01/26/2017 2:46PM

Long odds for investors in high-stakes Pegasus World Cup

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Barbara D. Livingston
The statue of Pegasus towers over the Gulfstream Park track as California Chrome exercises last week.

Shortly after 5:40 p.m. on Saturday, as the sun sets on Gulfstream Park in Florida, a horse will take home the largest purse ever offered in Thoroughbred racing, the $7 million winner’s share of the inaugural $12 million Pegasus World Cup.

Beyond the winner, however, the connections behind the vast majority of the also-rans will bear losses in the hundreds of thousands of dollars.

This is the unusual dual reality of the Pegasus, the brainchild of Frank Stronach, owner of Gulfstream and Shaman Ghost, an expected starter in the race. Under the unique conditions of the Pegasus, 12 slots giving the owner a right to start a horse in the race were sold by Stronach’s company last May for $1 million each, and on the eve of the race, many of those owners are now facing significant losses on their investments.

Days before the race, most slot owners expressed optimism about the Pegasus, citing the fervid anticipation among racing fans for a rematch between Arrogate and California Chrome, the one-two finishers in last year’s Breeders’ Cup Classic. It is widely expected that those two horses will finish in the top two again in the Pegasus, sharing $8.75 million of the purse. Third will get $1 million.

“The eyes of the racing world will be on the Pegasus this Saturday, and this is bringing great awareness to racing in America,” said Earle Mack, the New Jersey real-estate developer who bought a slot in the race in September after another group backed out. “It brings racing to the forefront with a very positive and sought-after event.”

But when asked if he would buy a slot in the race next year, Mack was like many other slot owners – noncommittal. Mack and his partners, Moustapha Fostock and Chester Broman Sr., will start John Oxley’s Noble Bird in the Pegasus at morning-line odds of 25-1.

“We’ll see what happens,” he said about buying a slot next year.

:: Pegasus World Cup: The art of the deal

Paul Reddam, the West Coast-based owner who bought a slot in the race just weeks after his then-undefeated horse Nyquist won the Kentucky Derby, said this week that his “expectations are not very high” for his Pegasus entrant, Semper Fortis, a second-string horse from his own stable who is 50-1 on the morning line. Reddam had hoped last year that Nyquist would make the race, but the horse was retired near the end of 2016 after three disappointing starts, leaving Reddam to look down the shed row for a suitable horse to run in the race.

Unlike many slot owners who did not have a horse in the race, Reddam did not seek a deal with other horse owners in the hopes of scoring a Grade 1-class horse who could compete with Arrogate and California Chrome. Instead, he is starting a horse from his own stable so that he does not have to split the purse with any partners, salvaging as much as he can from his investment, including the $250,000 guaranteed to any horse who starts.

“It just seemed to me that with both California Chrome and Arrogate targeting the race, it was going to be a definite buyer’s market, and I didn’t want to chase that,” Reddam said this week. “But you have to start a horse to get that $250,000 back, so we’re in.”

Asked if he would exercise his right to purchase a slot next year, Reddam said, “The answer is, I don’t know.”

Reddam’s decision to forego a partnership underlined the problems many slot owners had in securing a horse in a deal that resembled anything like their initial expectations, despite the predictably daunting dynamics of the market for the slots. When the race was announced, many slot owners expected that they would be able to sell their slots at a sizeable percentage of the buy-in or reach deals that gave them a reasonable chance to get a positive return.

Those chances wilted when Arrogate and California Chrome remained on track to start. Even without those two in the race, however, the majority of slot owners would have ended up chasing the same horses, giving the owners of those horses a heavily lopsided advantage.

“What could have worked out in theory did not work out in practice,” Reddam said.

According to several officials who were involved in negotiations for Pegasus slots and agreed to speak about the deals only on condition of anonymity, agreements to secure a horse for the Pegasus were heavily skewed toward horse owners. In those deals, the horse owners did not pay a cent to get into the gate and will share in a percentage of the purse if the horse finishes in the top three or five positions. In other words, the horse owners basically got a freebie to start in a $12 million race, with nothing but upside and nothing at risk, aside from the opportunity cost of starting the horse in the Pegasus instead of another race that weekend.

“It will be very, very tough to duplicate what they did this year by selling the shares in May,” said one of the people who conducted negotiations. “Knowing what we know now, everyone will just say, ‘I’ll try to get in in the aftermarket, 90 days out, or in December.’ There’s no need to buy the slot for $1 million.”

Although a California Chrome-Arrogate rematch would not seem to need much promotion, The Stronach Group has certainly pulled out all of the stops to promote the race. The company purchased a 90-minute window on NBC’s national network to televise the race and is paying NBC to produce the broadcast, using the network’s national racing team, including new racing host Mike Tirico, one of the network’s top talents. It also has blanketed social media with advertisements and promotions and pressed simulcast outlets to pay a higher rate for the rights to offer wagering on the race.

Those high-profile moves are designed to establish the race firmly on the national racing calendar, but they also come at a price, one that will be borne in part by the race’s investors, according to several slot holders. Under the race’s structure, each slot holder is entitled to a one-twelfth share of specific revenue sources tied to the race, such as the sale of media rights and sponsorships plus a portion of the handle on the race.

Citing time constraints, The Stronach Group did not reply to detailed questions submitted Monday about the revenue shares this week, but according to several slot holders, those shares are believed to be net of the cost of the revenue, meaning that some costs of the race will be subtracted from the distributions.

Still, some slot owners said they are entirely behind the race’s concept despite the difficulties in securing a horse and the potential for a large financial loss. Jeff Weiss, a Florida real-estate developer who is starting Zayat Stables’s Prayer for Relief (50-1) in the race, said the time he spent trying to find a horse for his slot “was one full month of straight stress” in which “nothing seemed to work out.” But he still praised Stronach as a visionary, and when asked whether he would exercise his first-refusal right to buy another share for the 2018 Pegasus, he did not hesitate to answer.

“Oh, absolutely,” he said. “Next year is going to be an unbelievable race.”