By JOE DRAPE
Published: April 21, 2008

BOYNTON BEACH, Fla. — Big Brown is lightly raced, has tender feet and is the early favorite to win the 134th Kentucky Derby, which, statistically, has proved to be the kiss of death on the first Saturday in May. Still, his trainer, Richard Dutrow Jr., said he would be “all in” on Big Brown.

The last time Dutrow went all in on one of his horses was at the 2005 Breeders’ Cup Classic: he said he bet $160,000 on Saint Liam and won $384,000 when the horse won by a length. No matter how much he wagers on Big Brown in the Derby, however, it will pale in comparison to what the colt’s majority owner, International Equine Acquisitions Holdings, will have at stake.

I.E.A.H. is applying the lucrative lessons its founders learned on Wall Street to an industry that has proved inscrutable to many other successful businessmen. It is currently raising $100 million to buy, sell and breed horses, and it will operate like a hedge fund, collecting management and performance fees. The founders want to take the company public before the end of the year.

So far, their fundamentals have been sound; the company’s horses have won 25 percent of the time this year and earned more than $3.1 million in purses, putting I.E.A.H. among the top owners in North America. On Sept. 3, when Big Brown rocketed to an 11 1/4-length victory in his debut on the turf at Saratoga, the company’s co-president, Michael Iavarone, said he knew he had found a key component of I.E.A.H.’s future.

He called Dutrow from his house in Long Island as Big Brown crossed the finish line. “I have to own this horse,” he told him. “We can win the Derby with this one.”

A few days and $3 million later, the company owned 75 percent of Big Brown. Now, I.E.A.H. is not only intent on capturing the Kentucky Derby, America’s greatest horse race, but it also wants to remake the economic landscape of a multibillion-dollar industry.

“It would show how you can move the blue blood from Kentucky to New York,” Iavarone said, referring to both a Big Brown victory and his horse hedge fund.

Neither the racetrack nor Wall Street traffics in sure things, however, and as talented as Big Brown, the undefeated son of Boundary, is, he must defy some compelling historical data.

A chestnut colt, Big Brown has raced only three times. The last Derby winner so untested was the filly Regret in 1915. Last year, for example, Curlin, the eventual Horse of the Year, arrived at Churchill Downs similarly undefeated after three starts, but he finished third as the second betting choice. Big Brown ran in only two prep races this year, a lack of seasoning that only two Derby champions in the last 60 years have been able to overcome: Sunny’s Halo in 1983 and Street Sense last year.

Then there are Big Brown’s troubled front hooves, which have been responsible for his limited number of starts and his long absences from the racetrack. Shortly after I.E.A.H. purchased him, Big Brown got an abscess in the sole of his left front hoof, which caused a wall separation and kept him idle for 45 days. He had the same injury in his right front hoof in mid-December and did not train in January.

“The injury is caused by concussion — his feet hitting a hard surface — and they take time to heal,” said Ian McKinlay, a New York-based hoof specialist who continues to treat Big Brown.

When Big Brown finally returned to racing, at Gulfstream Park in Hallandale Beach, Fla., in a mile race on March 5, McKinlay fitted him with special glue-on shoes. The shoes had a thick polyurethane bottom to ensure that nothing hard touched the colt’s sole. Big Brown won effortlessly, by 12 3/4 lengths. Twenty-four days later, in the Florida Derby, Big Brown led every step of the way as his jockey, Kent Desormeaux, sat atop him like a leisure rider during a five-length victory.

“His feet are ice-cold now, and we’re not going to have any more problems,” Dutrow said. “I look at everything Big Brown has done and then at every other 3-year-old out there, and there is no comparison. Beat him? I’m not sure any of them can run close to him.”




There is little doubt that Big Brown will be the most accomplished horse in the field of 20 that is expected to line up at the gate in Louisville beneath Churchill Downs’s famed twin spires. But is he or any other racehorse a valuable enough commodity to build a lucrative hedge fund around?

In 2007, more than $15.4 billion was bet on horses in North America, more than $1.1 billion in purses was distributed and more than $1.2 billion was spent purchasing thoroughbreds, according to the Jockey Club. Iavarone and his co-president, Richard J. Schiavo — both of whom left Wall Street and investment banking — say they have a way of offering more people more opportunity to make money at the racetrack.

Since its inception in 2003, I.E.A.H. has raised more than $40 million from more than 80 investors and has formed partnerships to own various horses. The hedge fund model will supplant this arrangement; partners will own a part of all I.E.A.H. assets, from its 80 horses in training to its 15 broodmares and its future stallions, including the 2007 Breeders’ Cup Mile champion, Kip Deville; Benny the Bull, winner of the $2 million Dubai Golden Shaheen; and Big Brown.

Each financial quarter, an independent auditor will assess the fund’s value, and investors will be able to decide to buy into the fund or sell their positions. “What we’re offering are liquidity and options that people in the horse business have never had before,” Iavarone said.

There is no doubt Big Brown is the component with the greatest upside within the company’s portfolio. If he wins the Derby, he will immediately be worth $30 million as a stallion. As a rookie sire, he is certain to command at least the $100,000 per coupling that the 2004 Derby winner, Smarty Jones, commands, and attract 150 or more mares. If Big Brown becomes the first horse since Affirmed in 1978 to win a Triple Crown, there is no telling how valuable he will become.

So just like Dutrow, I.E.A.H. is all in on Big Brown.

The colt’s minority owner, Paul Pompa Jr., has already experienced a windfall. In April 2007, he bought Big Brown at a 2-year-old-in-training sale for $190,000, and named him because his family-owned trucking company in Brooklyn had just renewed a contract with a longtime client, U.P.S. When Big Brown’s scintillating debut at Saratoga brought deep-pocketed suitors, Pompa adhered to the golden rule of horse racing: take the money.

“I chose I.E.A.H. because they were young, classy, impressive guys,” said Pompa, who has owned horses for 15 years. “And they were going to let me keep a piece of the horse.”

He said he wished them well in their mission to change the face of horse partnerships, but that he was not interested in joining them. He said some things remain priceless.

“I want to win the greatest race in the world,” he said. “I want to make history.”

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