Studios needing money seek outside investors
It’s a brave new world in film financing.Hollywood has had outside investors in the past and many of them have been burned. But the new crew have logical motives for getting into business with Hollywood. For one thing, studios really need the money. And to get it, they’re doing something previously unheard of: opening up their books. Banks, hedge funds and private equity firms now can run the numbers, work the models. Many, though not all, come away feeling they’ll get a fair shake and, hopefully, decent returns. Despite horror stories of outside investors in wicked Hollywood, more transparency (not to mention the considerable allure of those A-list parties) are getting deals done. Hollywood tentpoles also offer the tempting possibility of big returns, perfect for the hedge-fund managers and other high-yield types flocking to the biz. Besides, pics are one more place to park some cash, given lackluster stocks, low interest rates and a scary real estate market. “There’s a lot of money that has to go somewhere,” says Prudential analyst Katherine Styponias. “Otherwise,” she says, only half-joking, “you have to give it back.” Even better is that many of the deals being done are for entire slates. The studios rarely considered slate deals, even during previous boom periods of Wall Street-Hollywood synergy, but everyone agrees they are statistically bound to be more lucrative than single pics. That’s particularly true as the massive DVD market (albeit slowing) bulks up profits and tempers financial wipeouts. As the pacts pile up, investors study deals each studio has already made, seeking a level of comfort that there will be enough decent films left to finance. “You have to ask: What’s the studio’s capacity? If they already have co-financing deals, it means less product will be offered and you may get the dregs,” says one investor. He also tries to sniff out first-dollar gross players or other side agreements that could cut into profits. One financier thinks slate financing may ease those super-rich talent deals, enabling studios to play good cop-bad cop. “They can say, ‘We’re making the movies with these other guys, and they won’t go for it,’ ” he says. If Wall Street has real gripes, it’s the 10%-15% distribution fee the studio takes before anyone gets paid. “That means, as equitable as a deal is, it’s never equal,” says one fund manager. An investor in a hedge fund, where cash is pooled, may be third or fourth in line. Another bone of contention is that most big slate deals exclude franchise pics or big sequels. There are no “co’s” on “Harry Potter” or “Spider-Man.” But, as Warner Bros. proved with “The Matrix” (partnered with Village Roadshow) and “Superman Returns” (with Legendary Pictures), it’s possible to get in on a franchise as it starts up. “A deal could provide franchise opportunities — just not existing franchises,” says one aspiring Hollywood investor who’s planning to launch a $100 million film fund this spring. The enthusiasm has spawned a chaotic marketplace of deals in search of funds. It’s a world of roaming pitches shopped by an eclectic group of middlemen — producers, former industry execs and moneymen. “It’s always like that in any market that’s fairly new where there’s a lot of money,” says John Hunt of ABRY Partners, a private equity firm backing Thomas Tull’s Legendary Pictures at Warner Bros. Currently, two former AOL execs under the banner Smashing Pictures are trying to line up funds for a slate of youth movies for Fox. Consulting firm Hedgeco Networks has had six requests over the past year to start up Hollywood film funds. It had none the previous year, according to principal Evan Rappaport. There are also a fair number of hucksters. Ryan Kavanaugh of finance and production shop Relativity Media says he gets at least 15 pitches a week. “Some guys came to me and said, ‘If you invest $100 million with us, we’ll come back in a week and give you $500 million,” says Kavanaugh. “I had someone check out their office in New York, which turned out to be a trash dump.” That’s why, for every deal that gets done, a dozen die. Sometimes it’s not even about bankrolling a slate but about banking on a studio. The debt facility that will put $525 million into Marvel Studios, despite the fact that the shingle has yet to release a picture, is a perfect illustration: Investors are hoping Avi Arad’s model of franchisable pics is set for a hot streak. There are some naysayers who feel the outpouring of cash leaves Wall Street more vulnerable than it realizes. “I’m always leery when I see huge piles of money flowing into anything, whether it’s the movie business or chemical companies,” says Vic Hawley, a fund manager at Reed, Conner & Birdwell, adding, “I’m not nervous for Hollywood — I’m nervous for the investors.” Longtime Hollywood moneyman John Heyman agrees: “In the world of film financing, I’ve long believed that the inmates have taken over the asylum.” Steven Zeitchik contributed to this story.