The business of breeding and raising a Thoroughbred horse to sell at auction comes with a myriad of decisions to make, many of which might have to be made possibly years before sending the horse through the sales ring.
Weigh the risk versus the reward. Understand the process.
For the newcomer, one without any experience in the breeding business, it’s important to have a broodmare with a proven record on the track and/or proven produce record. For those starting from scratch, this will be the backbone of their breeding operation. Some find it advantageous to buy or claim a well bred filly toward the end of her racing career. There are also breeding stock auctions with plenty of talent. Some of the auction horses are already in foal, or pregnant.
The seller’s process also can start with “pinhooking” – or buying a weanling or yearling for re-sale.
The 2016 Keeneland November breeding stock sale featured 284 weanlings that changed hands at that auction and went on to sell at next year’s Keeneland September yearling sale.
As a group, the 284 horses brought $17,224,550 as weanlings and re-sold in 2017 for $35,697,000 – more than doubling their combined sale prices. Those numbers expand even further when factoring in horses that went RNA, or were sold in other auction markets.
While not an overwhelming slice of the mixed-sale economy, the young horse pinhookers market has produced some lucrative returns in the sale ring and successful graduates on the racetrack. Kentucky Derby winner Nyquist fits both of those categories, bringing $180,000 as a weanling… then $230,000 as a yearling before going on to an Eclipse Award-winning racing career.
Thoroughbred racing offers many thrills, and thousands of owners have known the adrenaline surge when their horse takes the lead in the stretch and goes on to win a race. But the Thoroughbred industry has another equally potent high, one that has been experienced by fewer people. Selling a young horse is no less suspenseful or emotional than running in a race. Look at the similarities. It takes months to prepare a horse for a race, and similarly the time from a horse’s birth or purchase at a previous sale spans several months. On the track, there is the nail-biting anticipation when the horses go into the gate and the hold your breath tension through the first fractions of a race. Those reactions are followed by the letdown or euphoria in the stretch, depending on how the horse finishes. At a sale, the owner or consignor frets as the horse walks behind the sale ring, waits with anticipation as the bidding begins on the youngster, and then reacts according to how well the horse sells.
This is an expensive investment if you want to acquire quality prospects, and other investors also want to minimize their risks by joining forces with people holding similar goals.
Racing vs. Breeding. The object of both ventures is to make money, and it is no easier to show a profit in the sale ring than on the track. But money can be made in the commercial breeding market if the venture is approached wisely. Even with the best of advisers and blue-blooded ponies, however, profits are not guaranteed. Here is where the standard business evaluation of risk versus reward should and must come into play. In short, everything could go wrong, even though you, as an investor, have taken prudent steps to limit the downside. Is the profit potential large enough to justify the level of risk?
The concept of buying yearlings at the Keeneland September sale and sending them to the OBS two-year-old sale, has been around for quite some time. If they sell well, an investment would yield a short-term profit. If they did not sell well for whatever reason—market conditions or the physical condition of the horse—you have the option of retaining the horse and racing it.
Let’s walk through a theoretical pinhooking venture.
Spread the risk. Let’s decide to buy five horses instead of one or two. We recognize that the unexpected can happen and often does, so it is prudent not to have our entire money committed to one or two entities. Thus, we invest a total of $267,000 for four colts and a filly in this example.
Anticipate carrying costs. As with a racehorse, the purchase price is just the beginning. These horses eat every day, of course, and the idea is to enhance the value of the investment, so it can be resold at a higher price. Again, having the right adviser helps to increase the prospects for profit. In all, the expenses might total roughly $45,000, and they would include such items as training fees, veterinary care, farrier, vanning, mortality insurance, and consignment fees.
The decision to diversify (in this example) proved to be a wise one. Sometimes the yearling you believe has the highest profit potential, for example the Stormin Fever filly, turns out to not be a break-even sale. Here, 4/5 horses sold for a total of $443,000.
(See Table 1.)
With many pinhooking ventures, every horse doesn’t turn a profit, and this example investment was helped by a home run. The Menifee x Sortofa Lady colt, bought for $42,000, sold for $190,000. This is a pleasing surprise, and shows how the value of a Thoroughbred can change over a short period of time. The Meadowlake x Bald Beauty colt also sold well, reaping a $41,500 net profit after carrying costs and sales commissions. Venture nets 34.9%
In all, the investment in acquiring assets (the horses themselves) and the cost of maintaining and enhancing those assets totaled $312,000. That yielded a profit of $108,850 after six months. In percentage terms, the net profit after sales commissions was 34.9%.
It should also be noted that this venture yielded a short-term profit, which would be regarded as current income. You and your tax adviser should discuss the implications of such a venture. If pinhooking yearlings is risky, then pinhooking weanlings is very risky, and the investor must evaluate whether the high level of risk is proportionate to the prospects for profit. Weanlings are truly babies, and they can move forward or backward unexpectedly. At the same time, a weanling purchase has more options than a yearling purchase, principally because it can be resold anytime as a yearling or as a two year-old.
As always, a thorough examination of your investment objectives and your risk tolerance should be undertaken with your financial adviser before buying a Thoroughbred for racing, resale, or long-term investment (a broodmare, for instance). This evaluation of your goals and preferences, as well as your current investments, will determine whether a pinhooking venture might be considered as part of your short-term strategy.