Collecting art or classic cars, owning a professional sports team, even horse racing: all achievable and entertaining hobbies for a high net worth individual. At a certain point, all of these things will also become valuable financial investments. Can they be good investments and, if so, how do these hobbies then need to be treated?
By way of example, let’s start by looking at a hobby very close to my own heart: equestrian sports. When thinking about investments and horses, most people’s minds go straight to race horses and for good reason. Horse racing is hugely popular across the world, indeed it is the most watched sport in the UK after football. It’s no surprise then that this high-adrenaline sport appeals to the high net worth individual, and what better way to get close to the action than to become an owner. Racehorses can be prestigious assets and a winner can bring glory to the owner. Having access to the winners’ enclosure does come at a cost, however, as there are no guarantees your investment will pay off and a lot more variables in play than investing in more traditional commodities.
A good flat-racing horse can cost around £100,000 to buy and the Racehorse Owners Association estimates ongoing costs at around £20,000 a year to train plus entry fees, vet bills, and insurance. Whilst poor performance and injury represent substantial risks, if you are lucky and have a horse that wins in a big race it could be sold for several million – in addition to the prize money, which will not be inconsequential. If you are looking to turn a profit from this particular hobby, though, it is crucial to be prepared to sell the horse at the right time. Rugby star Mike Tindal was reportedly branded an ‘idiot’ by his wife when he purchased a racehorse on a whim for £12,000 in 2013. Then the horse had a win at the Welsh Nation and following this race was reported to be worth more than £200,000 – not a bad return on his investment.
It’s not all about racing though. Whilst racehorses are the most common equine investment, dressage horses, eventers, and show jumpers can be big business too. Dressage in particular has become very popular among the wealthy and has become closely linked with fashion and celebrity culture in recent years. The prize money in dressage is relatively low compared to racing and show jumping, yet dressage horses can be the most costly of all sports horses. One three-times Olympic medal winning horse was reported sold for €9.5m, and following the 2012 Olympics it was rumoured that double Olympic champion and World Recorder Holder Valegro was for sale for between £6 million and £12 million. Owners Carl Hester and Roly Luard could have made a substantial return on their investment as Carl purchased Valegro as a 2 year old. Nevertheless, they decided not to sell Valegro and instead offered investors the opportunity to own a share in him. Because the 2016 Olympics are likely to be Valegro’s last, as he will be 14 years old, his value is likely to decrease substantially but for many owning a share in potentially the greatest dressage horse of all time is more important than the money. Plus, in the meantime he is earning his keep through lucrative advertising deals.
The world of show jumping is glamorous and over the last few years has also become a lucrative global sport with luxury brands including Rolex, Gucci, and Longines sponsoring events. This glamorous sport attracts many of ‘the rich and famous’ as both spectators and owners. Show jumpers that are able to complete at World Championship or Olympic level can be sold for anything between £1 million and £5 million. If you are prepared to purchase a youngster as a long term investment and pay for a professional to train the horse from scratch the return on your investment can be huge. Again, this holds the same risks and limited window of opportunity as other equine investments, yet for those passionate about the sport the great enjoyment to be found more than outweighs these potential negatives.
So if your passion for horses makes the risks worthwhile and there are also significant opportunities for financial upsides, they can be good investments.
It’s not just horses that are attracting high net worth individuals to invest in their passion, of course. Football (or soccer, just to clarify for our American friends) is another sport that has huge appeal for the passionate high net worth. Most people are aware that Russian billionaire Roman Abramovich purchased Chelsea Football Club in 2003. Since then Sheikh Mansour has become the owner of Manchester City and, on a smaller scale, lottery winner Les Scadding decided to purchase Newport County AFC.
Premiership clubs have always been big businesses through sale of television rights, ticket rights, kit sponsorship (Manchester United’s current kit deal with Adidas is reportedly worth over £75 million per year), stadium sponsorship, player sales, and sales of general merchandise. For less prestigious clubs money can be made by selling players, this is done by attracting potential talent to the club, nurturing that talent and then selling the players to the big clubs for millions. Football is Europe’s favourite pastime and its appeal is enduring, so investing in a football club can certainly be a sensible investment.
Cars, Art, and Other Collectibles
Classic and luxury cars have always appealed to high net worth individuals, however, until recently purchasing a classic car had been viewed exclusively as a hobby rather than an investment. This has changed over the last ten years and gained attention due to the staggering returns that have been achieved by some leading investors. According to the Knight Frank Luxury Investment Index, classic cars have seen returns of over 500% in the last 10 years, far out-performing other luxury assets. Although both can give you the chance to feel the wind in your hair, I must (grudgingly!) admit that owning a car is certainly much lower risk than owning a race horse and has a more enduring value over the long term.
Similarly to cars, it wasn’t long ago that collecting art and investing in art were completely different beasts. Collecting was typically a hobby and a passion of the collector; they weren’t concerned if all their portfolio was of a single artist, they bought what they liked, and they didn’t really consider the long term value of the piece. However, as the price of art has soared things have changed and buyers have become much more likely to consider whether the piece was likely to make them a profit before making the purchase. Consequently art is now seen as an investment in the artistic and financial worlds, with financial advisors focusing on art as a source of long term profit. Over the last 10 years art has performed extremely well, and again according to the Knight Frank Luxury Investment Index art has seen returns of over 226% over this time. However, one thing potential investors must factor in if they are purchasing from auction houses is the commission charged – which can range from 12.5% to 25%. Despite the potential returns to be made, however, Ricki Ferri (Forbes) has nevertheless recommended that when it comes to art “Collecting should be viewed as a hobby first and an investment second.” Our own Art advisors at Auriti Art offer exactly the same advice to clients looking to engage in this area.
The question for many HNWIs will be when exactly a hobby becomes an asset or even an investment, because these categories bring with them broader concerns and responsibilities that will need to be addressed. It varies by hobby, of course. For anyone considering buying a major football club, it should be immediately apparent that they are engaging in a business venture and would hopefully be treated as such from the outset. With collectibles, however, this can often start small and grow over time, from one canvas to a hundred works of art, or one car to an extended garage of antiques.
When holding a luxury asset it is prudent to set up an investment holding entity to hold it and keep it separate and ring-fenced away from your other assets. The owner may consider establishing a holding company for this purpose or they may decide to establish a trust to hold the asset, with the latter being particularly appropriate with durable assets that can be passed to and enjoyed by future generations. Such a trust can be structured to ensure that the asset cannot be sold and stays within the family, something which may be attractive to art collectors in particular, or to put in place any other stipulations that may be important to you.
In conclusion there is certainly potential for money to be made, and lots of enjoyment to be had from investing in your hobby or your passion. However, it is crucial to remember that these are high risk investments and you may not realise any gain on your investments, and in the case of some passion investments could lose your investment entirely. However, for many people investing in their hobby or passion the financial gain is not what’s important, it’s the pleasure they get out of it that counts. Regardless, these hobbies must be recognised as financial assets and treated as such, ensuring that they are held in a responsible fashion.