Stallion Shares & Noms Facts
Randwick Bloodstock publishes listings of stallion shares and nominations for sale on its web site. The only stallion nominations we advertise for sale are those which are being offered by a stallion shareholder. Quite regularly we are asked by people new into the thoroughbred breeding game how do thoroughbred stallion syndicates work? It is hoped the following overview will give those people a basic insight into how these syndicates are set up and operate.
”A newcomer’s guide to stallion shares & nominations” By Brett Howard
The practice of stallion syndication became popular in the 1950’s in the USA. When a top class stallion prospect became available for stud duties, in order to help gather the funds to purchase the horse from its racing owners, stud masters would set about phoning up their clients and potential clients to ask them to put up some cash to take a ownership share in the horse. In return for this initial up front payment, the person each year would be allowed to nominate one mare to be covered by that stallion free of charge (a stallion nomination), until such time that the stallion passed away or was no longer able to cover mares. These days here in Australia, stallion syndication is still a widespread practice, however, with the influx of shuttle horses, probably not as popular as it was in the 1970′s and 1980′s.
A horse is normally broken up or syndicated into forty to forty-five shares (some syndicates have as many as seventy shares). The stud where the horse will stand will usually be the largest shareholder (25-50% ownership), although, it is not uncommon for the stud to only keep a few shares and sell the remaining shares to their clientele. Most studs normally like to keep roughly 25-50% of the shares. With this size holding, it usually makes it near impossible for the horse to be moved away at a later date, should say, the other shareholders vote to have the stallion relocated. The stud can veto this move via the rules of the syndicate, which are set out in some detail in the syndicate deed.
The syndicate deed is usually quite a lengthy document. It outlines such things as number of shares in the syndicate; rules for the buying and selling shares and annual nominations; names a syndicate manager and/or management committee and how they must act; what records must be kept and distributed to shareholders each year; the number of nominations to be given free to the stud each season in lieu of payment for caring and managing the stallion and so on. A person buying a share in a newly syndicated horse should always check that the syndicate deed has been approved by the Australian Securities and Investment Commission (ASIC). If it hasn’t, then the document is probably of little value and should problems arise within the syndicate later on down the track, you may find yourself in an unhealthy position.
In Australia and NZ, the initial price of a stallion share is usually set at three times the stallion’s first season advertised or proposed service fee. Sometimes the share price might be four or five times (or higher) the first season fee. To offset this higher multiple in the share price, the share buyer might be issued with extra free stallion services, usually to be utilised at sometime in the stallion’s first few years at stud. For example, there are two new stallions that are to stand for a first season fee of $10,000 and both are being syndicated into forty shares. Shares in one horse are offered at $30,000 and in the other horse they are offered at $45,000. As an incentive to encourage the higher up front payment from the breeder, the $45,000 share is being offered with one bonus nomination/year for the stallion’s first three seasons at stud, hence, a total of six free nominations in the first three years, as opposed to the $30,000 share which has only the standard one nomination/year in the first three years.
Some new stallion syndicates have insurance for the first twelve months built into the initial share price. The stud or syndicate manager will normally disclose this to you on inquiry, however, you should always remember to ask the question. Apart from mortality cover, the insurance will also offer some form of infertility cover, so that if the stallion proves to be infertile or sub-fertile, you will get your money back. A famous example of a first season sire being declared infertile was USA’s 1995 and 1996 Horse of the Year, CIGAR. Luckily for his two owners Allen Paulson and Coolmore Stud, they had him covered for infertility and they received a then record US$25 million payout.
Apart from trying to work out which of your broodmares is most compatible to the stallion in which you have a share, perhaps the most important thing a shareholder needs to consider each year is that the mare they send to the stallion on the share’s nomination has every possible chance to conceive. Should the mare utilising that nomination fail to fall pregnant, then you don’t get a second chance the following year (the odd syndicate allows you a second chance, however, this is rare). Therefore it is recommended that the mare you send on your share’s nomination is either a maiden mare (has not been to stud), a dry mare (an empty mare from previous season) or an in-foal mare which is foaling relatively early in the season, say no later than the end of September. This way the stallion should have plenty of opportunities to cover the mare before the end of the breeding season. If at all possible, do not send late foaling mares, very old mares, or mares with previous poor breeding histories. If you are sending your mares away, it is suggested that dry and maiden mares should arrive at the stud farm around June or July. This will give the mares plenty of time to settle in and allow the farm to set them up for an early September cover. Many farms like to put these mares under lights from around mid-July. This usually assists in getting the mares to cycle earlier than they might normally.
If you find yourself in the position of not being able to utilise your shareholder nomination for the coming season, you are allowed to transfer the nomination to a third party. You can sell, swap or even give the nomination away.
If you decide to sell the nomination, you can either do it yourself, give it to a bloodstock agent to sell or sometimes the stud farm that stands the stallion may be able to sell the nomination for you. Most syndicates have fairly strict rules as to how you can advertise your nomination and you should know these rules if you or an agent decide to advertise the nomination for sale. Some syndicates operate a pool, whereby the “unused” shareholder nominations are all pooled together and sold from that pool. For example, there are twenty pooled nominations at the start of the season. The stud sells fifteen nominations and twelve end up pregnant. Once the all the fees have been collected from these twelve mares, each pooled nomination will receive a one-twentieth share of these proceeds.
If you decide to sell the nomination, you are subject to the market conditions for that particular stallion at that time. If a stallion’s services are in high demand and the farm is selling them at or close to the advertised service fee, then it is unlikely you will have any difficulty offloading the nomination. If the stallion is struggling to attract mare owners, then you will probably have to look at discounting the nomination (quite heavily sometimes) in order to find a buyer.
Nominations can be traded with any number of differing terms and conditions. It is just of a matter of the mare owner coming to a suitable agreement with the shareholder. We normally recommend to shareholders that they sell their nominations on the basis of receiving a 10% non-refundable deposit on the signing of the sale contract, the balance payable on the mare having a positive pregnancy test (PPT) at forty-five days and payment due within 30 days of that date. Shareholder nominations will not normally carry a Free Return (FR)* or a Live Foal Guarantee (LFG)*. The selling price of the nomination normally has these things factored in. If a mare owner can purchase a nomination from the stud for $10,000 with a Live Foal Guarantee and with 30th June payment terms, it would be unrealistic for a shareholder to expect a mare owner to pay the same price using our recommendations. The sale price in the finish might be closer to $7,000 to $7,500, that way making it more attractive to the buyer.
If a FR or LFG is really important to the mare owner, then you can look into taking out unborn foal insurance (all bloodstock insurance brokers offer this type of cover). If for example, the nomination was bought for $7,000, you could insure the unborn foal for this amount. The insurance rates at present are around 13-15% (depends on mare’s age and previously foaling history), so the premium would be approximately $1,000. You are being asked by the shareholder to pay for the nomination six months earlier than the stud farm. If it costs10% pa to borrow money, the interest cost in having to pay early equates $400 (5% of $8,000). You have also had to pay a $700 non-refundable deposit. Assuming 85% of mares covered each season conceive, your chances of losing this are small. In summary, the shareholder nomination has cost the mare owner $8,400 (that’s assuming they have taken out the unborn foal insurance – the cost would be $7,350 if they did not), a saving of $1,600 from what the stud had wanted to charge them.
Once the nomination sale contract has been signed by both the mare owner and the shareholder, the shareholder will then advise the stud master that such and such mare is to visit such and such stallion on their share for that season. The mare owner then contacts the stud to notify them of their mare’s impending arrival. The stud master will have no hesitation in accepting the mare onto the property to be covered by their stallion. The agent will then liaise with the stud during the season, keeping track of the mare. Once she is tested forty-five days in foal, they will invoice the mare owner for the service fee, collect the money, and take out their commission (usually 8.8%), and pay the shareholder the balance. If the mare has fails to conceive, everybody misses out.
Secondary trading of stallion shares is a common occurrence. After a period of time, you may wish to sell your share, even before the stallion has had runners, or wait and see how his progeny perform on the racetrack, before deciding to keep or sell the share. If the stallion’s progeny perform well then the stallion’s service fee will rise, and so will the share’s value. Likewise, if the stallion’s progeny perform poorly, his service fee will decline and so will the value of the share. Imagine if you had purchased a share for NZ$4,500 in SIR TRISTRAM when he first went to stud in 1976. For the next twenty years, you had the right to send a mare to him each year for free. At the height of the 1980′s bloodstock boom, his service fee rose to NZ$100,000 and subsequent to the boom his service fee never fell below NZ$35,000.
If you had owned a share in SIR TRISTRAM all the way through his career, apart from doing well from the annual stallion nomination you received, you would have also happily received a healthy dividend cheque each year. A rough example on how the shareholder dividend is worked out is as follows:
Number of mares covered by stallion during season = 102 (40+12+50)
Number of shares in Stallion = 40 (all noms used by shareholders)
Number of free noms to Stud = 12 (all noms used by stud)
Number of services sold to other mare owners = 50
Number of these 50 mares pregnant = 40
Service fees collected from these 40 pregnant mares = $400,000
Dividend per share = $400,000 divided by 40 shares = $10,000/share.
Share sellers normally list their shares for sale with a bloodstock agent. We feel that they should always do the stud where the horse is standing, the courtesy of telling them that they have decided to sell, and the price at which they wish to sell. Sometimes the stud may be able to help them value the share, or even with finding a prospective purchaser. If you are in the market for a share, then it is alway worth keeping an eye out on bloodstock agent’s listings to see what is available, or to advise the agent that you are in the market for a share in a particular stallion.
Most stallion share trading normally occurs in the six months leading up to the start of the breeding season. Most stallion syndicates have what are called pre-emptive rights. This means that if a shareholder wishes to sell their share to someone outside the existing syndicate membership, then they must offer the share back to the existing members, at the price at they wish to sell to the outside party. The members normally have fourteen days in which to respond to this offer. If more than one member wants to purchase the share, there is a ballot. If no one has responded to the offer to purchase at the end of the period, then the shareholder can sell it to the outside party.
We hope this brief overview has supplied you with a valuable insight into some of the processes involved when buying stallion shares and nominations. Please click here to email Brett Howard with any questions you might have in relation to this topic.
*A Free Return (FR) usually means that if the mare fails to produce a live foal, then you can send the mare back to the stallion the following season for free. Live Foal Guarantee (LFG) usually means that if the mare does not produce a live foal, then the stud guarantees that they will refund you the service fee. You should always read any stallion service contract to ascertain that particular stud’s interpretation of a FR or LFG when one is offered. We recommend to shareholders that they do not offer Free Returns with the nominations that they sell, as complications could arise should the they subsequently sell the share, and the mare which is pregnant from that season on that share, not produce a live foal. They can offer a LFG should they wish, however, purchasers of these nominations should be satisfied that the shareholder will be able to honour their obligation to refund the service fee.