Thinking About Buying a Racehorse? Things to Consider.

Imagine how exhilarating it would be to watch your horse cross the finish line first (or even second or third) in a Breeders' Cup race. Is that possible? Is world-class racing too lofty of a goal for a pro­spective new owner, or one who doesn’t invest millions of dollars?

The reality is that the price tag of the horse is not predictive of its future success. Breeders' Cup win­ners, Kentucky Derby (gr. I) winners and Horse of the Year victors come in all shapes, sizes, back­grounds (and price tags). Yes, there are sheikhs, princes and big commercial farms with horses in these races, but if you want to participate in racing, there is an entry point option at a reasonable price utilizing racing partnerships.

Many racing partnership groups had entries in the 2024 Kentucky Derby at Churchill Downs and Breeders' Cup at Del Mar. Racing partnerships are de­signed to let an investor buy into a horse, or a group of horses, for much less than it would cost to go it alone. Partnerships are an excellent entry vehicle for a first-time buyer, as well as great fun for repeat buyers. Owning a partnership interest is all the fun and excitement, but with less finan­cial commitment and less risk.

This article is written primarily for first-time racing partnership investors, but is a useful guide for anyone evaluating racing partnership documents and structure. What follows is a guide to some of the more common variations seen in rac­ing partnership agreements. While some rac­ing partnerships are entered into among friends on a handshake or loose verbal agreement, most are formally organized groups that will present you with an organizational document such as an LLC operating agreement, partnership agreement or co-ownership agreement.

Below is a non-exhaustive list of considerations intended to assist in review of the governing documents and to prompt thoughtful questions regarding purpose, structure, operations and costs.

Begin by doing some due diligence as you would with any other business investment. As noted by late author and real estate broker Arnold Kirkpatrick in his book Investing in Thoroughbreds; Strategies for Success, “don’t check your brain at the door” simply because you aren’t experienced in the thoroughbred industry. Do your due diligence; use that business knowledge you have from other industries. Research online, ask around about the various partnerships, meet the principals and choose a partnership with objectives that align with your own. There are almost un­limited variations in the structure, operation and manage­ment. There isn't a model that is necessarily better than another. Rather, identify what kind of partnership you would like to be involved in based on the financial model, required investment, where the horses run, what kind of horses are to be purchased, what you hope to get out of your involvement and other key factors.

Often the ownership/management document is not particularly negotiable as it may have already been executed by other investors. However, your questions or concerns may prompt a manager to add or change provisions in the future.  Your remedy, if you don’t care for a particular structure, is to walk away and find a partnership that meets your goals and objectives. Find the one that is a fit for you personally.

1. Purpose of the partnership.  The horses.  Is this a partnership to buy yearlings and sell at the 2-year-old sales (pinhooking)? Is it to buy 2-year-olds that are ready to race? Year­lings to develop and race? Identify the aspects of the Thor­oughbred business that you are interested in and your timeline. Pinhooking can be higher risk but also presents the possibility of a quicker return. Buying a 2-year-old already in training, or an existing racehorse, will get you to the track faster. Buying yearlings may be less expensive, there are more choices and your team develops these young horses as the trainers see fit, offering a longer time frame, but more control over the course of events.  The longer the timeline to reach the objective, the higher the carrying costs and the greater possible risk. 
2. Purpose of the partnership. The people. Some partnerships are more affordable and intended to attract younger investors as an introduction to the business, and to generate new fans and owners.  Some of these models are “clubs” with a very low buy-in and no profit motive.  Others are focused on racing and social events, and some are targeted to women to encourage more women to invest in and learn about the industry.  Know your objectives and match those with the partnership that fits.
3. Horses purchased. How many and what type of horses are expected to be purchased from funds raised? Age, sex, upper limit in price? Some partnerships invest only in fillies so that after their racing career, the horses may ultimately be sold as broodmare prospects. With a de­cent pedigree, this is a relatively predictable exit strategy. Buying colts generally means they have to have significant success on the track to be a stallion prospect in today's market. Some will be gelded, meaning that at the end of their racing career, a new career will need to be identified. Do your re­search on the price points that typically have a positive re­turn on investment (ROI). The Jockey Club and others keep track of purchase price versus success on the racetrack and the percentage of horses that are successful on the track.
4. Racing region and types of racing. Some partner­ships focus their efforts on a particular racing region, for example: California, Florida, Kentucky or New York. Ask ques­tions about past history and trainers used so that you can determine where the horses are likely to be targeted to race. It is most fun when you are able to see your horse race in person—although in today's environment, watching online or on TV is always an option. Some partnerships are all about “Big Days” and some are more focused on a range of competitiveness.  Note if the operational docu­ment permits a horse to be entered in a claiming race. This should be addressed in the documents as the claiming race value will set the value of the horse (for insurance purposes, etc.) and cause the horse to be "sold" if claimed. However, some highly effective partnerships are formed for the sole purpose of trading in and out of claiming races.
5. Capital. What is the capital raise objective? A minimum and maximum amount of money to be raised is often identified either in the document, or in a term sheet circulated in advance of closing. If the minimum isn't raised, then the offering doesn't "close" and your deposit is returned. How much is raised between the minimum and the maximum matters if you are planning to invest a fixed amount (say, $50,000). If $100,000 is raised, you will own 50% of the partnership. If $500,000 is raised, your outlay is still the same ($50,000) but your interest is less, and your pro-rata expenses will be reduced. How much is raised will also determine how many horses, and of what quality, can be purchased. Get comfortable with what the buy-in is and what percentage you will own.
6. Ongoing funding.  This is critical.  How much will it cost you to continue month-to-month and year-to-year in the partnership?  Some part­nerships collect enough money in the initial capital raised to fund the partner­ship for some period of time beyond the initial horse purchases. This time frame may be six months or a year, or through the 2-year-old sales in the event of a pinhooking partnership. Purses or sales of partnership horses may continue to fund the operations. Most likely, you will be billed monthly or quarterly for expenses. All of these arrangements exist and are acceptable—just know what the situation is and budget accordingly. More importantly, if expens­es exceed ongoing earnings (and they are likely to), will the manager make a capital call? Is that capital call voluntary or man­datory? Be prepared and budget for such calls. If the calls are voluntary, the agree­ment should provide that if one investor makes the additional capital contribution and one does not, the non-contributing investor's interest will be ratcheted down, pro-rata. Partnerships estimate the cost to keep a single horse in training at $60,000 per year, the bulk of which is the trainer's day rate, which in­cludes stabling, feed and employees.
7. Financial reporting. Deter­mine how often you will receive a profit and loss statement (monthly, quarterly, annually). Inquire as to the detail on the reports and whether you can clearly iden­tify how and where the money is spent. How often are profits, if any, distributed? Some partnerships deduct outstanding expenses from any revenue source and pay or request the difference. Some partner­ships bill monthly or quarterly, but pay out your share of the purse money after every successful race, without offset of expenses other than those deducted at the track level (10% to the jockey and 12-13% to the trainer who typically shares part of that with his/her staff). This can be fun, as you are cashing checks along the way.  Also, know what management expenses are funded and what the budget for such expenses is i.e. travel, hotel, entertainment of partners and similar expenses.
8. Insurance. Insurance is critical to the operation of the business. The operation should have a general liability policy in place as well as mortality insurance on each horse. Most partnerships cover both in the expenses so that coverage is in place and management dictates coverage amounts based on the purchase price or market value of the horse. Some, how­ever, leave the mortality insur­ance to the individual partners. You may choose to insure or self-insure. You can insure a percentage interest in a horse, but you will need to coordinate with the manager and other partners on valuation. Compet­ing policies with different in­surance companies may create coverage issues in the event of a claim, so best practice is typically one policy administered by the manager and expensed through to the partners pro-rata.
9. Taxation. The typical racing partnership (LLC, partnership) will gen­erate partnership returns (K-1’s) and the profits and losses will flow through to the investor's personal return. Be aware that investors in racing partnerships are largely considered "passive" investors, meaning that an investor does not invest a material amount of time or authority in decision-making and management. As such, losses may not be taken each year on the investors return, but rather carried forward until the conclusion of the partnership. Passive loss­es can however be taken against other passive income (rental real estate, for example). Con­sult an equine tax advisor on these matters as well as on the availability of depreciation and tax treatments specific to horses.
10. Management. The docu­ment should set forth a "manag­ing member/partner" or other equivalent. If the manager is an entity, determine the ultimate owners of that entity. Interview the manager. Ask questions about his/her background, education, experi­ence and track record with prior partnerships. Request refer­ences from past and current in­vestors and interview the inves­tors about their experience.  Ask your friends about their experiences.  The website www.ownerview.com publishes statistics including win percentages by part­nership, which can be useful as a comparison tool.
11. Management compen­sation. There are numerous ways that managers may be compensated. Some charge a monthly management fee. Some take the bulk of their money on the front end by pur­chasing horses and contribut­ing the horses to the partner­ship at a mark-up. If you are curious about the degree of the mark-ups, all public sale-price history is available online or through industry resources. Some managers employ more of a hedge fund formula (i.e. 10/10/10) where the manager takes a percentage of assets under management each year and sales commissions on the horses on the way in and out of the partnership in return for their efforts in identifying or selling prospects. Read the document carefully to understand the management costs.
12. Removal or replace­ment of manager. Most agreements provide for a super-majority vote to remove a man­ager and some will provide for removal upon "cause," which might be for the conviction of a crime or for any reason that re­sults in the manager not being able to be licensed by a racing commission or Horseracing Safety and Integrity Act (“HISA”) or being sanctioned or temporarily or permanently suspended by a racing com­mission or HISA. Provisions should be made for the partners to select a successor manager should one be unable to continue to serve for any reason.
13. Member voting. Do the members (non-managers) have a say in any decision-making? Most commonly, if this is a partnership that is managed by someone who does this for a living, the members do not have a vote on any day-to-day decisions. Some agree­ments provide for a super-majority vote for major decisions such as to admit a new member, terminate the part­nership, change the manager, spend above a certain amount, borrow money, sell a horse and similar big-ticket items. Do not be sur­prised if as a minority member you do not really have a vote on most issues. Remember, you are relying on the manager, who has experience, to make these decisions for you and to edu­cate you along the way. If you have questions about how the partnership is managed, speak to the manager. Communication is key.  Partnership timelines are typically fairly short, so ultimately you can choose not to re-invest in the next partnership if your interests are not aligned.
14. Re-Sale of interests. Partner­ship interests are typically closely-held with significant buy-sell restrictions. Such restrictions are in place for good reason; first, so that the parties are not trading what may be characterized as a security and, second, to control who par­ticipates. Also, there may not be a lot of buyers for an interest in a racing partnership that is already underway. Both the manager and the other members want quality partners who understand the model, how it will work and who will pay their bills. So if an interest can be transferred, it is usually subject to a right of first refusal back to the re­maining members at the offered price, and for the manager and/or members to vote whether or not to permit the transfer. Involuntary transfers (death, divorce and bankruptcy) should be addressed in the documents.
15. Private sale of a horse. What if the part­nership or manager receives an enticing offer for all or part of a particular horse? Who decides if the horse should be sold? Often this is a management decision or a super-majority decision as the manager is generally best-suited to deter­mine fair market value. Up-and-coming 3-year-olds that are on the Derby trail or other horses headed to the Breeders' Cup will attract attention from one or more potential buyers (individuals or stallion farms) as the horse approaches big race days. Some buyers intend to own 100% of the horse and will not entertain having the original owners stay on as partners. Sometimes the seller of the horse can negotiate to stay in for a percentage (even if a minority interest) in order to enjoy the ride to the Derby, Breed­ers' Cup or other big race. These details are negotiated at the time of the offer. Additionally, commercial stallion farms will sometimes buy the breeding rights to a colt during the horse’s racing career in order to tie up a promising prospect for stallion duties upon retirement.
16. Career-ending decisions. Evaluate what happens if a horse is injured and cannot race in the short term (costs and location of lay-ups) or long term (needs to be retired) or simply is not demonstrating an aptitude as a racehorse. Typically, the manager makes this decision in conjunction with the trainer and/or veterinarian in the best interest of the horse.  Is there a plan for re-homing a horse that cannot race or isn't suitable for sale for breeding purposes (lack of commercial pedi­gree, gelding, etc.) as a sport horse? Ask the man­agement how they handle such decisions. Responsible Thoroughbred own­ership is important and there are numerous retirement and retraining options available across the country. Thoroughbred Aftercare Alliance is one organization that accredits these types of organizations. 
17. Exit strategy. This is by far one of the most important provisions for the investor. Ask the manager when and how the partnership will be concluded.  There are many options. Racehorses may be sold at public auction by a particular date (say, in the fall of their 3- or 4-year-old year). Research the nature and timing of the public auctions. Infrequently, agreements provide for conversion of the partnership to a breeding partnership by the vote of the members. If you are buy­ing an interest to race, are you willing to own a broodmare, which takes years to realize a return and requires the pay­ment of long-term boarding fees, vet bills and stud fees? The type of partnership often dictates the exit strategy and the timing of such exit. Be sure that management files the necessary papers in the state of orga­nization upon dissolution of the partner­ship to put an end date on both taxation and possible liability issues.

Tangible and intangible benefits. Review the document and ensure the manager explains/outlines other benefits such as back­side access, morning workouts, trainer and training barn access, farm tours, tickets or boxes at popular racetracks or hard-to-get tickets to premier racing. If you own an interest in a racehorse, enjoy all the perks of owner­ship. Some of the intangibles are meeting and socializing with new, like-minded friends, camaraderie, introduction to industry leaders and trainers, attending horse sales, special industry events, charity events and awards dinners. These elements may be unwritten but are what participating in racing partnerships is all about—en­joyable experiences and, hopefully, the thrill of victory.