How should one treat the business of producing future racehorse champions? Taylor Wessing saddles up to look at the bloodstock market.

The sport of kings, as horse racing has been called, has been taking place for centuries and, of course, gambling on horses is a big business. Huge sums are invested and wagered on the sport. There is a specific area around investment in bloodstock – the business of breeding potential future champions. In this article, David Roberts and Charlotte Ford at Taylor Wessing, the international law firm, consider whether bloodstock can be seen as a hobby or investment, or both at the same time. This is part of a series of articles around “investments of passion” by the firm to have already appeared in these pages. As ever, readers are invited to comment and can contact the editor at tom.burroughes@wealthbriefing.com.

Traditionally, buying racehorses has been considered a hobby rather than an investment. Improved communications and transport has seen the development of a flourishing and sophisticated global racing and breeding industry. 

The modern bloodstock industry affords the opportunity for an investor to combine an interest in horses and racing with the opportunity for a lucrative investment. An investment in bloodstock offers the promise of sporting excitement, the exhilaration of watching your horse race, together with the opportunity for winning prize money and the prospect of creating significant bloodstock sales in the sales ring.

There are many opportunities to purchase racehorses at public auction, most commonly as yearlings (one year old), but also proven racehorses are offered for sale by some auction houses. You may decide to get involved at the very beginning of the life cycle of a horse by purchasing the offspring of a specifically chosen mare and stallion, or instead by purchasing a young racehorse and training them to glory at Royal Ascot.

Alternatively, investing in thoroughbred horses for breeding, or young stock, can offer the potential for profit realised from breeding and selling a thoroughbred horse. There are many different investment opportunities that can offer significant returns.

Historically, returns on bloodstock have been attractive in comparison to other high risk investments. The market is supported by the price insensitivity of many of the leading bloodstock purchasers who buy for pleasure alone and do not expect to make a return on their investment. 

So, what are the key issues that high net worth investors and their advisors need to be aware of before investing in bloodstock?

Choosing a horse
Buyers will need to decide on the age and type of thoroughbred racehorse. Choosing a horse is inevitably speculative, but it is advisable to employ a professional advisor, such as a bloodstock agent, to advise you. Selecting horses can be a fine art, and an agent will be able to sift through a catalogue of horses and eliminate those with poor pedigrees or bad conformation.

Most bloodstock is bought and sold at bloodstock sales, and purchasers are able to buy horses as foals, yearlings, horses in training or mares for breeding.  In the UK, the biggest bloodstock sales company is Tattersalls. Bloodstock sales are auctions, and bids are made in guineas (£1.05).

The type of race a prospective owner would like their racehorse to compete in will determine the characteristics of the horse they purchase. There are racehorses that will compete in flat racing, such as Newmarket, Royal Ascot and the Derby, and racehorses that compete in the National Hunt (jumping) arena, such as at Cheltenham.

Purchase
Buying a racehorse can cost as much as the investor wants it to and prices can range into the millions. Price is predominantly determined by the immediate breeding of the horse and its looks. Horses are a fragile investment that balances on the talent of the individual racehorse, which could either lead to lucrative gains or unprofitable failings. A reputable bloodstock agent can advise on the horse's bloodline and its potential as a racehorse.

Once a shortlist of prospective horses has been made, it is essential to complete a veterinary report on the horse. The veterinary surgeon will check for the soundness of the horse's wind and any conformational faults that might affect its ability as a racehorse.

A purchaser might consider purchasing a more expensive racehorse in partnership with someone else. However, being the outright owner of a successful racehorse is very rewarding.

Horses are generally sold as seen, without a warranty, so if the right questions are not asked and inspections are not made before purchase, there is a greater chance that the purchase may lead to disappointment later on, with few options of recourse to the seller. Therefore, a written agreement with the seller that records the terms of the sale and any specific representations that the seller has made is important.

Ongoing costs
If a horse is purchased at auction, the care of the horse becomes the purchaser's responsibility from the fall of the hammer, so it is essential to already have suitable arrangements in place; insurance can be arranged with immediate effect.

In addition to the initial purchase price, there are ongoing costs involved in the care of the racehorse. The cost of keeping a horse in training for a year will on average cost £25,000 (£38,566). This includes basic daily training, racing expenses and entries, and registration of owner, racehorse's colours and name amongst others.

Breeding
For a racehorse that has retired from racing but is still healthy, breeding is a method of making a return during the horse's later years. Proven talent of the racehorse at races will increase the return that can be made through breeding. There are two routes: owning and breeding mares to outside stallions, or owning stallions to be bred to outside mares.

A mare can usually produce up to 15 foals in a lifetime. She could be a worthwhile investment, especially if the mare is of good pedigree and capable of producing progeny with good confirmation and of above average athletic ability. The downside with breeding is that not all foals will be sold for a profit due to physical faults. There is the additional cost of a stallion's covering fee to consider, which can be anything from £2,000 up to more than £125,000.

Standing stallions can offer large profits for a prudent investor, but it is highly speculative. Top stallions can cover over 140 mares in one year and a healthy stallion can stand for 15 to 20 years.

Horse breeding costs and services offered will vary between horses, and it is important to fully understand what is being agreed. Most professional stallion owners will provide an industry approved agreement between the owners of the stallion and the mare owner, and this agreement ensures that disputes do not arise between either party and that the precise terms and conditions are clearly documented before the agreement is signed by both parties.

The thoroughbred industry provides opportunities for likeminded people to enjoy a challenging and passionate sporting interest that now encompasses the globe and caters for all budgets and all walks of life. However, giving some thought to the technical and legal aspects will likely be a prudent investment too, so the racing horse enthusiast can enjoy their interest to the full.

The authors acknowledge the assistance provided by Richard Frisby of Richard Frisby Bloodstock Limited.