Confab weighs the risks and benefits of making movies

As an investor in the record-breaking film “Avatar,” Chip Seelig, managing director of Dune Capital Management, could be expected to be bullish on the subject of film financing.

But on Tuesday, Seelig told a panel of Hollywood financial heavyweights that the biz is fraught with peril and “the uncertainty equals risk.”

“This business itself has never been that profitable; now investors may not see enough return to compensate for that risk,” Seelig said.

Not everyone was so glum, however, as financiers at the Film Finance Forum East at Gotham’s Metropolitan Hotel weighed whether backing movies these days is dominated by uncertainty or filled with opportunity.

During the confab, presented by Winston Baker in association with Variety, panelists did agree on one thing: the heady days of the last decade with loads of private equity funding and billions in slate financing are long gone.

The financing drought of the past two years is seeing some improvement, said Marshall Sonenshine, chairman of Sonenshine Partners, a boutique M&A firm. “I see a clearing,” he told the more than 100 attendees. “But we are not Pollyannas here. This is still a difficult category.”

The landscape that potential financiers see today is very different from the one just five years ago. Studios are releasing far fewer movies, the capital markets are still in repair with banks being much more selective on deals and deal terms, and the traditional windows model is in flux.

What’s more, continued weakness in the DVD markets, over capacity on the production side and uncertainty about whether web models will be a real business has left lenders skittish. “And who knows? One day the goal may not be to get to the big screen first,” Sonenshine suggested.

Yet for every bear, there is a bull, and that came in the form of Ryan Kavanaugh, the founder of Relativity Media, who sat on the same panel as Seelig. He said he is seeing a lot of new interest from venture funds and high net worth individuals. As far as the uncertainty about new business models in Hollywood, “I see it as opportunity,” said Kavanaugh.

He conceded it was a tough business, where you can see at one moment 10% declines, and the next 25% gains. “It’s a capital hog,” Kavanaugh said. “You can lose a little, or make a lot, or lose a lot and make very little. It’s (about) timing. The longer you are in the business, the less volatile it becomes.”

While foreign money may offer hope, particularly in Asia, financiers in those countries are showing less interest in Hollywood. “There is an extraordinary amount of capital flying around in Asia,” said Stephen Scharf, a partner at the law firm of O’Melveny & Myers, “but it’s mostly for Asian product.”

Premila Hoon, managing director of Entertainment Capital Advisors, said she had just gotten off a plane from Mumbai, which she likened to Los Angeles because of people’s interests in entertainment. “Everyone is watching very closely (India’s) Reliance’s moves in Hollywood.”

One burgeoning area of film finance is investing in the marketing side of movies, P&A, by big consumer brand companies. Instead of investing in product placement and writing it off as marketing expenses, in theory those companies could see actual returns on certain investments.

“That’s like manna from heaven for them,” said James Clayton, chief executive of Ingenious Media Investments, one of “Avatar’s” investors. “In practice, however, it is very hard for (those companies) to take the step.”

Robert Friedman, a former executive at New Line Cinema and now president of Radical Media, said brands will be what matters most in the future of Hollywood.

“If content is king,” said Friedman, “then brands are the palace guards. It is what will separate you from the clutter out there. What matters most to consumers is not the box, or the device, it is what is coming through on the box.”

In the end, risk has always been part of the equation for film financiers. Why so many banks and investors are sitting on the sidelines now is “not about risk,” said Patrick Russo, a founding principal of strategic advisory firm The Salter Group. “It’s all about the scarcity in liquidity. The pendulum will swing back.”

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