Big Brown's owners don't horse around

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 (IEAH), 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 1-2 favorite for the $1 million Preakness Stakes in Baltimore on Saturday.

Win, and it'll be on to 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 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 already is paying huge returns.

IEAH purchased a 75 percent interest in Big Brown for about $3 million from Paul Pompa Jr. after the colt's first race. Many people involved in limited partnerships or syndicates spend tens of thousands 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.

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 but quickly became co-president.

"I saw Mike was onto something new and I liked the way it was going," Schiavo said, tugging at his monogramed shirt cuffs. Schiavo is in charge of IEAH's planned equine hospital, a $17 million facility being built near Belmont Park in New York. The hospital is to 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 would come from prize money, breeding rights and horse sales.

IEAH Stables, a unit of the holding company that runs the horse business, also would 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.

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.