GARDEN CITY, N.Y. (AP) - It's all about risk and
reward for Michael Iavarone. First as an investment banker on Wall Street, now
as a millionaire owner in the high stakes world of thoroughbred racing.
In just his fifth year as co-president of International Equine Acquisition
Holdings, Iavarone is on an ultimate high: Two weeks ago his 3-year-old colt Big
Brown blew away the field to win the Kentucky Derby, and now the big bay is the
overwhelming 1-2 favorite for the $1 million Preakness Stakes at Pimlico Race
Course in Baltimore on Saturday.
A win, and it's on the Belmont Stakes in New York on June 7, with a chance
to become the first Triple Crown champion since Affirmed in 1978.
The 37-year-old Iavarone, with his unseasonable tan, slicked back hair and
designer sunglasses, brings a bit of Manhattan flair to the horse ownership mix.
He's also brought a Wall Street business model, soundly beating the long odds
against having a horse in the winner's circle.
His secret? Like the New York Yankees, he spends big to buy proven assets.
But that requires lots of bucks and a tolerance for potential losses.
Iavarone and his partner, Richard Schiavo, plan on tapping the stock markets
and the deep pockets of corporate heavyweights to get the cash, using an
untested business model that is already paying huge returns.
"Right now, there's very little outlay, very little upside to the way most
investors get into horses," Iavarone said. "We think we can give more people a
chance to make more money on horses with our model."
IEAH purchased a 75 percent interest in Big Brown for about $3 million from
Paul Pompa Jr. after the colt's first race. Pompa bought Big Brown for $190,000.
Many people involved in limited partnerships or syndicates spend tens of
thousands of dollars to buy a share of one horse or a small stable of horses.
That leaves them captive to the performance of only a few horses with little
option for diversity.
But investors "want to get in and out of their positions depending on how
they are doing," said Iavarone, who founded IEAH to buy, breed and race horses
on a larger scale.
He used his banking connections to raise more than $40 million from about 80
investors. The 55-year-old Schiavo came on board as an investor -- "on a tip
from my father-in-law," he said -- but quickly became co-president to help
Iavarone run the business.
"I saw Mike was onto something new and I liked the way it was going,"
Schiavo said, tugging at his monogramed shirt cuffs held together by silver
horse-head links. Schiavo is in charge of IEAH's planned equine hospital, a $17
million facility being built near Belmont Park in New York. The hospital will
provide a steady stream of revenue that will help cash flow for the horse
business.
The company's primary business plan is to turn IEAH's stable of horses into
a hedge fund -- which operates much like a mutual fund in that it pools
investors' money to buy diverse assets.
Hedge funds usually have high minimum investments and tend to have very high
risk profiles. Instead of stocks or exotic securities, the IEAH fund's assets
would be horses. Its returns will come from prize money, breeding rights and
horse sales.
IEAH Stables, a unit of the holding company that runs the horse business,
would also have a stake in the fund and would receive fees for managing the
assets, probably 2 percent of total assets, plus 20 percent of profits, Iavarone
said.
An independent appraiser -- like the kind breeders use when buying insurance
policies -- will make a quarterly valuation of the fund's assets, and then
investors can sell shares or buy more if they like during a two-week window.
"All you have to do is write one check and we're gonna make you money in
thoroughbred racing," said Iavarone, surrounded by a clutter of racing magazines
at IEAH's Long Island offices.
IEAH's vast success on the track is bulging the company's balance sheet.
Iavarone said it will book $70 million in revenue this year, up from $10 million
in 2007 -- "and more than 50 percent of that is going to be pure profit," he
said.
Much of that, of course, will come from Big Brown, who turned into a
rainmaker with the Derby win. His breeding rights are worth an estimated $70
million -- or more -- and he is likely to command at least a $100,000 stud fee
after he is retired from racing.
Iavarone said he expects to announce a deal worth "several tens of millions"
for a share of Big Brown's breeding rights, perhaps as soon as Thursday. That's
a hefty return on the reported $3 million investment.
IEAH is more than just Big Brown, though. The company won the 2007 Breeder's
Cup Mile with Kip Deville and took home the $2 million purse at the Dubai Golden
Shaheen with Benny the Bull.
Such success, especially early on, comes against long odds -- only about 2
percent of thoroughbreds bought at auction wind up in the winner's circle. Yet
IEAH-owned horses have won 25 percent of the races they've entered this year,
bringing in $4.2 million in prize money.
"We only buy proven horses," Iavarone said. "They cost more, but we can
afford them and so far they've won."
The wins will almost surely allow the men to meet their goal of raising $100
million from about 50 investors for the hedge fund.
"I can raise that in a week," Iavarone said, even with a minimum buy-in of
$500,000.
Schiavo said he just received a copy of the preliminary prospectus that they
hope to send out next month.
"It's a lot more fun to follow your investment at the track than on the
stock charts," he said.
Most of the prospective investors are Wall Street bankers or corporate
personalities. The men would not disclose names, but said the biggest investor
is chairman of a New York Stock Exchange company. Schiavo said another is a
former New York Yankees manager, turning his eyes toward a picture of Joe Torre
in the winner's circle at Saratoga with Sugar Punch.
"We're asking you to make a man's investment, write a real check, play the
real game," Iavarone said. "This is high risk, high return. You could lose your
investment, or you could score big. Right now, we're on a roll."
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