Racing to save the champions

Lib Petagna was a shareholder in Clean Sweep. Picture / Bay of Plenty Times

Have you ever been to the Cambridge Jockey Club at six in the morning? It's quite a sight. You will see up to 400 thoroughbreds strutting their stuff in the chilly Waikato air, enjoying an early morning workout. It's busier than London's Victoria Station, says one racing expert.

In the heart of Waikato - the hub of New Zealand's highly acclaimed horse export industry - it's business as usual. Training and breeding horses is still what it's all about there, and because of the quality of our grass, the ability to raise our horses outside all year round and the standard of the people working in the industry, New Zealand's reputation for producing race horses prevails.

But in the rest of the country, in big cities such as Auckland and Wellington, horse racing barely registers. Racing used to be as much a part of the New Zealand psyche as rugby union and the Sunday roast. Most of us have some memory of a visit to the races. Mine was watching helplessly as the red dye dripped from my dress on to my white socks at an extremely rainy Melbourne Cup the year Vanderhum won.

A myriad of activities, from computer games to weekend shopping, now compete for the entertainment dollar, and the public's enthusiasm for both attending race meets and investing in the industry has faded.

But in March, plans to resurrect the seriously eroded industry were announced by Racing Minister Winston Peters. Those changes come into effect on Tuesday. The racing industry doesn't associate the Rt Hon Winston Peters with embarrassing press conferences alongside possible future US presidents. It sees the minister as its saviour.

Under the changes, the gaming duty will be reduced, so punters can expect more back in their pockets. There will also be an accelerated write-down regime for investment in bloodstock. Furthermore, the totalisation duty of $32 million saved in the new arrangement will go towards a 28 per cent increase in the prize money offered by racing clubs, making our industry more competitive with Australia.

Speaking en route to Kuala Lumpur last week, Peters was vehement about the need to arrest the racing industry's decline and to create a more investment-friendly environment. New Zealand's blood-stock exports are the sixth biggest in the world, and he wants to maximise this.

"My objective, long term, is to triple the exports of bloodstock by lifting the quality of stock and ensuring that we are able to put in the requisite investment and turn it back into the world leader it was 35 years ago," Peters says. "I am interested in getting stallions back in New Zealand, where the quality of bloodstock can be controlled."

To investors who are wary of the rollercoaster ride of investing in racehorses or bloodstock, Peters has this to say: "A smart owner buying quality horses can do well. That's how it works in France, Ireland and Australia."

The season's bloodstock sales, which normally happen this month, have been postponed until next month in light of the new tax regime. In these first sales we will get an idea of what the investment community thinks, Peters says.

The racing industry believes there is a latent pool of money waiting to enter the market. In the 1980s it became the done thing to buy a racehorse - or at least a leg of a racehorse with a group of friends - as a personal tax dodge. "Many came into the industry, and it all got a bit silly and has now been tidied up," says one government source. However, the IRD would be monitoring the new situation closely.

Auckland lawyer John Carter had a dabble in the late 1970s and has been back investing in racehorses since 1999.

He and his wife Victoria, a former Auckland city councillor, have achieved remarkable success through their 50 per cent ownership of racehorse Joker's Wild.

Carter attributes his good fortune to bloodstock consultant Paul Moroney of Ballymore Stables in Matamata. "It was a stroke of luck," Carter says. An understatement. Joker's Wild, a gelding that has just been awarded Champion 2-Year-Old, was bought for $40,000 in 2005 and is now attracting offers from overseas of more than $1 million.

Carter had a share in one horse with limited results when he invested the first time, but in 1999 he started taking shares in a Moroney class syndicate.

"Syndicates are a good way of investing. You are well spread," he says.

It hasn't been all smooth sailing. "I bought a horse, Straight Eight, and brought a bunch of my friends into it. It showed considerable promise, but then it got injured, and we had to sell that off. But we got our money back eventually," he says.

Carter has stepped up his investment since the last election, when indications were that the tax structure was going to be reformed. As he grows more experienced as an investor, Carter is becoming more bullish about the kind of results he can expect.

"It is high risk... but if you get the right advice, I believe the risks can be minimised. The chances of success increase."

Although he is a businessman, Carter has no intention of selling Joker's Wild. "It is not an investment decision for me."

Another Moroney client, Wellington racehorse owner Lib Petagna, is also becoming more adventurous with his hobby.

Not only does he take shares in syndicates, he has also bought a couple of horses outright and is now breaking into breeding mainly fillies. He owns or co-owns 20 horses altogether. "I've had one or two successes. I was a shareholder in Clean Sweep, which was a Group 1 horse. I have an interest in a colt, The One, a promising rising 3-year-old."

Petagna says horses have always been a part of his life, and breeding them is a natural extension. He welcomes the new tax regime. "If I invest in a stallion, I am able to get tax depreciation in two years. It is quite a big fillip for people, it improves the numbers. Hopefully, it will reduce the cost."

Moroney has high hopes that other investors like Petagna will enter the market in the coming months, ones who will not only invest in working racehorses but also in breeding new ones.

Moroney has a database of hundreds of investors who are involved in the syndicates he organises privately for buying racehorses. The horses he buys typically range from $10,000 to $225,000. He says prices can skyrocket like in no other industry. A filly can be bought for $20,000 and 16 months later, after considerable success, be worth a million dollars. But then there are others that go from being worth $100,000 to $10,000, Moroney warns.

"On average you could expect to get about a 30 per cent return on your investment," says an industry source. "That will improve vastly with the tax changes. But there's a thin line of successful owners."

Moroney agrees it's a high-risk investment but says people don't necessarily enter into it with the aim of making money. "A lot of people who normally could not afford a horse go into a 10 or 20-person syndicate, and they have a lot of fun, it's like a club. It is an amazing feeling for them, when they see their horse win, the euphoria of it."

The rewards can be equally thrilling and longer lasting for those who get involved in breeding champions, says Michael Martin, the man who bred New Zealand's best horse for years, Sunline. The chief executive of the Thoroughbred Breeders' Association says that in order to keep producing great horses like Sunline, the money has to be spent on buying the top stallions or on keeping the best stallions in New Zealand. Investing in bloodstock "is a fascinating lifetime involvement" says Martin.

It can be a good idea to buy a filly with the expectation of breeding from her after racing. "Our successful fillies and mares are worth a lot of money. If they are a Group 1 winner, they can be worth a quarter of a million bucks to the international market."

Martin says he's never seen the industry brought so low, and he's extremely grateful to the racing minister for throwing it a lifeline.

"I represent the investors, business owners and breeders. And a lot of us have had to sell our best stock to remain involved."

Better prize money is vital to keeping champions in New Zealand and investors in the game, Martin says.

"What we want to see with the improvement of the depreciation is a return to more Kiwis owning stock."

Phar Lap, Kindergarten and Sunline all came from the same core mare. Sunline, owned by New Zealander Trevor McKee, who has had numerous offers to buy her, won $11 million.

To would-be investors, Martin says: "You would not put the money in which you are keeping to put your mother into an old people's home.

"I see it as falling into that part of your portfolio where you want to enjoy something, meet new people. People have to get a few things behind them, like education, home, family. I don't see it as something for the under 35s."