We have posted recently on our social media pages (links at the top of our home page) about the “Share the Upside” program in which we will be participating at Spendthrift Farm with their new stallion, Lord Nelson, and we thought it worthwhile to explain a bit about the program for those that aren’t familiar with it.
Historically, ownership of a stallion standing at stud was maintained by a syndicate of breeders, all of whom were theoretically committed to supporting that stallion with their own mares during his breeding career. These syndicates were typically divided into 32-40 shares, at a time when the most mares that a stallion would breed (or “cover”) in a given year was 40 (a “full book”). Over time, stallion books expanded, and ownership of a share in a syndicate came sometimes to entail the right to breed one mare a year to the stallion and two mares every other year, or else two mares each year. In either event, syndicate members owned the stallion and were responsible for their proportionate share of the expenses related to the care of that stallion.
Nowadays, many – if not most – stallions are owned solely by the farms which stand them, or else by small partnerships of farms and breeders. And the stallion owners count on the support of predominantly outside mares to fill a stallion’s book of 100 to 150 or 200 mares. And rather than paying a large up-front price for a share in a stallion and subsequently breeding to that stallion with no stud fees due in the future, a mare owner pays a stud fee only after the mating of their mare to a stallion produces a live foal (technically, the terms of breeding contracts require payment of the stud fee upon birth of a “live foal” that “stands and nurses” or LFSN).
Concurrently with – and no doubt closely related to – the expansion of stallions’ books has come an increase in the number of breeders (like us) who produce foals for the commercial market, rather than breeding to race themselves. And what this means is that breeders are looking to incur the least possible amount of risk with their stallion choices. To oversimplify things a touch, a breeder’s best chance at a large return often comes – unless you can afford to breed to one of the absolutely top-of-the-tree stallions like War Front, Tapit or Medaglia d’Oro – by breeding to an unproven, first-year stallion who has not yet had a chance to fail.
A corollary to the popularity of first-year stallions is that sires in their second, third and fourth years at stud (before their first foals have a chance to prove themselves successful on the racetrack) are comparatively unpopular among breeders. Back in the day, a mare owner had an incentive to breed to a stallion in his second through fourth seasons because the mare owner was invested in that stallion and would thus benefit when he produced successful runners on the racetrack (and theoretically would only breed to a stallion that they believed would succeed with his runners) – not to mention that the mare owner did not have to pay a stud fee relating to those second through fourth year covers. Now, in the big book era, the over-riding incentive for a mare owner-cum-commercial breeder is to get as high an economic return as possible when they sell a foal or yearling – and “bubble sires” are unpopular in this equation.
Which is where Share the Upside comes in. The program really is as simple as it sounds: pay a nominal fee to secure your spot in the program upon the stallion’s retirement from the racetrack, execute LFSN breeding contracts for the stallions’ first two years at stud, and once your mares produce those two live foals and you pay the attendant stud fees, you own a lifetime breeding right in the stallion – meaning you can breed one mare a year to that stallion for the rest of his breeding career with no stud fee owed. A lifetime breeding right (LBR) is similar to owning a share in a stallion, except that an LBR conveys no ownership interest in the stallion and thus no liability for expenses relating to stallion ownership.
Not only does this mean a breeder can breed to a stallion in his third and fourth years at stud “for free,” but the breeder can also sell the entire LBR, or just the right to breed to the stallion in a given year. Which – if the stallion becomes successful – could be quite lucrative. (Economist Dr. Robert Losey outlined some of the potential financial outcomes back in 2012, both lucrative and otherwise.)
The poster boy for the appeal to breeders of Share the Upside is Spendthrift’s Into Mischief. Available at the outset of his breeding career for a LFSN fee of $7,500, he stood the 2016 breeding season for $45,000 LFSN, which is quite a boon for those breeders (there were reportedly fewer than 20 of them) who took advantage of Spendthrift’s innovation back in 2009.
The drawbacks to the program are fairly minimal for Spendthrift: in the third and fourth years of a stallion’s breeding career, Spendthrift gives up potential revenue from LFSN breedings (though there is no guarantee that these matings would occur absent Share the Upside), and in the event that the stallion becomes a successful sire, Spendthrift has given up revenue from some future LFSN breedings at a higher stud fee (because participants in Share the Upside can breed for free regardless of that increased fee).
Meanwhile, the appeal to Spendthrift is obvious: Share the Upside incentivizes breeders to patronize a stallion in the otherwise unpopular second through fourth years at stud, which gives that stallion that much more of a chance to succeed at the same time as it reduces the number of mares being bred to a competitor farm’s stallions.
Though there has been some frustration from other farm’s relating to the effects of Spendthrift’s Share the Upside program since its inception in 2009 (John Sikura of Hill N Dale Farm penned a piece back in 2013, and though his criticisms are more specifically directed at Spendthrift’s Breed Secure program, it seems to encompass Share the Upside as well), its popularity with breeders has meant that many other farms have now copied the program with their new stallions – especially those standing in Kentucky at relatively low fees where competition is fiercest.
As small breeders, trying to breed commercially, we see Share the Upside with Lord Nelson as a tremendous opportunity. As a well-bred, high-priced yearling who was a stakes-winning juvenile before going on to win three Grade 1 sprints this year at 4-years-old, Lord Nelson’s pedigree, looks, speed and precocity represent virtually the perfect combination for a commercial stallion prospect, even absent Share the Upside. Indeed, whereas Share the Upside originated as a way to make lower-priced stallion prospects more popular, Spendthrift recently announced that Lord Nelson would stand next season for a LFSN fee of $25,000.
Though we will pay a slightly increased fee in his first two years ($30,000 LFSN versus $25,000) in order to participate in Share the Upside, we think it well worth the risk. Even if, as suggested by Dr. Losey in the article cited above, Lord Nelson’s fee decreases each year that he is at stud, there will still be value to us in years three and four in being able to either (a) breed a mare to him “for free” who might otherwise not justify a chance with such a high-priced stud, potentially increasing her chances of producing a successful runner and therefore increasing the commercial appeal of her future foals, or else (b) sell the right to breed to Lord Nelson for cash which we can then put toward a LFSN fee for another stallion who is potentially more commercial that season, all while we bide our time and hope that Lord Nelson “hits” with his runners – which we think there is every chance that he will do.