01 Mar 2005
In the Blood
Robert Clay goes the distance as owner of Three Chimneys Farm, a Thoroughbred horse farm in the heart of Bluegrass Country.by Julia HannaTopics:
To leave Lexington’s Bluegrass Airport, exit on Man O’ War Boulevard, named for one of history’s greatest Thoroughbred champions. It’s a little like taking the new Ted Williams Tunnel from Boston’s Logan Airport — but in Kentucky the sport of choice is horse racing, not baseball, and the heroes are mostly of the four-footed variety.
Just across the road is Keeneland, a sprawling auction and racing complex where Robert Clay (OPM 4, 1980) recently sold a horse from his nearby Three Chimneys Farm — a mare called Take Charge Lady — for $4.2 million. Clay didn’t own the horse, but he makes a standard commission of 5 percent on managing the sale of some 250 horses a year like her. Boarding and sales are two facets of his business, Clay explains; he also breeds his own mares, occasionally sending some of the offspring to racing stables for training. Finally, Three Chimneys manages the breeding rights for eight stallions, which Clay cites as the segment of his business with the highest profile and greatest returns. Smarty Jones, winner of the 2004 Kentucky Derby and Preakness, began his career at stud last month, standing at Three Chimneys for a fee of $100,000.
“We’re nothing more than glorified farmers here, but it’s a fun business, and there’s a little bit of glamour to it,” says Clay, who grew up in the small town of Mt. Sterling, Kentucky. His family was in the tobacco business and also owned a fertilizer company, where Clay worked after serving as a Navy lieutenant in Hawaii from 1969 to 1971. There were early signs of his interest in the Thoroughbred industry, however — a thesis on the economics of the business written as an undergraduate at The College of William & Mary, then a job after college as the assistant night watchman at nearby Spendthrift Farm. His father had begun to buy and breed a few Thoroughbreds, too. Before long, Clay had caught the bug. In 1972 he purchased a 100-acre parcel of land along the Old Frankfort Pike, about ten miles outside Lexington, which would form the beginnings of Three Chimneys (named for the Bermuda address of an old fraternity brother and the number of chimneys on Clay’s restored farmhouse). By 1978 he had twenty broodmares; in 1984 he launched his stallion business.
“I enjoy the spectacle of animals and people competing to beat each other — that’s something that goes back centuries,” says Clay. “There’s a beauty in watching a foal being born and growing up to race and become a champion. It gets in your blood quickly.”
When Clay attended the Owner/President Management Program (OPM) in the late 1970s, however, he did so in his capacity as president of Top Yield Industries, the family fertilizer company. At HBS, he met Professor Neil Churchill, who agreed to serve on the company’s board. “At our third board meeting he asked me to give him three reasons why I would want to be in the fertilizer business, and I couldn’t give him one. In 1984 our family sold the company to Cargill, and I moved to the farm full time.” Today Three Chimneys employs 140 and encompasses 1,800 acres spread over six parcels of land: four are dedicated to mares and foals, one to yearlings, and the last to the farm’s stallion business.
The strategy for Three Chimneys differed from that of Kentucky’s established breeding farms, some of which managed over forty stallions. Clay adopted a boutique approach to guarantee personal service for both the owners and their horses, and serve as a point of differentiation to ensure successful competition with larger, better-funded neighbors.
That approach attracted Karen and Mickey Taylor, owners of Seattle Slew. The only undefeated Triple Crown winner in history also enjoyed great success in the breeding shed, siring over 100 Stakes winners with combined earnings topping $79 million. Before his death in 2002 at the age of 28 — 25 years to the day after his 1977 victory in the Kentucky Derby — Seattle Slew commanded a stud fee of $300,000.
“The stallion business is a little like owning an NBA franchise,” Clay reflects. “When we lost Seattle Slew, it was like losing Michael Jordan. We need to have enough veterans on the team and enough rookies coming up — like Smarty Jones — to keep our roster competitive.”
Clay maintains a level-headed outlook in an industry known for big wins and even bigger losses. “The person who buys a horse hoping to win the Kentucky Derby has a 1 in 36,000 chance of doing so, because about 36,000 foals are born each year,” he says. “Then about 3 percent of horses will win graded Stakes races with purses of $100,000 or more, so that’s a risky game, too. On the other end of the spectrum are those of us in the breeding business who raise livestock to sell to the people who want to take that gamble. So there are different ways to get into the game.”
In addition to offering close personal attention and care, Clay limits the size of a stallion’s “book,” selecting a limited number of quality mares from those that have applied for a booking. “In 1984, a normal book was 45 mares a season. Last year, one of our competitors bred over 180 mares to several of his stallions. We have a customer base that comes to us because we limit our books, creating some scarcity value that appeals to the people willing to pay to get these exclusive stallions,” he says.
Such was the case with the owners of Smarty Jones. “They didn’t want him bred to more than 110 mares in a season and neither did we,” says Clay, who remains committed to smaller bookings. But he cites increasing pressure from the large-book trend as one of Three Chimneys’ biggest challenges in the years ahead. “Do we let our philosophy drive our customers to us, but possibly limit our capital?” he asks, posing a classic B-School conundrum. “I think we’ll stay the course, but capital is always a concern.”
The financial details of the stallion business are simple enough but require some explication. If a horse is successful at the track, its owners are courted by breeding farms that hope to manage his career at stud. “When you stand a horse for someone, it’s a little like taking their children into boarding school,” says Clay. “They’ve entrusted you with their prized possession and expect you to manage it properly.” Once the owners have settled on a home for their horse, the farm manages the syndication process for a fee, selling shares to interested parties. Smarty Jones was syndicated for $39 million into sixty shares, thirty of which were kept by his owners. “We sold the rest and bought ten for ourselves. We decide on a case-by-case basis how much equity we’ll take of the horse we’re syndicating. The investment side is where you hit it big or you don’t. It’s similar to drilling oil wells or having a portfolio of venture-capital companies. Three or four horses will hit big, three or four won’t make it, and three or four will pay their way.”
Clay’s window-filled office looks out on the farm’s rolling green paddocks and neat post-and-rail fences. A table holds photos of his family and Queen Elizabeth II, who has visited the farm twice.
It is no doubt tempting to spend the majority of one’s days on the peaceful, manicured grounds of Three Chimneys. But Clay and his president, Dan Rosenberg, must travel to every corner of the world to cultivate the business relationships that could bring a champion back home to Kentucky. Japan, the United Arab Emirates, South Africa, England, Ireland, Australia, France, and Brazil are just a handful of the countries that represent the global nature of the Thoroughbred industry. “For years, about 60 percent of our product went overseas,” says Clay. (Kentucky is the largest overseas exporter of live animals in the United States.) “Now we probably have more U.S. customers than we’ve had in the past.”
While the business has grown over the years, Clay says that Three Chimneys’ core values have remained the same. “We’re in a horse-trading business where there’s opportunity for chicanery and less than full disclosure,” he observes. “Our number one value is honesty without hesitation.” Clay’s management style is equally simple: “People and horses produce at a higher level when they’re happy. If you get the right people on the bus and let them know where you want to go, they’ll get you there.
“This business is just like any other business,” he continues. “Treat your customers and employees right, put out a good product, and you’ll make it. The fundamentals that I learned at the OPM course contributed to whatever success we’ve had, no question about it.”
Clay also attended the HBS Executive Education course Families in Business with his wife, Blythe, whom he refers to as “my board of directors”; daughter Heather; son Case, who acts as codirector of sales; and Case’s wife, Lorin.
“Eighty percent of family businesses don’t make it to the second generation,” Clay observes. “We learned that in the successful transitions the founder has to be able to give up authority to change the dream. If Case wants to raise pigs, as hard as it may be for me, I have to let him. Case learned that he doesn’t have to emulate the founder — but he may have to be a better manager.
“The third lesson we learned as a family was, No surprises. Everything has to be out on the table. We come together every year for a family council and tell each other everything there is to know about the business and our personal lives.”
As focused as he may be on the day-to-day business of Three Chimneys, Clay sits on numerous industry boards and is widely regarded for his role in uniting a fragmented industry through the creation in 1998 of the National Thoroughbred Racing Association, an advocacy group that promotes the sport. He’s also involved in an effort to preserve 50,000 acres of farmland and open space from the steady pace of development. “It’s a signature brand for Lexington and the state of Kentucky — that’s worth paying attention to,” he says.
Clay names golf, not horseback riding, as his hobby of choice — “I’m a businessman first, a horseman second”— but his devotion to the art and science of Thoroughbred breeding is apparent in every fence post that marks Three Chimneys’ domain. “I think it takes a lifetime to become a complete horseman,” he says, sounding pleased by the prospect of dedicating himself to this daunting task. “It takes forever.”
The Little Horse That Could
While his 2004 bid for the Triple Crown ended at the Belmont Stakes, where he lost to Birdstone by a length, Smarty Jones and his team had already won the hearts of his fans, many of them new to racing. The story of a little colt from Pennsylvania's Someday Farm that came back from a gruesome skull fracture suffered in a training accident, a jockey (Stewart Elliott) with a troubled past, and a trainer (John Servis) who won the Kentucky Derby and the Preakness on his first try parallels that of Seabiscuit, the Depression-era Thoroughbred memorialized in Laura Hillenbrand's best-seller and a 2003 movie. Bred by Roy and Pat Chapman on a $10,000 stud fee, Smarty Jones boasts career earnings from eight wins of nine starts that total over $7.6 million.
Public interest in Smarty Jones—hundreds of fans have streamed into Three Chimneys since his arrival—has been matched by breeders who hope their mare will produce a champion when mated with him. Those lucky enough to have purchased a share (or shares) of Smarty (at a cost of approximately $650,000 per share) are entitled to breed one mare per year to the horse for the rest of his life. Others must apply and if accepted, pay a stud fee of $100,000 for the 2005 breeding season. (Depending on the success of his foals on the racetrack, that fee could be adjusted up or down in subsequent years.) Smarty Jones is one of eleven sires with a stud fee of $100,000 or more, with Storm Cat—a neighbor at nearby Overlook Farm—topping the list at $500,000.
Class of OPM 4