisiana and slots at Calder still to come, it looks like gaming is the biggest growth sector in the Churchill portfolio. (For those who might be checking my figures, yes, there is a  difference between the sum of the sector profits and Churchill's overall corporate profit for the quarter; that reflects one-time charges for discontinued operations and for expenses at the corporate level.)

A look at actual handle, both at the race tracks and online, confirms the shift away from racing as the primary profit center for Churchill.  In the third quarter this year, handle at all four of Churchill's tracks declined compared to the same quarter last year: Churchill Downs dropped 20%, Arlington 6%, Calder 27% and the Fair Grounds (betting on simulcasts) 19%.  In contrast, online handle through Twin Spires was 62% higher than in 2007.  The overall handle decline was 12%, even more than the 10% nation-wide drop, but the online platform was definitely a bright spot.

When you combine the growth in Churchill's online betting with the fact that Churchill as a corporation retains a much larger share ofr the online revenues than it does from money bet at the track, one can see why it's so adamantly opposed to giving horsemen afair share of the online revenue.  Overall, the corporation returns 9.1% of its online handle to the originating racetracks.  If we assume that money is split 50-50 between purses and the track, then the contribution to purses from Churchill's online betting is about 4.5%.  Assuming a blended takeout rate of about 20-21%, the national average, that leaves a lot of money on the table for Twin Spires.

Owners and trainers at Churchill's tracks, represented by the Thoroughbred Horsemen's Group (THG) are seeking an equal three-way split of online wagering takeout.  That would raise the percentage that Twin Spires pays into purses from 4.5% to, say, 7%, an increase of roughly 55%.  Not enough to make racing a profitable proposition for most ownersand trainers, but every little bit helps.

In many contexts, the idea of a progressive tax is accepted as being patriotic and civic-minded.  As your income increases, it's reasonable to pay an increasing share of the growth in taxes, or in payments to the people who make yor profits possible. If Churchill took such a view, it would be saying, thanks for letting us keep expenses low when we were starting out in our online business, but now that we're up and running and making a profit, sure, we can pay a fair share to the horsemen.  But Churchill's management seems to share the view of Sarah Palin, that a progressive tax system is somehow unpatriotic. So far, they're not willing to share one more cent of their rapidly increasing online revenues.If their position prevails, and if total handle declines or even stays flat, while the share of that handle represented by online betting continues to grow, then Churchill's profits will continue to climb at the same time that purses decline. Given the shaky economics of owning and training race horses, that's simply unacceptable.

I've seen lots of comments on horseplayer blogs to the effect that it's all the fault of the greedy horsemen for cutting off simulcast signals where they don't have an agreement for a fair division of the revenue.  Well, we can't go on strike, since we're not "employees" of the tracks. And we can't do much else in the way of collective action lest the tracks and the ADWs sue us for antitrust violations -- something Churchill is already doing in Florida and Kentucky.  But federal law does give us (except in New York) the right to shut off the signal.  So if that's the only weapon we have, then that's the one we'll use.  Churchill, as we've seen, could afford to pay a little more into purses. Unlike Magna, the can't claim that giving the horsemen a fair deal would bankrupt them.  Oops, sorry, Magna's already bankrupt, fair deal or not. But even Magna, in its sorry state, is willing to negotiate about online revenue.  Maybe if all those non-racing people on Churchill's Board of Directors and in its executive suite spent a little more time with horses and a little less with their spreadsheets, they'd see their way to doing the right thing. 

Friday, November 7, 2008

Magna: the Gory Details

As I noted last night, Frank Stronach's Magna Entertainment Corp. has posted another large quarterly loss.  For the quarter that ended on September 30th, Magna lost $48.4 million, bringing its accumulated losses over the last decade to a staggering $626 million total (over $300 million of those losses incurred just in the past three years).

Now that I've had a few hours to analyze the latest quarterly reLinkport, it's more apparent than ever that this is an enterprise on serious life support.  The distressing outlook for Magna that I discussed when their mid-year report came out in August has, if anything, become even worse.

In a sign of increasing desperation, Magna announced that it had hired the investment banking firm Miller, Buckfire & Co. to advise on restructuring, sales of assets and possible joint venture options.  Miller, Buckfire isn't your ordinary investment banker, doing whatever kind of deals it can put together.  No, these guys specialize in salvaging failing companies; their motto is "creative solutions for complex problems," and they've won something called the Turnaround Management Association's Transaction of the Year Award twice for their work with other distressed companies. Hiring this particular advisory firm is definitely a sign that even Magna's own management recognizes they're in dire straits.

Frank Stronach's comments on the quarterly results show at least some awareness that all is not well:

Although MEC has a strong asset base, we remain burdened with far too much debt and interest expense. Our previously announced debt elimination plan has been negatively affected by the weak real estate and credit markets, which have impacted our ability to sell non-core assets. As a result, we are evaluating MEC's core operations with a view to possibly selling or joint venturing one or more of MEC's core racetracks in order to strengthen MEC's balance sheet and liquidity position.

That's putting it mildly.  Magna needs to raise cash. Now. And it's trying to do that in the face of the worst US real estate and equities market in decades.  It'll need all of Miller, Buckfire's magic to turn this around.

The "core assets" that Stronach referred to are Santa Anita, Gulfstream, Laurel and Pimlico. When he starts talking about selling these tracks -- something that, in the face of lucrative offers, he has resisted up to now -- we can guess that even Frank is seeing the handwriting on the wall. He may, however, be seeing it too late; it's unlikely that, in today's depressed real estate and thoroughbred racing markets, anyone would offer today the same amount that they might have a couple of years ago, whether the prospective buyer intends to keep operating the properties as race tracks or "develop" them into condos and shopping malls.

Here are some of the highlights, and lowlights, of the latest quarterly report.

  • While overall revenue remained flat, at $81.5 million for the quarter, this masked some differences arising from specific operations.  Revenue was down in Maryland (Laurel and Pimlico) and at Lone Star Park, but up at Gulfstream (from slot machines, not live racing) and Golden Gate. But the latter two increases resulted from one-time events, so the increase doesn't really represent a long-term improvement. At Golden Gate, there were 10 more racing days than last year, so the total improved, even though the daily average fell.  And at Gulfstream, there were more slot machines than last year, as well as simulcasting that wasn't available in 2007.
  • Magna spent $2.4 million during the quarter promoting a yes vote on the slots referendum that was approved by Maryland voters on Tuesday. Magna will be applying for a racino license for Laurel, although the Baltimore casino will apprently be built downtown, and not at Pimlico, and so Magna wouldn't get as great a benefit as would be the case if the slot machines were part of a Pimlico racino.
  • Magna's balance sheet shows that its available cash as of September 30 was only $21 million, compared with $34 million at the end of last year. That's very low for a company of Magna's size.  In addition, Magna continued to carry "racing licenses" on its books at a value of $109 million, even as the value of those licenses continues to decline.
  • Although Magna has reduced its accounts payable from $65 million at the end of 2007 to $41 million at September 30 (I can hear the grateful sighs of various suppliers from here), overall indebtedness continues to rise. Total liabilities as of September 30 were $420 million, up from $390 million nine months ago.  The lion's share of that debt is owed to Magna's parent company, MI Developments, another member of Stronach's corporate empire.
As Stronach has admitted, Magna's much-publicized "debt elimination plan," announced just over a year ago, has failed.  No significant assets were sold in the third quarter of 2008, and earlier this week, the prospective buyers of Magna's 500 acres of land near Ocala FL backed out of their deal to take the land off Magna's hands for $16.5 million. In the current real estate market, it's hard to imagine that Magna's assets can be sold for anything approaching what Stronach paid for them.

MI Developments has continued to sink money into Magna Entertainment.  But, as Ray Paulick has pointed out, its minority shareholders are becoming increasingly restive.  The MI Developments board of directors has ignored an offer from internet entrepreneur Halsey Minor to purchase the Magna Entertainment debt -- which would put Minor in a position effectively to foreclose on Magna Entertainment and realize his dream of becoming a race track operator.  I don't claim to be an expert on the corporate law of Ontario, where MI Developments is headquartered, but it's hard to imagine that the board's turning down an offer to buy up Magna Entertainment's junk-quality debt for its full face value could possibly be seen as acting in the best interests of all shareholders, as opposed to the interests, best or otherwise, of Frank Stronach.

Magna Entertainment's loan obligations are once again coming due -- $40 million to the Bank of Montreal on November 17 and nearly $200 million to MI Developments on December 1.  These loans have been extended month-by-month during the past quarter, but if either the bank or the thus-far supine directors of MI Developments ever decide to pull the plug, the next stop is bankruptcy.

These race tracks are too important to be in the hands of a bankruptcy court -- or of someone like Frank Stronach, who has already proven his inability either to turn a profit or to provide a decent experience for the racing fan.  It's time, in fact it's long past time, for a change.

Wednesday, November 5, 2008

Magna - Another Day, Another Loss

Magna Entertainment Corp., Frank Stronach's vehicle for running racetracks, has just posted its third quarter results (cleverly released at 10 pm, so as, I suppose, to minimize public attention).

The good news, such as it is, is that the level of quarterly losses has more or less stabilized. Magna lost $48.4 million in the quarter ending September 30, 2008, compared to $49.8 million in the same quarter last year.  I guess that's progress.  For 2008 to date, though, through September 30, Magna's total loss is $116.1 million, compared to $70.8 million for the first nine months of 2007.

The quarterly report is filled with lots of detail, shedding some light on how long Magna can hold out without giving up its "crown jewels at Gulfstream, Santa Anita and Maryland. It's too late in the evening for me to decipher the teeny tiny print on my screen right now, but I'll take a longer look at the numbers tomorrow.

Belmont Trend Continues on Downward Path

The New York Racing Association has just released the final numbers for the recently concluded Belmont meet.  As one would expect, they're  all down from the same meet last year, at least when calculated on a per-day basis. This year's meet had four more racing days than in 2007, so some of the aggregates are higher, but that doesnt hide the negative trend.

According to the NYRA press release, the average all-sources daily handle for the Belmont meet was 8.3% below last year's figure, coming in at $9.63 million per day.  NYRA did not say how much of that handle was bet on-track or through NYRA's own phone and internet account system; those are the bets that contribute the most to NYRA and to horsemen's purses. Off-track bets, whether through OTBs, other tracks, internet sites, etc., pay much less of the takeout to NYRA.  Trends around the country suggest that on-track wagering is falling at a faster rate than total handle, so the hit to NYRA's bottom line could well be more than the reported 8.3%

Searching for a positive spin, NYRA reported that the daily handle decline at Belmont  was actually lower than the 10.2% decline registered at this year's Saratoga meet.  But Saratoga had three weeks of horrendous weather to open the meet, while Belmont benefitted from near-perfect weather.

Daily attendance dropped even further.  On an average day at Belmont this fall, only 3,987 hard-core fans passed through the turnstiles, compared to 5,001 last year.  That's a drop of more than 20%, once again suggesting that the on-track betting handle was probably the worst-performing part of this year's Belmont betting mix.

Average daily purses also declined, although somewhat less than the decline in betting handle.  The daily average for the stakes-heavy Belmont meet this year was $574,036, a 7.7% decline from last year's daily average of $622,116.  Purse adjustments generally lag behind developments in handle and attendance, and NYRA responded to the decreases at Belmont by significantly cutting purses for the Aqueduct fall mett, which started October 29th.

The new NYRA Board of Trustees will be meeting soon to set the 2009 stakes schedule.  It would be prudent to take a chunk out of the stakes budget, in the hope of keeping purses at least at their current level.  The Phippses and Maktoums may be doing fine, and I'm happy for them to add to their trophy collections. But the everyday working New York horseman and woman is having a tough time making a go of it in this very expensive milieu.  If overnight purses decline much further, it'll be hard for many of them to stay in business.

Saturday, October 25, 2008

So Long Breeders Cup, Hello Aqueduct

The Breeders Cup is over. So let’s get on to the important stuff.  Which is that racing returns to Aqueduct on Wednesday.

Well, OK, perhaps Aqueduct isn’t the center of the racing world any more – though it did host the Breeders Cup in 1985 – but for some of us in the game, it can be the center of our economic, if not aesthetic, lives.

And for the New York Racing Association (NYRA), which operates the rusting old track on the fringes of JFK Airport, Aqueduct is, bizarrely, its most reliable profit center.  Sure, Belmont and Saratoga have the famous races and, occasionally, draw the big crowds, but it’s Aqueduct that actually generates the cash.

For those who haven’t had the pleasure of spending quality time at the Big A, here’s a video clip that can give you a bit of a feel for the ambience. True, the clip is 40 years old, and the crowds are a lot smaller these days, but some things never change.

The original Aqueduct track opened in September 1894. At the time, long before there was an airport there, the area was farmland, and still independent of New York City.  In 1941, a new clubhouse and track offices were built. The whole plant was razed in 1956, just after the New York Racing Association was formed, consolidating the then-four major New Yorktracks into a single entity, and a new "Big A" opened in 1959.

That new Big A is now approaching 50, and its age is showing.  The plant that held over 40,000 for the Breeders Cup back in 1985 now draws an average weekday “crowd” of perhaps 1500.  The cavernous grandstand has been closed off for years, awaiting the installation of slot machines that were approved by the New York State Legislature in 2001 and are, at latest report, going to be ready – perhaps – by 2010. Unlike most tracks that operate in the winter, Aqueduct has no indoor seating from which to watch the races.  If you want to see them live, rather than on a TV screen, you have to venture out into the often-frigid box seat area, where the paint peels from the iron rails, and feeble electric heating elements shine a dim yellow light that one can pretend has some warmth in it.

But, to look on the bright side, Aqueduct is the only track in America that has its own subway stop. In fact, you can stand on the subway side of the clubhouse and see the skyscrapers of Wall Street in the distance. The folks betting the daily double are probably doing better these days than those guys in the skyscrapers

And don’t forget the racing itself. In 1975, an inner track, which miraculously resists freezing, was built to accommodate winter racing. Once the horses move to the inner track – usually from December through March – there’s no turf racing, and the distances are a relentless parade of 6-furlong, 1 mile 70 yards and 1 1/16th miles, with a few longer routes thrown in very occasionally for variety.  The intrepid handicapper gets very accustomed to seeing the same horses, in pretty much the same conditions, running against each other every other week. From a handicapper’s point of view it’s pretty ugly; the inner track is relentlessly speed-favoring, especially when it’s wet (which is often).

On the bright side (at least it’s bright if you’re a very young rider), most of the top jockeys head south for the winter, so there’s almost always room for an unknown apprentice or two to break through into the standings, a pattern that’s helped along by the speed bias.  Trainers put a 105-pound bug boy (or girl) on their horse and tell them to just pop out of the gate and hold on.  If the horse is fast enough to clear the field, and the jock doesn’t fall off, they’re on their way to the winner’ circle.

In an ideal world, you might think, Aqueduct would just go away, we’d race at Belmont from, say, March through July, go the summer camp for racetrackers, i.e., Saratoga, for August, then back to Belmont through maybe Thanksgiving.  And, in the winter, horses could go to beautiful oldHialeah or Gulfstream, or just take a few months off and frolic in the pastures of South Carolina.  Oops, John Brunetti’s intransigence and the demographics of South Florida seem to have doomed Hialeah, and Gulfstream is no longer either old or beautiful.  And most of us who own horses can’t afford the luxury of a winter vacation.

Certainly there have been attempts from time to time to close the place.  To understand why it endures, and why some even love it – well, perhaps love is too strong a word; how about have a secret, well-guarded fondness for it – one needs to understand the crucial role that Aqueduct plays in the economics of New York racing.

There are four different interests whose need Aqueduct serves very well: (1) New York State and its politicians; (2) NYRA itself; (3) owners and trainers who race in New York; and (4) New York thoroughbred breeders.

First, the state.  Since Albany takes a very big cut from the betting dollar,Albany has mandated that NYRA run many, many racing days each year. These days, the Aqueduct “season” runs from late October through the end of April, with only an 11-day break at Christmas.  The rest of the time, the live racing show must go on.

Second, there’s NYRA.  Strange as it may seem, NYRA makes a profit at Aqueduct.  Sure, on-track attendance is low, and so is on-track handle. But the Aqueduct simulcast signal, sent through the statewide network of OTBs and to virtually every pari-mutuel betting outlet in North America, brings in much appreciated dollars. At the same time, purses are much lower than atBelmont and Saratoga.  Hardly any of those pesky Grade I stakes that cost the track money, but there are lots of NY-bred maidens and allowances, and lots of low-level claiming races, with appropriately low purses. Generally, NYRA breaks even, more or less, at Saratoga – huge handle, but correspondingly huge purse distribution – and loses money at the Belmontmeets, which don’t have the huge attendance, but do have lots of rich stakes races.  This year, NYRA has cut back Aqueduct purse levels by 10%, so even with an expected decline in handle, there should still be a profit.

Third, Aqueduct is the savior of the average working horseman.  When the big outfits, with their million-dollar yearlings, roll into town for the summer, it’s pretty hard for a small stable, with modestly priced horses, to compete. But when we move to Aqueduct, all of a sudden there’s room in the winners’ circle. As Pletcher, Zito, McLaughlin et al. head south, the rest of us begin to see spots in the condition book where we can compete.  (My own modest stable, Castle Village Farm, was leading owner at the Aqueduct spring meet in 2006, something we’d have no hope of accomplishing at, say, Saratoga.) Stables that have lots of New York-breds tend to do particularly well at Aqueduct, because the racing secretary needs to fill races, and there are lots of NY-breds at the track, so there are often four or five NY-bred races on a nine-race card. And those races draw full fields, which makes NYRA and the state happy as well, since betting handle is pretty much proportionate to field size.

Finally, because of its reliance on NY-breds, Aqueduct is a major force propping up the New York breeding industry.  Thanks to the efforts of horse owner and retired State Senate majority leader Joe Bruno, New York has one of the richest state-bred programs in the country, with substantial bonus payments to the owners, breeders and stallion owners of NY-bred winners. For a good-sized breeding farm, those bonus payments are like annuity checks, rolling in every two months.  Without the heavy diet of NY-breds running at Aqueduct, a lot of those farms wouldn’t survive.

So I don’t see Aqueduct fading away any time soon, no matter how much the NY Port Authority would like to grab the land for airport parking.  Neither the state, nor NYRA, nor a good portion of the horsemen could survive a long winter break.  And Belmont, where the grandstand faces into the north wind, and there’s virtually no heating, would require a billion-dollar makeover to handle winter racing.  So that leaves Aqueduct as the only feasible winter track.

But the old decrepit Aqueduct that we have such an intense love-hate relationship with may, finally, be in for a change.  After years of delay, theAlbany politicians have at last agreed on an operator for the (as yet totally imaginary) 4,500 slot machine palace at Aqueduct.  The lucky company is Delaware North, which also runs the slots at the Saratoga Harness track and at Finger Lakes, the only New York thoroughbred track that’s not part of NYRA.  Construction may finally get under way any day now – well, more likely sometime next spring.  And after that, it’s mere months, well perhaps 15 of them, until the slots are in action and the profits are flowing, in distinctly unequal shares, to the state, Delaware North, NYRA and, finally, purses for the horsemen. (Oh, and the breeders, connected as they are in Albany, get a share too.)

Delaware North has, in fact, put forth a vision of the new and improved Aqueduct, complete with a convention center, hotel, shops and restaurants (gee, sounds almost like Frank Stronach’s fiasco at Gulfstream; let’s hope not):

Any resemblance between that drawing and Aqueduct past, present or future is, I’m sure, purely coincidental.  But it’s nice to dream.

Meanwhile,  my NY-bred filly Just Zip It is entered in the feature race on Thursday. I can hardly wait.

Monday, October 20, 2008

New York Moves Toward Uncoupled Entries

The New York State Racing and Wagering Board – the state agency responsible for regulating thoroughbred racing – has proposed a rule that would allow trainers to enter a maximum of two horses per race as uncoupled entries, i.e., separate betting interests.  The rule, which was announced by the Board on October 10th, could be adopted any time after the public comment period ends on October 29th.

Coupling of entries has always been a hot-button issue for bettors.  When a trainer’s horses run uncoupled, and the 20-1 longshot wins, while the 8-5 favorite runs up the track, many handicappers are quick to suspect chicanery. And who knows, in some cases they may be right.  So the pressure for requiring a trainer to couple entries has always come from bettors and those in the press who say they’re representing the bettors.

Uncoupled entries are already permitted in New York in stakes races. The proposed rule would allow them in all races.  Coupling of entries as a single betting interest would still be required, as it is now, when two or more horses in a race have the same ownership (in New York, that means a 25% overlap in ownership among the horses), whether or not the horses have the same trainer.  Obviously, the potential for game-playing is greater where there’s common ownership, as the same entity ends up with the purse, no matter which horse wins.

New York trainers have been seeking the rule change for years.  They say, with a good deal of truth, that the rule limits their options for entering horses, and makes it difficult to explain to their owners why some horses get in and others don’t. A particular issue has been the rule that, if a trainer enters two horses in a race that will have superfecta betting, then only one can race, with priority established according to which one has the better date (don’t ask – the date-preference system deserves a column all its own), and not by which one the trainer really prefers.  Uncoupling the entries would eliminate the superfecta-race problem, while at the same time making it easier for the racing office to attract enough entries so that the race could be used for superfectas.

That’s the real reason for the change – since it isn’t always possible to get bigger fields, this is a way to get more betting interests and a bigger handle without having to beg more trainers to enter their horses.  In the face of double-digit declines in handle around the country, the Racing and Wagering Board has dusted off the long-pending rule on uncoupled entries to try to provide some short-term relief.

Along with permitting uncoupled entries, the proposed rules would also reduce the field size required for various types of bets.  Exactas could be used with as few as three betting interests in a race, compared to four under current rules. The minimum for trifectas would drop from six to five for all races; now it’s five for stakes and some allowances and six for all others. And the minimum for superfecta races would drop from eight betting interests to seven, with a further proviso that a late scratch – after the horses have left the paddock –down to six betting interests would not cause the entire superfecta pool to be refunded.

If you put together the decrease in required field sizes for the exotic bets and the new rule on uncoupled entries, it’s pretty clear that the state is doing what it can to keep handle – and the portion of handle that goes to the state –as high as it can in difficult economic times.  I don’t expect many handicappers to find real overlay bargains in five-horse trifecta fields or seven-horse superfectas, especially given New York’s high takeout on multi-horse exotics, but perhaps that’s not the point.

For those who are so inclined, you can send comments to John Googas at the Racing and Wagering Board.  His email is Comments are due no later than October 29th.


Equine Hedge Funds

Even as the world financial system came crashing down over the last few weeks, it appears that promises of returns that are too good to be true aren’t limited to Wall Street.

For those who, luckily, aren’t in the stock market, here’s a quick definition.  A hedge is an unregulated, rich guys’ version of a mutual fund.  It collects money only from “qualified investors” (i.e., rich people) and invests in, well, anything, from credit default swaps with Lehman Brothers to thoroughbreds with blazing speed and bad feet.

For the promoters of hedge funds, the big lure is the compensation.  The industry standard – don’t ask me how it got to be the standard, because it represents an unbelievable level of greed – is that the fund manager’s annual compensation is 2% of the value of the assets, plus 20% of the profits.  So, if you can attract enough money into the fund, you’re guaranteed to do well even if your returns are no better than what one would get putting the money into the S&P 500. Or a mattress.  It appears that hedge funds as a whole are losing something like 25% this year. But the managers will still get that 2%. So if you have a $100 million hedge fund, there’s $2 million in compensation just for turning on the lights.

It was only a matter of time until this get-rich-quick model made it into horse racing. Michael Iavarone of IEAH, whose name in most newspapers is preceded by the label “Wall Street investment banker”  (and who, actually, should be labeled “former Long Island penny-stock broker,” but, hey, a little puffery never hurts, right?) is setting up a $100 million fund, with a minimum investment of $500,000. Reportedly, the IEAH fund does NOT include an interest in Big Brown.

Not to be outdone by those sharp New Yorkers, the Kentucky establishment has countered with the Thoroughbred Legends Racing Fund, the brainchild of Kentuckians Olin Gentry and Thomas Gaines, along with New York investment banker Tripp Hardy of Gallatin Capital.   The model is similar – a goal of around $100 million, with a minimum investor commitment of $1 million a year for three years.  The major come-on is that the horses will be divided evenly among the “legendary” trainers D. Wayne Lukas, Bob Baffert and Nick Zito.  Like IEAH, the Legends Fund will operate on Wall Street’s “2 and 20” model. Thoroughbred Legends was among the leading buyers at the Keeneland September sale, spending $12 million for 29 yearlings, an average of just over $400,000.

Now, if you spend enough money at the sales, you’re going to get some good horses, so I’m sure the investors in IEAH and Thoroughbred Legends will get to be in the winners circle for some big races.  If that’s all they’re looking for, then maybe they’ll be happy. But if they’re looking to make money – which is usually why people invest in hedge funds -- the odds are surely against them

Here’s why. Purses are going down, while the costs of maintaining horses are going up.  The current nationwide purse level of some $1.2 billion doesn’t even cover the current costs of keeping horses in training, and that’s not counting  the original capital costs of buying or breeding those horses, and maintaining them until they are old enough to race.  And, once they are at the races, perhaps one of every ten horses is modestly profitable in a given year, and perhaps one in 100 is a serious money-maker.  But everyone (except, I’m sure, the marks who are going to be attracted to these hedge funds) knows that you don’t go into racing to make money

In the past few decades, the real money has been in stallion stud fees. And the only wildly successful business model has been Coolmore’s. The Irish powerhouse spends perhaps $40 million a year, mostly on well-bred yearling colts.  It probably buys 50 or more yearlings every year, but if even one or two of those colts turn into multiple Grade I winners or champions, then Coolmore is in a position to recoup the whole $40 million through stud fees, breeding their stars 200-300 times a year, in both Northern and Southern hemispheres. One wonders if an equine Viagra is part of their vet bills.  If Either IEAH or Thoroughbred Legends can convert some of their pricey colts into high-priced stallions, then maybe the investors can make some money.  But the timing is against them, as all the presure right now is for stud fees to go down, and for fewer mares to be bred.

For most stables, if they can’t afford the top-of-the-market prices for yearlings with blue-blood pedigrees that have the potential to be important commercial stallions, the economics are strongly against serious profitability. And the hedge fund model of putting all the assets in a single fund makes it even more likely that the fund as a whole won’t break even.  There’s a strong tendency in these aggregations for results to return to the mean – and the mean, or average, result in racing is that an owner loses money.  That’s why most partnership operations, including my own, have moved toward single-horse partnerships.  That way, if you happen to get a really special horse, its earnings aren’t eaten up by the losses on the others. Still no guarantee for making money in the long run, but, I think, more psychologically satisfying.

So, if anyone out there has a spare $3 million, or even a spare $500,000, have fun with these equine hedge funds.  But remember, the people making the money will be the managers, not you.