Tuesday, January 21, 2014

Looking for a Partnership?

Lots of action on the racing partnership front, at least in New York. Lots of recent Facebook controversy about the ubiquitous Drawing Away Stables, and whether its partnership model contributes to the likelihood that its horses might be over-raced and under-retired. And a couple of interesting new partnership initiatives, from trainers Gary Contessa and Abigail Adsit, the latter a former Linda Rice assistant who's recently gone out on her own. And my own Castle Village Farm is looking to put together new claiming and two-year-old partnerships in the new year. At the same time, the failure of the well-known Karakorum Racing Stable, which once occupied Drawing Away's place as the New York partnership with the most starters, and which took with it a good deal of partners' and employees' money, reminds us that there are indeed risks in joining a thoroughbred partnership. (For a sanitized version of that story, see here.)

Overall, the rule of thumb for many years has been that purse earnings amount to about 50% of the cost of keeping all those race horses in training. With the advent of higher purses in New York, and relative stagnation in trainers' day rates (except perhaps at the stratospheric level of Todd Pletcher et al.), one can guess that a thoroughbred owner in New York might now lose only 25-30% of the cost of keeping an average horse in training. Still, that's a loss, and it doesn't count the cost of acquiring the horse in the first place, whether it's a $12,500 claimer or a $500,000 yearling purchase at Keeneland. Sometimes, your horse gets claimed for more than you paid for it, or you can sell it as a broodmare or stallion prospect. Far more often, you sell your horse for only a fraction of its purchase price or give it away (to, I hope, a good retirement home).

So don't go into a racing partnership expecting to make money. If you do, great. But more likely, you won.t. And if you don't, you'll still have the thrills that go with thoroughbred ownership -- watching your horse develop, hanging out at the barn, getting your picture taken in the winners circle. For most partners, a good result is having a good time while not losing too much money and not feeling that you're being taken advantage of.

So what should you look for in a partnership business plan or contract -- whether you're in one now and thinking about changing or whether you're thinking about getting involved for the first time?

Let's deal with the non-monetary issues first.

At the top of the list is what kind of involvement does the partnership provide? The high-end partnerships -- Centennial, Dogwood, Team Valor and West Point, for example --  have superb customer service, with staffers providing tours of the barns and meeting partners in the paddock. Of course, one pays for that kind of service (see below). At the other end of the scale, some partnerships bar partners from the training track and barn area, at least during training hours, and provide minimal information and partner support.

Questions to ask: Can I go to the barn and the training track to see my horse? Will the partnership help me with licensing? Does the partnership let me know what's going on, with phone or email notification of workouts, plans for races, entries, results and more? How can I be in touch with my fellow partners; is there an email list for the partnership? Will my opinion be listened to? Who makes decisions about which races to enter?

One goes, or should go, into a racing partnership knowing that the primary purpose is not to make money. Because that's true, the intangibles become all that much more important.

Next, What does your partnership do to make sure that its horses have a safe and secure retirement when their racing careers are over? Does the partnership have a clear retirement plan, and the financing to carry it out? Does the partnership contact successor owners of its horses, making it clear that the partnership is there to help if retirement becomes necessary? You'll feel better about your involvement if you know that the horses that give you so much pleasure are being taken care of.

Okay, now let's talk about the money. Basically, partnerships come in two flavors: those where the partners pay the ongoing training costs and those with a single up-front charge and no additional fees. The former is the more common and, in my opinion, makes more sense, for reasons that will become apparent.

So let's look at that model. The first question to ask is: how does the partnership manager or promoter -- who may be the trainer as well -- make money? There are really only three ways:

1. By marking up the cost of the horse. For example, West Point may buy a horse for $100,000 at the yearling sale, then syndicate it for $25,000 for a 10% share, effectively marking up the horse by 150%. Nice work if you can get it, and that markup does pay for a lot of customer service and advertising. Toward the other end, my own partnership, Castle Village Farm, charges a 15% markup on the initial capital in each partnership, whether that capital is then used to claim horses or to buy babies.

How do you know what the markup is? Easy. If a horse is purchased at public auction, that information is available on the website of the auction house, Fasig-Tipton, Keeneland or Ocala Breeders Sales Co. If the horse is claimed, you know what the claim price is. If it's a private purchase, the patrnership manager should be willing to tell you what the cost was. If not, that's a warning sign.

There's some justification for larger markups if the partnership manager personally bears the early risk. After all, if West Point buys a horse at auction and that horse breaks a leg before ever getting into training, it's likely that West Point will have to bear at least some of the initial cost. On the other hand, how much is too much? There's no one-size-fits-all answer, but a prospective partner should know what the numbers are.

2. By taking a piece of the purse. Often, partnership managers retain a 5% or 10% interest in the horse's earnings, without being liable for an equivalent share of the cost of keeping the horse in training. That's probably fairest to the partners, since an unsuccessful horse at least doesn't generate added charges.

3. By charging an ongoing management fee (or, as in the case of the late, unlamented Karakorum), a monthly training fee that far exceeded the actual training cost). That fee can be zero, it can be actual cost (of maintaining and office, tending to partners' needs, etc.), or it can be much more. The partnership agreement should spell out how much, if anything, the monthly or quarterly fee is.

Most partnerships charge a combination of these three items. I ca't say what's the ideal mix. Sometimes you get what you pay for, in service and support; sometimes you get more than you pay for; often you get a lot less. In all cases, though, if the partnership won't tell you up front what the costs are, including all forms of management compensation, beware!

Next,  how does your partnership share and distribute financial information? Are there monthly or quarterly reports to partners that spell out purse earnings and costs, breaking out training fees, vet bills, van bills, etc.? Does the partnership respond to your questions about the bills? And, a related point, does the partnership provide you with K-1s (the income tax form for your partnership share) in a timely fashion, so you can file your taxes on time? The less financial information you're getting, the more likely it is that the partnership manager is a gonif.

What about those one-time-only partnerships, where you put up some money at the start and then "never, ever" pay any more bills? Could be a good idea; there's not much that's more depressing than paying bills month after month for a horse that never makes it to the race track or that never earns enough to cover its training bills. But there are lots of pitfalls with this kind of arrangement. If you don't pay the bills, who does? Generally, it's the trainer, and that can lead to a variety of undesirable results. First, the most common version of the one-time-fee partnership is where the trainer gets to keep a majority or more of the purse, instead of the trainer's customary 10% That's the deal that Drawing Away Stables has with trainer David Jacobson, and it sets up some unfortunate conflicts of interest. From the trainer's point of view, it's better, in this sort of arrangement, to run a horse often and cheap, where the trainer has the best chance of picking up a purse. But that can often mean running the horse for a claiming price below its original cost. If the horse wins and gets claimed, the trainer keeps most of the purse, while the partners bear the capital loss on the claim price.

Alternatively, in the one-time-fee partnerships, the trainer or partnership manager could keep all the purse money until the horse has paid for all its training costs. For roughly 90% of horses, that means never, so the partners never see a return on their investment.

In either case, if you're tempted by the thought of never having to pay training bills, be careful. Make sure you understand the entire financial structure before you get involved.

And above all, look for transparency. Make sure you understand the deal, and that the partnership gives you all the information that you need. There are many that will; you don't have to go with the ones that won't.

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