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Hedge Fund Film Financing
5 Things to Know About Hollywood Hedge Funds
Despite huge differences in genre, budget, and profit, Avatar and The Devil Wears Prada have one key thing in common: Wall Street hedge funds footed at least part of the bill for James Cameron’s 2009 science fiction hit as well as David Frankel’s 2006 fashion flick, pointing to a financial trend that started with the entertainment industry’s corporate mergers of the ’80s and ’90s and exploded in the first decade of the 2000s.
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To be sure, investment methods in Hollywood films have changed over time, shifting from traditional financing deals that initially operated on a movie-by-movie basis to a new set of strategies geared toward funding entire slates of Hollywood films, each with varying levels of potential profitability. Wall Street investors have not only cultivated a deep relationship with Hollywood that officially dissolves the distance they famously kept until the 1980s, but they have become major players in many of Hollywood’s most current big hits.
What led this group to invest their time and money?
Here are the five things to know about the role hedge funds role in Hollywood productions today:
1. Hollywood hedge fund “slate financing” developed in the 1990s when Wall Street investors were seeking new markets and studios were seeking new funding sources
2. Slate financing supports a group — or “slate” — of films, which are usually a mix of sure-fire hits and less likely successes; the investor receives a cut of the profits of each film in the slate (more)
3. Slate financing has significantly impacted the structure of Hollywood (more)
4. While slate financing has become a norm, its efficacy has proven inconsistent (more)
5. Hollywood hedge funds have diversified the types of investors in Hollywood productions (more)
1. Hollywood hedge fund “slate financing” developed in the 1990s when Wall Street investors were seeking new markets and studios were seeking new funding sources
Corporate buyouts of the Hollywood studios in the 1990s set the stage for shifts in Hollywood financing tactics. When media conglomerates Viacom, Time Warner, and NewsCorp rushed to purchase the major movie studios, the result was a changed environment for moviemaking. Movie studios became small sections of enormous corporations, only minimally profitable and therefore less regarded than more lucrative arms of these expansive media companies. Corporation executives pressured studio bosses to generate hits but refused to provide the growing amount of funding necessary to produce and market a blockbuster movie. Studio producers needed to find new funding sources.
Around the same time in the late ’90s, interest rates were low and the stock market was sluggish, so hedge fund guardians were seeking new markets in which to invest money that was otherwise going nowhere. Wall Street investors began to look into the possibility of diversifying their portfolios by channeling more of their increasing capital from hedge funds into Hollywood. With the assistance of private equity firms, this new generation of financiers began guiding studios toward slate financing arrangements, which, for investors, maximized investment potential and minimized risk. For studios, slate financing meant more films would now be funded and made.
2. Slate financing supports a group — or “slate” — of films, which are usually a mix of sure-fire hits and less likely successes, and the investor receives a cut of the profits of each film in the slate
Rather than footing the bill for one movie at a time as per traditional financing, hedge funds can provide enough money to help support a range of films, which are put together in a slate. A slate is usually comprised of at least one potential blockbuster, plus several other films of varying profit potential.
After a slate of films is selected, investors contribute funds with the understanding that the studios take a 12 to 15 percent distribution fee before splitting the profits with their financiers. Studios also typically retain worldwide distribution rights. Both of these factors ensure that such co-financing deals will still be profitable for studios, though investors were also protected in a few important ways: For one, investors can be less concerned about box office flops; since they were backing entire slates of films, each film can perform on its own merit without risking the entire investment amount. Secondly, investors receive a cut of the actual profits brought in by each film on the slate. Even if this share is substantially smaller than that raked in by the studio and its parent corporation, there is always potential for considerable investment gains, especially with blockbusters and low budget, foud footage and low to mid family and comedies.
Since the early 2000s, most slate financing has loosely adhered to a 35/65 a hedge fund supplements over a quarter to half the production costs of a slate of films and the studio finances the rest. Another type of deal, such as the high-profile effort launched by Relativity Media with Sony and Universal in 2006, allocated a set amount of capital that was split between two studios and two sets of slates.
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3. Slate financing has significantly impacted the structure of Hollywood
Not only has slate financing enabled the production of films that may never have hit theaters otherwise, what’s become a complicated network of collaborative filmmaking has fundamentally changed the structure of Hollywood, introducing a number of new 5independent studios that are now producing lucrative films.
One example is Catch 22 Entertainment, a production, distribution, and marketing company fully independent of the major studios and launched by long-time financing consultant Anthony Millan. Catch 22 is partially financed through hedge funds, but it also benefits from Millan’s considerable prior experience consulting for studios such as Lionsgate, Voltage Pictures, and Relativity Media. Similarly, Relativity transformed itself into an independent studio after years of advising the big studios on how to optimize Wall Street capital and offering its own financial muscle. Argonaut Pictures, Mimran Schur Pictures, and Overnight Productions are also among the ranks of hedge-fund supported independent studios. These studios have set their sights on lower-budget films much like those successfully produced and marketed by the major studio independents, such as Fox Searchlight.
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4. While slate financing good for hedge funds and hnw investors
. For the big studios, slate financing has helped increase capital and reduce risk. But it can also diminish their returns on films as more investors receive portions of the profits. The deal structured by Relativity Media in 2006 that allocated $400 million to Sony and $200 million to Universal did not result in a higher box office performance for Universal, so Relativity ended up losing around $20 million in revenue and Universal did poorly that year overall. Still, Relativity’s net gains have been such that it has remained a leader in this new era of film financing, now producing its own films and even developing a coveted formula espoused to predict a film’s success.
The movie fund, and other ambitious independent studios and movue funds are comfortable and taking advantage of the digital revolution and producing smaller budget films, which have the potential to yield huge returns.
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5. Hollywood hedge funds have diversified the types of investors in Hollywood productions
Even as some hedge fund holders withdraw from Hollywood or sell their deals at a discount, other Wall Street investors are bolstering the efforts of the successful independent studios, as well as setting their sights on fresh aspects of the entertainment business. There has also been a surge in financing flowing into Hollywood from investors based in nations outside the U.S. and Western Europe: A rich source of film financing during the past decade has come from investors based in India, Abu Dhabi, and Dubai. In other words, the financing of Hollywood productions is becoming remarkably varied, raising intriguing questions about who “owns” Hollywood, where Hollywood now “exists,” and how this increasing diversity of players will impact movie-going in the years ahead.
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Hedge Fund & High ROI for Movies
ALEX CHADWICK, host:
The movie business now. It’s always on the lookout for new investors to help finance the growing cost of big-budget films and now there’s a new idea floating through the studios getting Wall Street hedge funds to finance an entire year’s worth of movies. Hedge funds are private, unregulated and often risky investment schemes, but they can bring in loads of cash. Edward J. Epstein writes about the business of Hollywood for our partner at the online magazine, Slate.
Welcome back, Edward. And these movie studios have long used outside investors–everyone from William Randolph Hearst to Microsoft co-founder Paul Allen. What’s different now about hedge funds?
EDWARD J. EPSTEIN reporting:
Before, the civilians, as they call the outside investors, all wanted to have some role in the movie, the famous casting cats. They wanted to put their girlfriend in or they wanted to read the story or have some access to the plot. What’s different now is the hedge funds. And hedge funds, I should say, have, according to The Wall Street Journal, $1 trillion under management. The hedge funds would buy the entire year’s portfolio, or a percentage of the films, and have no control whatsoever. It wouldn’t show up on the books of the movie studios, and it would basically simply be capital they could use and don’t have to show that they’re using the capital.
CHADWICK: Is it like a line of credit, are you saying? They can…
EPSTEIN: No, no, it’s the opposite.
EPSTEIN: It’s the opposite. It’s an equity investment. They put in an investment. Say, they buy 20 percent–they put up 20 percent to production budget, and they get back 20 percent of the profits or the earnings on everything–not just the movies; on the DVDs, on the television–on everything that comes out of it.
CHADWICK: And why go to hedge funds?
EPSTEIN: ‘Cause they have a trillion dollars, for one reason. Secondly…
CHADWICK: That’s enough right there.
EPSTEIN: We don’t have to stop there. But secondly, hedge funds like to show high performance. They compete for money–which hedge fund gets the money. And junk bonds basically pay 10, 11, 12 percent. Movie studios claim that they have a minimum of a 15 percent internal return on investment. So if you can buy 15 percent–and by the way, if you have a movie like “Spider-Man,” it can go to 25 or 30 percent, you have a better deal if you’re a hedge fund than investing in junk bonds.
CHADWICK: You’re writing in Slate about a young executive in Paramount who came up with a clever idea. What was that?
EPSTEIN: Well, this was Isaac Palmer, and this was the brilliant idea that it’s all based on, and that is–you could call it portfolio theory. Rather than selling one movie or a part of one movie, you sell everything you do–26 movies, in this case. Good movies, like “War of the Worlds,” and the lemons all together and it’s a portfolio. And then you basically show how your portfolio performed in former years, and if you can show that even in bad years, you had a 15 percent return, the hedge funds feel that they’re taking the risk out of the deal.
CHADWICK: So this buy in/buy the batch idea–this comes from Paramount. Are the other studios following?
EPSTEIN: Well, Fox considered doing it, but they haven’t yet come to terms–that deal they were working on fell through. Warner Bros. has a different deal with a company called Legendary, in which it’s five films a year, but that isn’t the same thing ’cause basically they’re five cherry-picked movies, so the investors are basically going to get the worst movies. And so, you know, we’re talking about things that are happening in the last few months.
CHADWICK: Are you and I going to be able to get in on this?
EPSTEIN: Only if you invest in a hedge fund, which usually requires a million dollars, but…
CHADWICK: Opinion and analysis from Edward J. Epstein, author of “The Big Picture.” He writes the Hollywood Economist column for our partners at the online magazine Slate. Edward, thank you again.
EPSTEIN: Thank you, Alex.
CHADWICK: DAY TO DAY is a production of NPR News and slate.com. I’m Alex Chadwick.
“I don’t know of any other alternative investment that can offer tax incentives, multiple exit strategies, an opportunity to guarantee 100% of capital, ”I am surprised how many accredited investors, family offices, asset managers, hedge funds, fund of funds, Venture Capitalists, tax planners, CPA’s, tax attorneys, public and private companies have no clue about these benefits” – Rutman, Movie Fund Investor Click for more
Funding for Movies : Capital Funding For Movies & Films
With world’s nations flirting with an economic crises, Wall Street panic at an all time high, and hedge funds and financial institutions disintegrating, New York based Elliott Associates has recently parked an additional $1 billion into Ryan Kavanaugh’s Relativity Media which will finance a large slate of Universal Pictures’ films over the next few years.
And the question remains “why?” in today’s economic crisis as well as the recent pull out of billions of dollars in institutional capital from the studios.
Well, Noci Pictures Entertainment (www.noci.com) a Chicago and Los Angeles film production and structured finance company thinks it may have the answer and its own opportunity with its $300 million dollar international tax advantaged structured film deal that has an option to be principally protected as well using CPPI, including a stand alone 100% principal protected Prints and Advertising Fund which will insure the Company’s U.S. theatrical distribution.
“No matter how bad things are in the world, people need to be entertained”, states Yuri Rutman, Noci’s CEO. “And while the crowd mentality of panic in the U.S. financial markets exists, overseas, properly structured commercial films generate more revenues which add to bigger distributor buys with the value of the Euro vs. USD.”
Apart from Elliott Associates, other investors including billionaires, family offices from Wall Street to Silicon Valley to the Middle East to Russia have been parking their money into Hollywood.
Anil Ambani, Larry Ellison Of Oracle, Paul Allen Of Microsoft, Steven Rales, Fred Smith of Federal Express, Norman Waitt, the Co-Founder of Gateway Computers, Jeff Skoll Of Ebay, Marc Turtletaub of The Money Store, Roger Marino Of EMC Corp, Sidney Kimmel Of Jones Apparel Group, Minnesota Twins owner Bill Pohlad; Real Estate Developers Tom Rosenberg and Bob Yari, and, financiers Sheikh Waleed Al Ibrahim, Michel Litvak, and Philip Anschutz are all behind the finance of a lot of films that range from box office hits to Academy Award winners.
While the glamour of the movie business may be appealing to most, at the end of the day, it is still an unknown business that many try to gamble on, and only a handful come out as winners. The real key is to minimize risk, maximize profits, and offer a steadier stream of revenues than what other alternative investments may offer such as real estate, oil & gas, commodities, hedge funds, or practically any other investment in today’s market.
Traditionally a lot of media and film funds have sunk because the equity parlayed into these deals was junior. Most of these funds have, and continue to, finance large budget studio films in the $40-$100 million dollar range with senior and mezzanine debt being first and second in position while the junior equity is usually never recouped.
Instead of dazzling investors with smoke and mirror Monte Carlo simulation models that offer various IRR’s and scenarios based on unpredictable film revenues streams and junior equity to trigger senior and mezz debt, the key is to offer an absolute return on investment utilizing international and U.S. public tax incentives that in certain instances can guarantee 100% or more of invested capital prior to revenues by leveraging equity positions with non-recourse debt vs. recourse debt.
The Company is putting together a slate of films using an innovative hybrid public-private finance strategy aimed at investors who either want to take a 100% Federal deduction under Section 181 or “The American Jobs Creations Act” against their ordinary income, get an additional 20-40% in tradable and monetized state tax credits or cash rebates, have a hedge of revenues from 20-30 films, a possible exit IPO on the London AIM., as well as stimulating local economic development, and creating jobs, including for women and minorities. Plus the Company is offering an alternative 100% principal protection of capital using Constant Proportion Portfolio Insurance.
“In practical terms, on a $10 million dollar film shooting in Illinois, $5 million would be equity (with CPPI principal protection), $5 million would be non-recourse debt through international pre-sales of a film” adds Rutman. “Assuming a discounted rate of about 28% (from 30%) tax credit from Illinois, that equals approximately $2.8 million dollars back into a film fund before revenues. Now assuming a Section 181 deduction is applied at a federal tax rate of 35%, an additional $1.75 million dollar reduction in Federal income taxes may be achieved so in effect investors are getting back almost $4.6 million dollars on a $5-10 million dollar investment before revenues, additional pre-sales, licensing, etc.”
Internationally, the same formulas can be applied leveraging about 50% in non-recourse government incentives, 20% equity, and 30% non-recourse debt on a film by film basis.
Further, if the entire deal is structured using static or dynamic hedging (CPPI), then equity risk is virtually eliminated while the upside on 20-30 movies becomes a high yield investment with an absolute return prior to a hedge of revenues.
A complimentary deal can be structured with dynamic hedging to facilitate a prints and advertising fund to guarantee U.S. theatrical distribution.
Sound too good to be true?
“I don’t know of any other alternative investment that can offer tax incentives, multiple exit strategies, an opportunity to guarantee 100% of capital, as well as giving back to the American economy and labor, while being involved with the moviemaking process”, states Yuri Rutman,. “That would also add to the long line of recent film funds that have been structured with numerous hedge funds, private equity investors, corporate tax credit buyers, and institutions. Heck I don’t even know of any business that someone can start where they know they will receive an exact ROI before they see any profits”.
For smaller individual accredited investors and family offices who are not aligned with large capitalized hedge funds and have under $1 million to allocate to a film, Rutman can accommodate such situations using single picture financing strategies incorporating the above risk minimization techniques.
”I am surprised how many accredited investors, family offices, asset managers, hedge funds, fund of funds, Venture Capitalists, tax planners, CPA’s, tax attorneys, public and private companies have no clue about these benefits”, Rutman adds. “Federal Preservation, New Markets Tax Credits, etc was the usual route for tax credit planning or alternative investments, but film production incentives offer a more liquid premium, equity, as well as a little Hollywood adventure and schmoozing with movie stars.”
Rutman adds “Plus, I am reinventing ‘conscious’ film finance. A lot of competitor deals have proven that they didn’t do their homework and won’t be around in a few years or even a few months because they didn’t do their homework. I want to be making movies when I am 100 and be able to sleep well every night until then.”
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