By Andrew Beyer
Thursday, May 15, 2008
Whenever a young horse displays special talent, agents will besiege the animal's owner, making offers on behalf of potential buyers who have visions of winning the Kentucky Derby. Only the very rich can afford to get into such bidding, but even the very rich regularly find themselves overmatched against two of the players in this game. An agent sometimes involved in such negotiations said: "You can't compete with Sheikh Mohammed. And you can't compete with IEAH. They're both willing to pay more than anybody else."
Sheikh Mohammed bin Rashid Al Maktoum of Dubai has been the world's most prominent horse buyer for nearly three decades, but IEAH -- International Equine Acquisitions Holdings -- was virtually unknown two years ago. Now it occupies the sport's biggest stage, as the majority owner of Big Brown, winner of the Kentucky Derby and the overwhelming favorite for Saturday's Preakness. IEAH also owns the nation's top turf runner, Kip Deville, and the top sprinter, Benny the Bull, according to the Daily Racing Form's rankings.
Its recent successes may represent just a beginning, because IEAH is about to embark on a bold and innovative venture that will give it even more resources with which to buy thoroughbreds. Yet despite all the publicity that IEAH has received, many industry insiders are mystified by this new power in the sport.
Michael Iavarone and Richard Schiavo, the co-CEOs, came from the world of finance and got into racing with the plan of buying proven runners instead of taking their chances at yearling sales. They employ several agents who scout for potential purchases, and Iavarone evaluates the prospects before making an offer. IEAH's operations are similar to other partnerships and syndicates that attempt to buy ready-made thoroughbred talent. What distinguishes it most is its financial clout. Iavarone said: "Our investors are people I know from my Wall Street life and people they have introduced to us. Most of them have never been in horse racing before. We have an unbelievable investor list."
Within a few weeks, IEAH will reconstitute itself in a new format, one modeled after hedge funds, and it will be unique in the horse business.
IEAH will have a maximum of 100 participants investing a total of $100 million. Instead of having a separate partnership owning each horse, the new entity will give each investor a proportionate share in the whole stable. All of IEAH's current runners (excluding Big Brown) will be part of the portfolio. At the end of each quarter, an independent appraiser will value all of the holdings; based on this price, investors can cash out and new investors can buy in. Following the hedge fund model, IEAH will take a management fee of 2 percent, plus 20 percent of net profits.
In addition to its racehorses, however, IEAH will have another component that makes the investment plan even more innovative. IEAH is building, across the street from Belmont Park, the Ruffian Equine Medical Center. (When Iavarone got into the sport, he said, "I found it hard to believe I had to send a horse [from New York] to Kentucky for a $2,000 surgery.") The hospital will presumably be a source of profits, so the IEAH partners will have some cash flow to counterbalance the high risk of their horse ventures.
The size and ingenuity of the deal is something one would expect from sophisticated Wall Street types -- and every profile of the 37-year-old Iavarone describes him as an investment banker who made millions during his 11 years on Wall Street. But the details of his career are invariably sketchy. His biography doesn't mention any firms where he worked; Iavarone said he is forbidden by "contractual obligations" from naming them. He didn't leave much of a paper trail, though he was once registered as a stockbroker for Joseph Dillon & Co., a now-defunct Long Island firm that received censures and fines for various securities violations. Iavarone's partner, Schiavo, did work for major Wall Street firms, but he was an administrator, not a deal-maker. Bloomberg.com, commenting on the two principals of IEAH, noted dryly, "It [is hard] to say where they come by their investment acumen."
Among racing people, IEAH has raised eyebrows because of some of the company it has kept. When IEAH entered the sport in 2003, dealing mostly with cheaper stock, its trainer was Greg Martin, who had a knack for improving horses dramatically and inexplicably. One such horse, A One Rocket, became the focus of a federal investigation after he won a race for IEAH. The trainer was found to have given A One Rocket a prohibited procedure known as a "milkshake." After Martin pleaded guilty to criminal charges and was drummed out of the sport, IEAH hired trainer Rick Dutrow, who has a lengthy record of medication violations and a reputation (as did Martin) for being able to transform horses almost miraculously.
When Iavarone was asked about the rap sheets of his trainers, he observed that plenty of other respected stables have employed trainers, such as Steve Asmussen and Todd Pletcher, who have been suspended for medication violations. "Our hope," he said, "is that racing is on the straight and narrow." From Dutrow, he said, "I've never seen anything but the best."
The most intriguing question of all about IEAH is whether it can possibly make a profit. This is not Wall Street, where many investors can make big money simultaneously. Most horse owners lose money and are resigned to treating the sport as an expensive hobby. So Iavarone is setting an ambitious goal when he declares, "We're trying to make a business out of something that is a pleasure."
So far IEAH has beaten the odds. The company bought a 75 percent interest in Big Brown for $2.25 million -- making his total valuation $3 million, a seemingly inflated price for a modestly bred colt who had won a single race on the grass. The Derby might have made him worth $40 million or thereabouts as a stallion prospect, but repeating a success of this magnitude won't be easy. Wealthy buyers from around the world are looking for the same types of horses, and using the same tools to find them, so it is hard for one wise guy to have an edge over the others. If some buyers, particularly the sheikhs, are willing to pay irrational prices, IEAH is going to have to overpay to play in this game. IEAH did so when it spent $5 million for a half-interest in the well-bred colt Court Vision, who has lost all of his races as a 3-year-old and finished 13th in the Kentucky Derby, looking very little like a $10 million property.
In order to pay such hefty prices while making IEAH a profitable business venture, Iavarone and Schiavo will have to replicate the great windfall they reaped this spring. But if the probabilities of the sport are any guide, Big Brown will be a tough act to follow.