09/01/2011 1:59PM

Keeneland September: A fresh case for ownership

Pamplemousse Grille
Jeffrey Strauss, executive chef of Pamplemousse Grille, first became an owner in 2008, when his horse The Pamplemousse emerged as a Triple Crown candidate.

On a recent August evening, a group of wealthy individuals arrived for an exclusive party at Jeffrey Strauss’s beachfront house not far from the Del Mar racetrack. As the guests enjoyed the view from Strauss’s backyard overlooking the Pacific Ocean, their host plied them with Kobe beef and lamb sliders, seafood paella, sushi, and more. Strauss is executive chef and owner of Pamplemousse Grille in Solana Beach, Calif., but he is also a racehorse owner, and it was as much for this sporting enthusiasm that the Keeneland Association had asked to use his home for this party.

Charismatic, passionate, and still in his 40s, Strauss is the kind of owner the Thoroughbred industry and sales companies want now more than ever. At a time when foal crops, bloodstock prices, and ownership licenses are falling, people like Strauss could be key to promoting racehorse ownership to a new generation of owners.

Strauss bought into his first racing partnerships in 2008 and quickly turned up a Triple Crown candidate in The Pamplemousse. A $150,000 juvenile purchase, The Pamplemousse dropped off the Kentucky Derby trail because of a tendon injury, but Strauss remained undaunted. He has since brought friends into racing partnerships, and he is a compelling spokesman for the joys of ownership.

“You know, I’ve cooked for eight presidents, but nothing makes me happier than feeding a carrot to The Pamplemousse,” he once told the Del Mar Times.

At the party last month at his house, Strauss waxed lyrical on such pleasures as Keeneland’s invited guests listened. They also watched a promotional video Keeneland provided. They asked some questions and expressed some interest, but it could take years before any of these targeted partygoers takes out an owner’s license.

Meanwhile, owners are leaving the game. The number of individual owner’s licenses in 2010 was down more than 19 percent from 2007, the year before the global financial meltdown, according to published figures from he Association of Racing Commissioners International. Unfortunately, attracting new owners is not a fast or straightforward process.

“You have to expose people to racing, and we find that’s the most important thing,” Keeneland’s director of sales, Geoffrey Russell, said. “Having people within the industry willing to bring people in to expose them is also important. There’s more of a comfort zone for people if a friend or business associate invites them to the races or to dinner to talk about horse racing. So we look for people like that in the industry to try to help us bring people along. Most people in the Thoroughbred business have an outside life. They’re bankers, wine owners, financial consultants, and if we can recruit them to bring in people they know in their industry and expose them to our sport, we can maybe get them to think about owning horses. But it’s difficult, because you’re introducing them to something they often know nothing about, and that takes longer.

“When we talk to people who are thinking about getting into the horse business, they like talking to the accountants,” Russell said. “You can tell them all about how wonderful it is to go racing at Keeneland and Saratoga, but they like to know all about what tax advantages they’ll have, too.”

Sales companies can indeed point to some favorable tax legislation for horse owners. The 2010 Tax Relief Act allows 100 percent depreciation on “qualifying property,” including yearling purchases, in 2011 only. That bonus depreciation drops to 50 percent in 2012. An expense allowance under the same law also allows buyers to write off as much as $500,000 of the cost of horses or farm equipment placed in service, up to $2 million. In addition, the new law will keep the top tax on capital gains and dividends at 15 percent through 2012, rather than the originally planned 20 percent for capital gains and 35 percent on dividends.

But from a strictly business standpoint, many accountants might balk at the idea of Thoroughbred ownership. In 2010, the last year for which complete figures are available, the number of North American races dropped to 50,770, the lowest in four decades. Average purses increased slightly, growing 0.3 percent to $21,761, but total purses were at their lowest level since 1998. And the chances of getting much of that money appeared pretty stark for many owners: Average earnings per runner were just $16,258, and median earnings were $6,218 in 2010. The same year, the average and median purchases price at Keeneland’s September yearling sale were $64,810 and $25,000.

Strauss said he believes figures like those illustrate why the sport must sell ownership as a special and rewarding experience more than a moneymaking one.

“I wouldn’t have gone just by people’s net worth,” Strauss said of the guest list at the recent Keeneland function. “I would have gone with people just getting into the game who can afford to go a little deeper in it. The people on our guest list that night had money, and these people want to keep their money. You don’t get into the horse business to make money. If you make money, it’s a great thing. What I’ve learned is, you have to treat it as a business but look at the financial aspects as a hobby. When it pays off, it’s great. But don’t go into this thinking you can invest $500,000 and make money, because you’re probably safer putting your money in the bank and getting interest.

“At my house, I talked to the people and told them, ‘If you’re going to go in and buy horses, you’ve got to take advantage of it, because eventually this industry’s going to take advantage of you. It has to be a two-way street.’ ” he said. “By that I meant, get up in the morning and watch your horses work out. Get to learn your horse’s personality. It’s like owning a sports franchise. It’s a sport that is so pure between the hours of 6 a.m. and 9 a.m. It’s simple, beautiful, and almost surreal to be on the backside in the morning.

“And that walk to the winner’s circle is one of the greatest feelings in the world.”

The Thoroughbred game’s unfavorable risk-reward ratio has prompted many new owners to enter the sport through partnerships and syndicates that allow them to experience the sport and its financials at lower risk. Public syndicate groups have enjoyed spectacular successes in recent years, and in 2011 syndicate-owned horses won both the Derby and the Kentucky Oaks. Derby victor Animal Kingdom, a $100,000 Keeneland September purchase, races for Team Valor International, and Oaks winner Plum Pretty, a $130,000 Ocala juvenile purchase, carries the colors of Peachtree Stables.

But the recession has taken a hit on many syndicate groups, too.

“People only spend their extra money with us,” Team Valor founder Barry Irwin said. “Owning a horse is not a necessity. Anytime there’s a reverberation in the financial markets, the first thing people get rid of is their horses or their boats or their planes or their fancy cars. When times are like this, it’s almost impossible to sell something unless it is just such a good horse or so attractive or that it is such a bargain that people can’t resist it.”

There are some financial opportunities in Thoroughbred racing and breeding, provided investors can stomach a lot of risk. The sport expects about $40 million in new purses and $6 million in breeders’ funds to roll in next year from Aqueduct’s new gaming machines, which are set to start taking bets in October. The number of race days nationwide has continued its slide in 2011, falling almost 7 percent from July 2010 to July 2011, according to the most recent Equibase statistics. But purses have gone up, edging up slightly more than 1 percent in the same timeframe. Relatively low bloodstock prices make it less expensive to buy into the game. A cheaper buy-in also offers the potential for future profits if and when the bloodstock market turns around, and the market has shown increasing stability so far this year. The high-risk stallion business has taken a hit as breeding activity has plummeted in the recession, but it, too, still has pockets of opportunity for investors willing to bet on a hot young stallion prospect.

These are some selling points that farms, bloodstock agents, and sales companies have taken upon themselves to pitch to potential Thoroughbred investors. And there are many groups out there pitching. Several years ago, Fasig-Tipton launched a racing stable aimed at newcomers. The Thoroughbred Owners and Breeders Association and other similar state groups host regular new owner seminars around the country. Public syndicates such as West Point, Bongo Racing, Dogwood Stable, and others market to various degrees. On the breeding side, Three Chimneys Stallions recently announced it was bringing in a major investor, Everett Dobson, and would “continue to recruit investors for its stallions and stallion investor funds.”

Such individual efforts probably are more effective than any attempt at an industry-led national owner recruitment campaign, Irwin said.

“The bottom line is, only one thing really sells, and that’s enthusiasm,” he said. “If I’m enthusiastic about a horse or the game, it’s going to spill over to people near me or who get near me. The real key question, and I can’t answer it, and I’ve thought about it for years, is, What makes any person on a given day decide to pick that phone up and call someone and say, ‘I’m going to buy a horse’? We have a list of about 650 people that we call our prospects list, and every time we get a new horse we send an email out. From that, we garner some sales. And I’ve asked guys from it that have called up out of the blue, ‘Why did you call today? You’ve been on the list for seven years, so why today?’ And they can’t answer it themselves. It’s a real mystery.”