Kentucky Derby winner Nyquist could be one of the 12 Pegasus World Cup starters.
One is a multiple award-winning owner and breeder who conceived the race and owns the racetrack that will hold it. Another is an ex-trainer who recently made a quick fortune in the ship-repair industry. Another has owned two Kentucky Derby winners, including this year’s victor, Nyquist. Yet another is a 32-year-old Northern Kentucky pizza-joint owner who says he has never before had any investment of any kind in any racehorse ever.
They are all among the motley crew of one dozen individuals or partnerships who have committed to spend $1 million for a starting slot in the inaugural $12 million Pegasus World Cup, scheduled to be run on Jan. 28 at Gulfstream Park in Hallandale, Fla. Put together in a matter of months earlier this year, the Pegasus is the latest brainchild of the billionaire racing titan Frank Stronach, and the race’s current cast of characters are perhaps as unusual as the conditions of the race itself.
Some are well known. Stronach himself bought a slot, through the family-owned racing company he controls, The Stronach Group. Jack Wolf, who was hired by the Stronach Group to run the race, bought a slot as well, through a partnership comprised mostly of investors in the racing partnership he runs. Then there are the owners of the top-class horses California Chrome, Runhappy, and Nyquist, and the principals behind the global racing and breeding operation Coolmore.
Beyond them, there is the newbie pizza-franchise operator, a 32-year-old Michigan native named Dan Schafer. Then there are a handful of racehorse owners who have only rarely played at the top of the sport, and the ex-trainer, Mick Ruis Sr., who recently sold a large stake in a ship-scaffolding company he bought after quitting the game in 2008. All have paid $200,000 so far to buy a slot in the Pegasus starting gate, according to the Stronach Group, with the remainder of $800,000 due in mid-September.
If the race goes off as planned, the Grade 1 Pegasus will be the richest race ever held, with a purse $2 million greater than the $10 million Dubai World Cup. The winner’s share of the Pegasus purse, $7 million, will exceed the entire purse of this year’s $6 million Breeders’ Cup Classic.
However, unlike stakes races offered across the U.S., which typically require owners to put up approximately 1 to 2 percent of the purse to start, with the racetrack providing the rest, the $12 million purse of the Pegasus will be provided entirely by the investors who purchased the starting slots. While a typical Grade 1 stakes gives a horse owner a 40-1 return on the entry fees compared to the winner’s share of the purse, the Pegasus will give the winner only a 6-1 return. Second place will get $1.75 million, third will get $1 million, and every other horse that starts in the race will receive $250,000.
Most uniquely, buyers of the Pegasus starting berths can sell or lease the slots to other people, a feature that has no precedent in racing history. In addition, each owner of a berth will receive a one-twelfth share in the net revenue that the race generates in wagering, sponsorships, and media rights – also unprecedented. Completely separate from the right to start a horse, the initial investors have also been given the right of first refusal to buy a berth for the race in 2018, with the option expected to carry over for every year that it is exercised.
“I thought it was a unique concept to own a race for one day, to own the track, so to speak, to have a hand in all the handle and the media and ads and everything for one race,” said Dean Reeves, a Georgia resident with a small stable whose best runner has been Mucho Macho Man, the winner of the 2013 Breeders’ Cup Classic. “I don’t look at this as a one-shot deal. I’m in for the long term.”
In interviews conducted over the last month, many investors in the race provided similar justifications for buying a berth. While the outsized purse gives some buyers with top-class horses an obvious incentive to buy in, the investors who do not currently own capable horses said that they expected the race to grow into a major event on the international racing calendar, citing its purse, its unusual structure, and the date and location of the race, held in Miami on the weekend between the NFC and AFC Championship games and the Super Bowl.
But those investors, for the most part, also acknowledged that they had little expectation of turning their $1 million berth into a profit, not without a lot of luck.
“We will not be getting back zero dollars, that’s for sure,” said Sol Kumin, in reference to the $250,000 purse guarantee and the revenue-sharing provisions. Kumin is a hedge-fund manager who purchased his first horses in 2014 and bought a Pegasus berth with James Covello, a horse owner who is a partner at Goldman Sachs. “But I could see myself losing 30, 40, 50 cents on the dollar in the first year.”
So why would he purchase a berth, given his partnership’s anticipation of a significant loss, in a sport in which owning horses is already a losing proposition for the vast majority of investments?
“I think this has a tremendous amount of potential,” Kumin said. “In five years this could be the biggest race in the world. Everything kind of fits, with the date and the location. We could be looking back then saying that it was a real good idea to get in on the ground floor. That’s kind of the bet we are making right now.”
Birth of the Pegasus
The path from conception to birth for the Pegasus has been a quick one. Stronach first mentioned the concept behind the race in early January while speaking extemporaneously, as he often does, at an owners’ conference held at Gulfstream. At that Jan. 12 conference, Stronach proposed holding a race with a $12 million purse, with investors purchasing a starting berth for $1 million each and receiving the opportunity to share in the revenue from the race by leasing the track where it would be held.
While the idea seemed far-fetched, officials at Stronach’s company issued a release 24 hours later saying the company intended to pursue the idea. The race then dropped off the radar for several months, but on May 12, nine days prior to the Preakness Stakes at Stronach’s Pimlico Race Course in Maryland, the company made a formal announcement that it intended to run the race under conditions that were in large part along the lines first proposed by Stronach.
According to Stronach officials, interested parties began reaching out to the company about securing a slot immediately after the May 12 announcement. By May 16, the race was sold out, Stronach Group officials said. On May 19, top Stronach Group officials, including Frank Stronach’s daughter Belinda, who had only recently been made chairman and president of the company, appeared at Pimlico to announce the 12 entities that purchased slots.
Paul Reddam, who purchased a slot and owns Nyquist, said that his trainer, Doug O’Neill, had been approached by a Stronach Group official, Tom Ludt, shortly after the May 12 announcement, with Ludt urging O’Neill to get Reddam to buy a spot. Reddam then said he received a call from O’Neill on Sunday night, May 14, about needing a commitment right away.
“It was the classic hard sell,” Reddam said. “It was kind of like buying a house. You’ve been there three or four times, and you like it, but then you get a call that there’s three or four offers on it better than yours, so you jump. We felt we should take one or we won’t get one.”
Mike Rogers, a member of The Stronach Group executive board, said that 14 entities, when including The Stronach Group and Jack Wolf’s group, had indicated that they wanted to buy berths by May 16. Two of the individuals who had expressed interest in buying a slot decided to partner, Rogers said, while the other individual failed to wire the $200,000 that was required to reserve a slot. That left 12.
“The remainder of the week we had significantly more interest, and unfortunately we had to turn them away,” Rogers said, in written responses to prepared questions.
According to The Stronach Group, all of the individuals were required to sign an agreement outlining the specifics of the race. While the individuals interviewed said that they signed the agreement, nearly all of them said they were not familiar with what it contained. The Stronach Group would not provide a copy of the agreement to Daily Racing Form.
Jim McIngvale, the owner of 2015 champion sprinter Runhappy, said that he jumped at the chance to purchase the slot, but he also said he could not provide specifics about what was in the agreement.
“I don’t pay attention to that stuff,” McIngvale said. “I’m not a big lawyer-up guy. I trust Frank Stronach and those guys. I didn’t get in it to get out of it. All I’m thinking about is Runhappy and letting the chips fall where they may.”
The Stronach Group said many details about the running of the race remain to be resolved, including rules regarding scratches. The company is holding a meeting with the berth-holders on Aug. 8 at the Fasig-Tipton Sales Pavilion in Saratoga Springs to discuss some of those details, and it expects to have the rest ironed out by Sept. 15, when the buyers are required to pay $800,000 to fulfill their $1 million obligation under the purchase agreement, Rogers said.
Because of the relatively small size of the racing industry, many individuals in the sport have close financial ties to other industry participants, either through direct ownership of racehorses or breeding stock or through shares in stallions, breeding rights, or foals. With breeding farms in three locations, a far-flung racing stable, and a vertically integrated racing company, Stronach has far more connections than most. And some of the individuals who have purchased berths in the race have very close connections to Stronach.
Reeves, for example, remains a part-owner in Mucho Macho Man, who stands at Stronach’s Adena Springs in Kentucky following Stronach’s purchase of a 70 percent share in the horse in 2014, just prior to the horse being retired. Mucho Macho Man was trained by Kathy Ritvo, the wife of Tim Ritvo, a top Stronach Group official.
Reeves, who said he told Ritvo he would be interested in buying a slot shortly after Stronach spoke at the January conference at Gulfstream, said that he paid cash for the berth he has secured, and that the berth is not financially tied to any other investment he has with Stronach. Reeves is the chairman of an Atlanta-based construction contracting company founded by his father.
“It’s completely separate from all that other stuff,” he said.
All of the buyers interviewed about their berths said that they did not have any partners in the slots other than those announced by the Stronach Group. Rogers, the Stronach Group official, said that The Stronach Group or members of the Stronach family do not have any financial stake in any of the other slots bought for the Pegasus.
However, Rogers also acknowledged that under the agreement for the race, none of the buyers are required to divulge any partners in the berths they have secured, nor are future buyers required to divulge any partners. Rogers did point out that Florida racing rules require the disclosure of any entity with a 5 percent or greater stake in a horse starting in a race. That condition will not kick in until entries are taken for the race, probably four days prior to the Pegasus being held.
Let’s make a deal
There is likely to be quite a bit of deal-making in the run-up to the race. Four of the entities that have secured a berth said they are pointing a specific horse to the race, and the Coolmore partners have shares in a number of top-class horses worldwide, but the vagaries of training and campaigning expensive racehorses often scuttle long-term plans. The owner of the top-class mare Beholder, a three-time Eclipse Award winner, was mentioned by several berth-holders as being a target for a possible sale, but the 6-year-old mare has struggled with injuries in the past, is already worth eight figures as a broodmare, and, in her most recent race on July 30, finished second in the Clement Hirsch Stakes at Del Mar as the 1-10 favorite. On the same weekend, Nyquist, whose breeding rights have already been sold to Darley Stud, finished fourth in the Haskell Invitational Stakes at even money.
Even if all the horses currently being pointed to the race make the starting gate, there will be at least seven berth-holders looking to strike a deal. The owners of open berths will face “no restrictions on how they market, sell, or otherwise convey or lease their entry spot,” the Stronach Group’s Rogers said, in the company’s responses to Daily Racing Form’s questions. That could lead to some creative deals, and even the possibility that some berths might change hands multiple times.
Jeff Weiss, a berth-holder who runs under the name Rosedown Racing, said he is looking forward to the deal-making. Weiss, whose best horse from a small stable has been Grade 3 winner Bashart, is a real-estate investor in Florida who does not currently own a horse that would fit in the race.
“I like the idea of networking with these guys,” Weiss said. “That could lead to other opportunities. Who knows what this could lead to? It could open all kinds of doors.”
All of the buyers who do not have a horse for the race said that they have not yet had any formal discussions with specific owners about a deal, though some said they have put feelers out. The real deal-making, they said, is expected to start after the Breeders’ Cup in early November, when the top ranks of the handicap division will be better sorted.
The most direct approach to fill the slot would be to buy a horse that could compete at a top level. But a racehorse that is capable of winning a Grade 1 race could cost millions of dollars, especially if the horse is a colt whose breeding value would increase markedly in the case of a good performance. In addition, owners of such a horse would be unlikely to sell the horse outright if the horse has a reasonable chance to win, not when there will almost certainly be a surfeit of Pegasus berth-holders who will be looking to sell their slots or strike a deal favorable to the owner of the horse. The stakes to fill the slot will be high – if a slot owner does not start a horse, there are no refunds, Rogers said.
Citing the likely surplus of open berths, most of the owners of the slots acknowledged that they will likely be facing a buyer’s market as the race approaches. The math for the owner of a top-class horse considering the purchase of a slot is pretty simple – if the horse is expected to be 6-1 on the morning-line or lower, the owners would face a reasonable expectation of return on spending $1 million to purchase the slot (disregarding the potential revenue from handle and sponsorships).
What makes that math daunting for berth-holders looking to strike deals is that likely no more than four horses will be expected to be lower than 6-1 in a race with a 12-horse field. That will drive down the price for a starting slot for the horses that are expected to be higher than those odds, though the risk is mitigated somewhat by the guarantee that every horse in the race will earn at least $250,000.
“If you’re the owner of a horse that is in phenomenal form, and it looks like you are going to be the big favorite, then you’re going to be able to squeeze four or five guys and get a really good deal,” said Kumin, the hedge-fund manager, who has an ownership interest in Preakness and Haskell winner Exaggerator.
Duncan Taylor, the president of Taylor Made Farm, which has a 30 percent share in California Chrome and in the berth bought by the partnership that owns the horse, said the ownership group is hoping California Chrome stays in form. After wins in the Dubai World Cup and San Diego Handicap this year, California Chrome is considered the best horse in training in the U.S., and if the Pegasus were held next weekend, he would almost certainly be the heavy favorite.
“If he can’t make it, it won’t be easy to sell the share,” Taylor said. “If you don’t fill the berth at all you are definitely going to lose 40 percent or 50 percent of the money you put up, at least, so you are going to sell it to somebody, whether you can get whole or not.”
Reddam, who earned a Ph.D. in philosophy and made a fortune in an on-line lending business that has often been criticized for high interest rates, said that shrewd deal-makers may have an advantage in the market for berths.
“Generally speaking, everyone in racing thinks his or her horse is a lot better than the horse actually is,” Reddam said. “That’s going to lead to some crazy deal-making. That’s really the element that I am going to find most interesting. And really this game could use something like that, something that shakes things up. People may get really creative out there. It could be a fun thing to be part of.”
While only one owner will have the chance to win $7 million, every owner who has secured a slot will have a one-twelfth share in several revenue sources from the race. According to the Stronach Group, the agreement states that the initial buyers will share in the “net revenue” from the handle on the race and all “net sponsorship revenue and any net revenue received from the sale of TV or other media rights from the race.”
Buyers said that the Stronach Group has declined to provide estimates for the amount that might accrue to the owners from the various revenue sources. However, the company did acknowledge that the buyers will not share in any revenue from a television deal this year, because the company would not be able to sell any television rights to the race in its first year.
“The Stronach Group felt that it was important to broadcast this race on a major network so we are currently working with a major U.S. network to finalize an agreement of which The Stronach Group will be responsible for any costs associated with the production,” Rogers said.
It is possible that The Stronach Group will be able to sell several sponsorships attached to the race, but the net revenue from those deals are unlikely to exceed a total of several hundred thousand dollars, said racing executives who spoke on the condition of anonymity. The only big-money sponsorship deals in racing are for the Triple Crown races, which can promise large television and on-track audiences, the executives said.
As for handle, it is difficult to estimate what any new race will generate in wagering revenue, but the makeup of the Pegasus field will likely play the most significant role in determining the level of gambling interest in the race. For that reason, it’s not impossible to believe that the Pegasus will attract as much wagering as the Breeders’ Cup Classic, which last year had handle of $28.6 million (including all horizontal bets paying off in the race), even if that figure is a best-case scenario.
Rogers said that it has not yet been determined if horizontal bets such as the pick 4 or the Rainbow 6 – a jackpot-style bet that has led to multi-million-dollar carryovers at Gulfstream – would be included in the revenue shares for the Pegasus slot owners. “This is an open issue that still needs to be resolved,” Roger said, noting that it may be worked out at the Aug. 8 meeting.
The rule of thumb for the track’s share of betting on a single race is five percent, a figure that attempts to account for the difference between the host track’s share of on-track and simulcast wagering and the contractual split of wagering revenue that must go to horsemen at the track. If the Pegasus handle figure equals the betting on the 2015 Breeders’ Cup Classic – in which Triple Crown winner American Pharoah made his final career appearance – then the 12 owners would share in approximately $1.5 million in revenue, or approximately $125,000 each.
Stronach Group officials did say that they planned to sell the race to simulcast sites at a higher rate than that in place for Gulfstream’s other races, under a clause in the track’s simulcast contracts allowing for a “premium signal fee” for special events. Still, that is unlikely to push the rate up to anything approaching a Triple Crown race or the Breeders’ Cup, which typically command rates equal to half the revenue from wagering, because the Pegasus does not yet have that kind of cachet.
Most of the buyers of Pegasus slots said they were undisturbed that the net revenue shares from the race were unlikely to amount to more than 15 percent or so of the initial purchase price. And that is because all said that they expected the race to become far more successful in the future.
“This could be something real big,” said Mick Ruis Sr., the ex-trainer who bought a slot. “That’s kind of why I got into it. It’s like when they started the NFL and people got in on the ground floor. I look at it as an opportunity. Will we get it back right now, this year? I don’t think so.”
“In the long run, this is going to be a really big race,” said Weiss. “The first year, it will probably not do so good, but I’m looking at this as a long-term investment. I’m not looking at this as a one-year deal. Frank Stronach is a big, big success. He’s proven it. He’s got the Midas touch.”
Largely through the success of his auto-parts company, Magna International, Stronach, has amassed a fortune estimated by Forbes at $1.6 billion (for the past several years, Forbes has relied on a Daily Racing Form reporter to provide estimates for the value of his racing holdings). However, Stronach’s history in the racing business is far less stellar. The Stronach Group, which is owned by a family trust, is Stronach’s third try at consolidating racing assets under one roof; the other two companies, both publicly traded, went bankrupt, burning through $1 billion in shareholder money.
Of all the questions surrounding the first running of the Pegasus, none are perhaps more interesting than those involving the purchase of a slot by a man named Dan Schafer.
In an interview several weeks ago, Schafer said that he is a 32-year-old Michigan native who moved nine years ago to Northern Kentucky, where he currently lives with his wife and children. Schafer said that he owns eight pizza franchises – five in northern Kentucky, and three in Michigan – and that he became an avid fan of horse racing 15 years ago. He regularly visits the tracks in Kentucky, he said, and went to his first Breeders’ Cup in 2011 at Churchill Downs. He also said he regularly goes to Gulfstream when visiting Miami in the winter.
He also said that his $1 million commitment to buy a Pegasus slot was the first money he had ever spent in racing. He is the sole investor in the slot he purchased, he said.
In the interview, Schafer demonstrated detailed knowledge of the handicap division, citing several horses owned by Stronach that had a chance to move up in the handicap ranks in upcoming races. He also said that he decided to purchase the slot after talking to several trainers at Gulfstream, but when asked to identify the trainers, he said he did not know their names.
“They were just guys hanging out by the paddock, like they all do,” he said.
Schafer started a Twitter account just after he was identified as one of the buyers of a Pegasus slot, with the handle @DanSchaferPWC. The account has been used exclusively to publicize the Pegasus. DRF used the Twitter account to contact him, since his name does not surface in detailed Internet searches, with the exception of a reference to the ownership of a single pizza franchise, Original Buscemi’s, under a Michigan company of which he is president.
Schafer said that he has considered buying racehorses in the past, and he also said that the Pegasus slot is likely only the first in a string of investments in the racing industry.
“For me, it’s not about making money,” Schafer said. “This is horse racing. I jumped into it a little backwards, but I looked at it as a business opportunity. You’re going to see this race become a very special day. I have a lot of respect for Frank Stronach, and you know him and his people are going to make this an amazing day.”
Schafer said he has never met Stronach, anyone in his family, or anyone at the company, at least prior to signing the deal to purchase the slot. He also said he does not know how he will fill the slot, but he said he expects to be flooded with offers from owners of top-class horses.
“I think it’s too good to be true,” he said. “You are going to see a lot of horse owners want to have a share in this.”
Following the interview, Schafer was asked through his Twitter account if he could provide a photo. He did not reply to the request.
Too much skin
While none of the current investors expressed any ambivalence about the decision to purchase a slot, there were some potential buyers who declined offers from Stronach Group officials to buy in. One was Mike Repole, the New York based owner and breeder who likes to play at the top of the game.
“I loved the idea of a big purse, it makes it exciting, and I think the richest race in the world should be in the U.S.,” Repole said. “But, for me, I just don’t like the idea of owners funding the purse. As owners we’re buying these horses, we’re paying for these horses to be trained, we’ve got all these bills, and now we’re paying for the purses too?”
At the same time, there are a number of owners who, come December, will be looking for a shot at a $7 million payday, and at least one owner is going to walk away with the largest racing purse in history.
The owners of the slots also seem to accept that in horse racing, the game is expensive to play, and there is no such thing as a sure thing.
“In a business sense I’ve yet to be able to justify just about anything I do in horse racing,” said Reeves. “You have to be a little out of your mind to do what we already do in this business.”
“You have to hand it to the Stronach folks, because you have all the owners paying all the expenses for your fancy day,” said Reddam. “That’s not a bad deal for them. For us, it’s like a poker game. Everyone has anted up, and then, if it’s like most poker games, at the end of the night one guy has almost all the money.”