Making Sense of Authentic's Derby Win for Investors
Focused and aggressive, Authentic showed dominance throughout the race, leading the field through both turns and outpacing Tiz the Law by a length and a quarter to win the 146th Kentucky Derby. Pushed to the outside of the starting stalls by Tiz the Law as they broke from the gate, Authentic immediately recovered and took command of the race, leading the field from the fourth path through the first turn. The Bob Baffert-trained thoroughbred managed to stay poised and hold-off surges by both Tiz the Law and Mr. Big News during the second turn, setting up a dash to the finish which quickly became a two-horse contest as the rest of the field battled for third. On a day where the stands at Churchill Downs sat in empty silence, Authentic silenced critics of his endurance by galloping clear of any last-ditch efforts by the chase pack. For his performance, Authentic will take home $1.86 million of the $3 million purse.
In June 2020, Spendthrift Farm, who often partners with MyRacehorse, bought a majority stake in Authentic. On June 30th, MyRacehorse officially announced the IPO of Authentic, pricing the 12,500 available shares for $206 each, giving each investor 0.001% ownership per share. Authentic’s valuation priced him at $15.2 million and MyRacehorse took a 12.5% stake in the Derby contender. In addition to providing investors the opportunity to make money from racing earnings, Spendthrift also acquired breeding rights to Authentic. Due to arrangements that are common in the horse racing business- particularly for elite horses, Authentic’s breeding rights carried performance-based kickers. Horses that are sold to a stallion farm while still active are typically sold at a base sales price which can increase depending on all race results for the horse prior to retirement. In Authentic’s case, two criteria have already been met- winning a Grade 1 race and winning the Kentucky Derby. Due to these victories, investors are responsible for covering the cost of the agreed-upon kicker. With a traditional horse racing syndicate, which was the primary way for the general public to invest in a horse before MyRacehorse came along, individual shareholders are responsible for paying for any additional fees or kickers out of pocket. This made investing in a horse extremely difficult and risky since there was no limit on the amount of loss an investor might incur. MyRacehorse created a new business model in which they cover all fees, providing investors with peace of mind knowing their initial investment, $206 in the case of Authentic, is their maximum loss. Since MyRacehorse covers all fees associated with their horses, race revenues are used to pay for any expenses and kickers.
When Authentic does retire, he will live the life of a Kentucky Derby-winning stallion. The stud fee for Kentucky Derby winners varies, although $50,000-$100,000 is a standard range. Authentic does have an impressive pedigree though which should help increase his initial price. His sire is Into Mischief, who has become a household name in the breeding industry as his stud fee has gone from $12,500 to $175,000 since his retirement and could increase dramatically now that he has sired a Kentucky Derby winner. Breeding revenue can far outpace what a horse earns in racing. Into Mischief is a prime example of this as he earned a respectable $597,000 in his racing career but has over $19 million in progeny earnings.
After Authentic begins his stallion career, eyes will return to the track to see how his offspring perform. Elite horses can breed for over 15 years and sire more than 1,500 foals. While investors are still required to cover ongoing expenses they are usually significantly less than the fees associated with an active racehorse.
As an example for how Authentic’s stallion career could work- Authentic could reasonably breed with around 150 mares per year. At an initial stud fee of $50,000, which would put him in line with the median of other horses of similar caliber, investors could except $30,000 per foal after fees and expenses. Multiplied by the ownership stake of 12.5% and divided by the total number of shares outstanding, 12,500, gives an estimated $45 in stud revenue for investors per year. Currently investors owe Authentic’s previous owners approximately $106 per share due to the Grade 1 and Derby kickers. With this model it will take investors just over two years to pay off the kickers and then an additional five years to see a profit. At $45/year that gives investors a 22% per year return per share, with a 9.3% IRR for the first 10 years. Around the two and three year mark though the first Authentic offspring will hit the track which can drastically impact the annual revenue Authentic earns. If his stud fee increases similar to that of Into Mischief, Authentic shareholders could recoup their investment much sooner and see an increased revenue stream for well over a decade.
MyRacehorse has provided the public with a new opportunity to take part in the ownership of world-class thoroughbreds. In the aftermath of Authentic’s victory, amidst the well-deserved praise rained down an expected degree of concerns regarding the payout structure for micro-shareholders. Since MyRacehorse used race revenues to cover the Kentucky Derby kicker, investors received none of the winnings. While some of their horses are geared towards providing investors with race revenue, MyRacehorse’s prospectus makes it clear that this was not the case with the Authentic offering. At the valuation level MyRacehorse bought in at and the kickers included in his sale, all value in Authentic for MyRacehorse owners will be in his career as a sire. One positive for Authentic shareholders is the consistency breeding earnings can provide compared to racing revenue. Horses with both strong pedigrees and impressive resumes offer steady returns for shareholders which can appreciate over time with the success of their offspring. This offering from MyRacehorse is concentrated on playing the long game and so far Authentic is playing along perfectly. Had MyRacehorse invested in Authentic at the $350,000 valuation he sold at auction for at the Keenland September yearling sale in 2018, investors would have received revenue from both racing and breeding. Hindsight is always 20/20 though, and they still managed to pickup the 2020 Derby champion before he had ever won a Grade 1 race. While there is no chance for investors to make their money back off of Authentic’s racing career, it was a great marketing and user acquisition strategy for the young company. For now, only time will tell if Authentic’s breeding career will provide investors with a profit.
As the world of alternative investments continues to expand, it is important to understand the risks associated with every opportunity. Whether the investment is a piece of sports memorabilia or a racehorse, there are no guarantees. As always, Altan Insights recommends thoroughly reading each prospectus before investing in fractional assets.
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