Big Brown owners IEAH are on a roll

By JEREMY HERRON - Associated Press | Wednesday, May 14, 2008 8:53 PM PDT ∞

GARDEN CITY, N.Y. ---- 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."

First name only. Comments including last names, contact addresses, email addresses or phone numbers will be deleted. All comments are screened before they appear online, so please keep them brief. Comments reflect the views of those commenting and not necessarily those of the North County Times or its staff writers. Click here to view additional comment policies.