So I was reading this article the other day about how certain Hollywood films are financed by international investors.
http://www.slate.com/id/2117309/
And started wondering to myself. Why don't any Wall Street firms have divisions that provide the financing for certain Hollywood films?
I mean there have been some rare instance where that has happened (e.g. ML helping finance Iron Man) and ML probably made a ton of money based on how the movie is doing at the box office.
Obviously there's a lot of due diligence that would have to be conducted on the film, but considering the investor gets to purchase the film and the studio basically pays the investor a lease and some sort of repurchase agreement if the movie becomes successful, I don't see why more investment banks look to expand into that space.
I know asset managers have invested in the rights to movie sequels before, but you have a good question. I'd imagine you'd need a unique team of Hollywood insiders and overall vets to complete due dilligence on a script, assuming that's where they come in, ground level.
Arundel Partners used to invest in the rights to movie sequels. They bought the rights to movies before the first one had even come out, regardless of the plot (see: Sleepless in Seattle 2).
Nonetheless, I believe they went belly up after too many of the "options" failed to fall into the money. The firms had priced them years ahead, some up to a decade, which obviously inflated their value a heckuva' lot.
Wall St. banks are involved in the financing. I remember reading an article in either the FT or Economist about how JPMorgan was dominating Hollywood financing. 'cause of the nature of hollywood movies tho, even on an Expected Value basis, most hedge funds that have tried investing have had negative returns i think.
they do, a friend of mine used to work in the movie financing group at a bank.
Is that normally done by their Asset Management/Private wealth division? I think ML/Citi/UBS do a lot of art financings, but it's done through their private banking division...
sounds like an interesting position (relative to some of the other groups at a bank)
any idea jimbo if he traveled a lot to LA? (assuming he wasn't based in an LA office to begin with)
Was not through private wealth...was a bit more like a merchant banking function i think but not positive.
Hedge funds also finance films.
Banks do sometimes finance by either providing a debt/equity investment to a film slate or even a single film for its rights. Just to throw out some examples:
Marvel $525 M credit facility by ML http://www.fool.com/investing/general/2006/08/18/marvels-new-facility.a…
Film Fund for Tax Shelter for high net worth ppl: http://www.newswiretoday.com/news/27845/
Citi provides Relativity Media $1B to finance 45 films http://losangeles.bizjournals.com/losangeles/stories/2007/01/29/daily26…
I have a ton more examples, but that's just a few.
Interesting read on the Going Private blog regarding movie financing:
http://equityprivate.typepad.com/ep/2007/06/johnny_fontane_.html
Reason is for every Iron Man, there are a dozen Speed Racers. More lose money than make money, and it's a real crap shoot on what wins and what loses. Also the financing terms are atrocious. Most people do it for the smallest chance to sleep with Scarlett Johannsen or Mischa Barton. Even if you don't sleep with a celebrity, saying you finance movies is better pickup line at Shelter than saying you do municipal bonds.
Equity Private has a good series of articles on why film finance blows.
..
Not sure if it is the case in the US, but in the UK you get a healthy tax-break from being involved in film projects - part of a government push towards the arts I think.
As a result, it is typically wealthy individuals who get involved on the recommendation of an accountant. Typically they aren't looking for much of an upside at all.
Yeah - That is also an extremely large concern for most investors. That is why you invest in a slate of films to spread out the risk. Even then though, high budget and P&A costs for films like Iron Man, etc. are hard to recoup. Best example I can think of was Sahara, grossed $120M in box with up to $200M expected in total(not bad right), budget of $160M and then distribution costs of $80M, and misc of $40M. So this one big budget was a loss of around $80M.
In any other industry, having a portfolio of companies in which more than half lose money is unacceptable. On top of that, any other company would have a real time expense reduction plan that was reactionary to some sort of sales figure. Since all the revenue in a film is generated post-facto, there's no real incentive for cost cutting. It's not like the producers and directors can say "this moving looks like it's going to be a flop each additional day I work on it, so let's cut a grip and a camera man here or there, or pay our actors less." In fact, in almost every movie costs spiral out of control, never believe a movie budget.
We owned a company in our fund that was very reliant on direct response media to drive sales. Since the media spend came first and sales followed, it was incredible difficult to predict what products would hit and when, so the idea was to spend on multiple products and count on one hitting. You can imagine that the bank group had a real problem with that. As a result, they hit us with a 75% excess cash flow sweep, fairly stringent covenants, and high term amortization.
You can't do that with movies, because unlike the company I described above, each individual project has it's own financing. So it's even more of a crapshoot. At least with the company I described, the banks were counting on one homerun product to support the spending on the rest of the dogs, while still protecting themselves. In the movie scenerio, you're pretty much assured that each movie is it's own credit and most of them will be dogs. The only way to make it really work is to raise a fund and dedicate it to an entire studio. In which case, you might as well be the studio.
You're right GameTheory, not to say it won't or can't be done, but studios do create such funds to take away some of their own risk. Hoping the fund and its associated costs at least breakeven with a hit or two within a large slate. Most recent idea of this sort is a $100M fund created by WMA focused on their own talent producing smaller budget films. This was announced about 12 days ago at Cannes, and is funded, in part, by JP Morgan.
It's an interesting field, I have a lot to add, but due to the fact I work within something that crosses over, I can't get into detail really.
So understandably so a lot of movies fail or don't have returns that meet expectations, which is why many banks and investors are usually hesitant about financing most of them.
But take a scenario seen more often on Wall Street. Firm X owns a significant portion of the debt of Company Y. Company Y defaults on its debt, as a result Firm X becomes the majority owner of the firm, usually putting its own directors onto the board or electing entrusted outside directors to the new board. Basically they are gutting out the incompetent management and looking to gain returns for turning the company around.
Likewise with investing in movies, firms own the rights to the movies. So if the movies fail why don't banks have specific people they have relationships with who can help make something out of their investment? Like Bank Y has a relationship with James Cameron so that when a movie they invested in fails, they bring in Cameron to turn it around and make something out of it.
Or is it at that point, they figure, we've wasted enough money on this movie already, it's not feasible, forget it, sunk cost?
At what point would they decide to bring in James Cameron? There's no oversight during the film making process, as I noted above, and there is certainly very little enforcable cost control (if costs are spiraling, the studio can threaten to pull the plug but once the movie is in production it's incredibly difficult to just stop filming). And if the project was good to begin with, why wouldn't Cameron sign on in the first place?
Also, in your scenerio, you're forgetting that debt holders usually do not opt to convert to equity and operate the company. They usually opt to amend the debt or file/liquidate. Some sub-debt holders may choose to retain equity in the company if 1) there's sufficient equity to be had past the senior holders and 2) they think there's a viable company coming out of the other side. But very rarely do debt holders become operators.
they do. been hit by credit crunch. i think the revolution fund that closed only did 15-16% IRR, which was the best performing.
Iure magni aut veritatis at voluptates sunt. Quam rem aut omnis autem et quia. Et pariatur aut sed voluptatibus eius praesentium. Cupiditate est quasi distinctio nisi nihil fuga qui accusamus. Consectetur voluptatibus pariatur dolore dolorem deserunt eum. Doloremque totam et rerum aliquid vero corrupti.
Numquam asperiores architecto officia sunt. Quia ut nostrum possimus.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...