Whether it’s insurance or German tax schemes, financing trends in the U.S. pic biz don’t tend to have much staying power.
But nearly halfway into 2006, producers and the agencies that package projects for their clients say they’ve been enjoying consistent financial support from a welcome pair of sources: Wall Street hedge funds and high-net-worth individuals. And with every indication that the money will keep flowing — in addition to U.S. federal and state incentives — the domestic financing landscape is more fertile than it has been in years.
“The next year should be a very healthy one in terms of new capital entering the film market,” says Hal Sadoff, who heads up ICM’s international and independent film group. “It is without a doubt a very good time for independent film.”
Institutional investment in the form of Wall Street-backed hedge funds continue to invest studio slates, but there’s also been an upswing in their willingness to back independent players.
Groundswell, Michael London’s production outfit that launched in February with an initial $100 million, is backed by two separate pools of money: the Lexington Fund in Beverly Hills, which uses the safer foreign pre-sales model, and the more risk-dependent Crescendo Independent Film Fund out of New York. The company plans on making five pics per year with budgets up to $20 million.
“The demand for these pictures is there — audiences want to see more personal stories, and the studios are cutting back on everything but their biggest possible releases,” says London. “And on the supply side, you’ve got a lot of money that’s been sitting on the sidelines for years since the Internet bubble burst — money that’s been accumulating in real estate or hedge funds and now with the growth of homevideo is being attracted to film. What’s resulted is a very healthy and robust market.”
Groundswell’s first two pics, an adaptation of Michael Chabon’s “The Mysteries of Pittsburgh” and the Neil LaBute spy thriller “Trust,” are slated for production later this year.
But while hedge funds are eager to invest in Hollywood, it’s not a free-for-all.
Getting hedge-fund backing is “not as easy as some people like to think,” says Inferno partner Bill Johnson, whose production/foreign sales company snagged $65 million through a Wall Street hedge fund. “They love the concept of ‘alignment of interests.’ ” (Which means, “You put up money; we put up money,” adds Inferno’s other partner, Jim Seibel.) “They want you to have skin in the game.”
Aside from the Wall Street influx, there’s still plenty of entrepreneurs willing to put their money in film.
Says Sadoff, “While the hedge funds tend to get into the game for purely financial reasons, private individuals are getting involved on a more creative basis.”
Many of those already in the private-equity financing game were big players in 2005. They include Bill Pohlad’s River Road (“Brokeback Mountain”), Bob Yari’s Yari Film Group (“Crash”), Sidney Kimmel’s Kimmel Entertainment (“Trust the Man”), Jeff Skoll’s Participant Prods. (“Syriana,” “Good Night, and Good Luck”), Marc Turtletaub’s Big Beach (“Little Miss Sunshine”) and David Sacks’ Room 9 (“Thank You for Smoking”) as well as Mark Cuban and Todd Wagner’s 2929 Entertainment, whose expanding empire includes 2929 Prods. (“Good Night, and Good Luck”), HDNet Films and Landmark Theaters.
Smaller indies with budgets around $1 million also have found their share of private equity supporters. “Along with the Bob Yaris and the Sidney Kimmels of the world, who are doing this on a big scale, there are also quite a few new players who are focusing on lower-budgeted films,” says Matt Littin, who oversees Cinetic Media’s financing division.
One such company is Charlie Corwin and Clara Markowicz’s Original Media, which helped fund Noah Baumbach’s 2005 indie hit “The Squid and the Whale” and co-financed Ryan Fleck’s “Half Nelson,” one of the most buzzed-about films at Sundance.
William Morris’ Cassian Elwes, who heads up the agency’s independent division, attributes the current investment boom to the fact that 16 years after Steven Soderbergh’s “sex, lies and videotape” kicked off the indie movement, industry veterans have gotten the financial equation down to a science.
“We know how to make these movies (and) sell these movies, and we can make a really accurate prediction of what the value of a film is going to be, based on a worst-case scenario,” says Elwes.
While in Cannes, he will announce a fund based on monetizing Stateside tax incentives. Elwes also has found a way of financing pics via the controversial federal initiative called Section 181, enacted as part of 2004’s American Jobs Creation Act (AJCA). “A handful of us have been working at this for quite some time, and we know what we’re doing.”
The AJCA initiative has been shrouded in confusion since its creation. Most scoffed at the low $15 million budget ceiling, and many still aren’t sure whether that figure includes residuals and participations. But despite this, as Elwes indicates, there’s an opportunity there.
“This uncertainty is due to the absence of regulations, which are in the process of being prepared by the Internal Revenue Service, subject to Treasury Dept. review,” notes attorney Thomas Selz of Frankfurt Kurnit Klein & Selz. “Assuming that a film production budget is not more than $12 million or $13 million, we believe that even if the regulations were to require that all residuals and participations be included, it should not be a problem for investors.”
Selz adds, “Section 181 benefits are particularly enhanced when a film fund invests in a slate of films. In such a situation, production costs of qualifying films, which are produced later in the life of the fund, can shelter the income from earlier films as they are being delivered.
“If films are being financed partially with debt (from presales or gap financing), an investor is able to take a deduction for the entire cost of production upon delivery, including the portion financed by debt.”
And he notes, “This analysis may have helped foster the film fund agreement between CAA and Union Square, (which was) announced last July.”
(Sharon Swart contributed to this report.)