See below for this month’s Waterhouse VC newsletter. We specialise in global publicly listed and private businesses related to wagering and gaming.

Since inception in August 2019, Waterhouse VC has achieved a gross total return of 1860% as at 31 March 2023, assuming the reinvestment of all distributions.

Are you feeling lucky?

“Finding a system that works and is stable and works for a long time is extremely difficult. If you’ve had a system that works for 20 years, it’s not as a result of skill. You acquire the system that worked by luck, then once it worked, it might keep working.” - David Walsh.

David Walsh and Zeljko Ranogajec (business partners) are professional bettors, whose syndicate bets about $10 billion per annum (Australian Financial Review) across horse racing, sports betting and lotteries. Walsh spent $75 million to re-open Hobart’s Museum of Old and New Art (Mona) in 2011.

In our December newsletter, we discussed the niche but highly lucrative field of professional betting. Betting successfully is incredibly challenging, with other market participants always trying to take your ‘edge’. This dynamic means that betting strategies must be adjusted all the time.

*The Pharos wing at Australia’s Mona museum. Source: Azure*

Rebating their competition away

The large betting syndicates receive generous rebates from pari-mutuel/tote betting for providing liquidity. This gives them a significant edge (varies depending on pool/jurisdiction) over other participants. To receive this rebate, bettors need to turnover vast sums of money. For example, U.S. totes typically only offer rebates to bettors who wager over US$5 million per year (Sports Trading Network). The largest pari-mutuel markets are in the U.S., Australia, Singapore, Japan, Hong Kong and France.

It is incredibly difficult for new entrants to compete with the handful that currently dominate because they are already behind. The compounding of their rebate advantage has generated the largest syndicates incredibly lucrative profits.

Data is competitive and costly

Alan Woods (deceased) and Bill Benter are other examples of successful professional bettors focused on racing. Bill Benter grew up in Pittsburgh and studied physics at university before taking on Las Vegas casinos at blackjack. Alan Woods grew up in Murwillumbah, a small Australian town. Woods was an actuary, who became a gambler with particular horse racing expertise.

After being banned from casinos, Woods and Benter partnered in 1984 to bet on horse racing in Hong Kong. Their system developed an edge by betting on overlays but it was several years before they were generating significant profits. In the first two years, they lost most of their $150,000 starting bankroll.

After a split from Woods, Benter started his own model using only 16 factors. Over several years, the number of factors used in the model grew to over 100 and complex data began to play an increasingly important role (Champion Bets). Today, syndicates have large teams of statisticians and data analysts assessing 100s of unique factors. For example, analysts of horse racing assess factors related to each horse, the racecourse, turf conditions, the trainer, the jockey and track configuration.

Whilst the largest syndicates would win without the rebates from the totes, the rebates effectively provide further funding for their investments into data analysis capabilities, strengthening their competitive advantage. This ‘rebate / data investment’ flywheel makes it extremely difficult for newcomers to break into professional betting.

Furthermore, in our discussions with professional betting syndicates, they told us that you usually need up to 5000 individual events to work out whether you have a real betting advantage that meets expectations, with lower advantages requiring more individual events. For example, sports betting models require more events, given their typically lower advantages than horse racing models. As Benter and Woods experienced early in their racing betting, unfortunate luck in these first few thousand individual events easily bankrupts hopeful syndicates.

*Model of a dice roll with a 5% advantage (yellow lines are 2 standard deviations).*

As shown by the deviations of the red line (cumulative result of actual dice rolls) above and below the blue line (expected value of dice rolls), it takes many events to determine the actual advantage (in this example, there are 6000 events and it is still unclear if there is an advantage).

Artificial Intelligence in betting

There has never been more data and technology applied to professional betting as there is today. The increasing power and prevalence of artificial intelligence (AI) is the latest wave of technological disruption, which presents opportunities and threats to existing and emerging betting syndicates. As discussed above, incumbent syndicates are best funded to further strengthen their dominance through investing in AI capabilities.

AI could improve the speed and efficiency of a syndicate’s automated betting processes, ultimately bringing down the cost of placing bets. Consequently, the speed of bet placement is likely to become even more competitive. From the bookmaker’s perspective, AI can identify new patterns and insights from betting data to ultimately make better predictions, adjust odds and minimise their losses to professional bettors. For casual bettors, AI allows bookmakers to personalise each user’s experience according to their betting data.

In November last year, David Walsh said that he was focusing his time on finding methods to protect his syndicate’s income from artificial intelligence, with the belief that having data sets with unique observations could favourably impact his syndicate’s betting results (Australian Financial Review).

Some of the world’s largest global investment firms are applying their expertise to professional betting. For example, Susquehanna International Group (SIG) was founded in 1987 and has grown to around 2000 staff and US$1 billion of annual revenue primarily through trading in financial markets. SIG established Dublin-based Nellie Analytics in 2017 to focus on sports betting. In 2022, SIG took a 12.8% equity stake in Pointsbet, which gave Nellie Analytics the opportunity to explore a partnership to provide sports analytics and quantitative modelling services to PointsBet.

Betting on tennis betting

In our December newsletter, we discussed Tom Dry’s professional betting syndicate, which is focussed on tennis. Tom Dry has been professionally betting on tennis since January 2020. He has prior experience working for Tony Bloom (owner of Brighton Football Club), both as a data scientist and as a football analyst. Through his experience working for Bloom, who is widely viewed as the world’s best football bettor, Tom developed both the analytical and operational skills required to build a professional betting business.

Tom’s operational metrics are very impressive and we believe that Tom has the ability to further scale the team, increase liquidity in tennis and also expand into other sports. Despite the challenges of breaking into professional betting, Tom has built specialism in a unique sport, which is much easier to leverage than multiple sports. We believe that Tom’s edge in tennis betting would be difficult to replicate due to the quantity of proprietary historical data he possesses and the proprietary factors that he applies to his model. On 1 July, Waterhouse VC will make an investment in the syndicate.

For bettors who are driven to put in the work and apply the latest innovations in technology, there are significant potential rewards.

Media

On 21st-22nd June, our Portfolio Manager, Peter Stevens, will be speaking at iGaming NEXT Valletta on the topic “State of play: Can the economic crisis yield unique opportunities?”. The conference attracts 4000+ senior delegates for two days of high level networking, world-class content and great hospitality. See more details about the conference here.

For wholesale investors interested in following wagering and gaming industry news and trends, please follow our updates on Twitter (@waterhousevc) or through our website at WaterhouseVC.com.

DISCLAIMER AND IMPORTANT NOTES

Please note the above information in relation to David Walsh, Zeljko Ranogajec, Alan Woods, Bill Benter, Pointsbet Holdings Ltd, Susquehanna International Group, Nellie Analytics, Tony Bloom and Thomas Dry, is based on publicly available information in relation to the company and should not be considered nor construed as financial product advice. Waterhouse VC has an option deal and has signed an agreement with Thomas Dry’s betting syndicate. The information provided in this document is general information only and does not constitute investment or other advice. Readers should consult and rely on professional investment advice specific to their individual circumstances.

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This material is for general information only and is not an offer for the purchase or sale of any financial product or service. The material has been prepared for investors who qualify as wholesale clients under sections 761G of the Corporations Act or to any other person who is not required to be given a regulated disclosure document under the Corporations Act. The material is not intended to provide you with financial or tax advice and does not take into account your objectives, financial situation or needs. Although we believe that the material is correct, no warranty of accuracy, reliability or completeness is given, except for liability under statute which cannot be excluded. Please note that past performance may not be indicative of future performance and that no guarantee of performance, the return of capital or a particular rate of return is given by Sandford Capital, Waterhouse VC or any other person. To the maximum extent possible, Sandford Capital, Waterhouse VC or any other person do not accept any liability for any statement in this material.

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