Germans learn new financing term: Equity

Int'l producers skeptical about Teuton tax finance

In Germany, the new movie money game is private equity financing.

German Chancellor Gerhard Schroeder’s cabinet approved an across-the-board tax legislation bill May 4 that effectively nixed Germany’s private tax-backed investment funds in media, shipping and real estate.

Some funds — VIP Medienfonds, for example — are still raising coin, guaranteeing money back to investors if tax writeoffs disappear.

But the effect of the May 4 move can be seen at Cannes where international producers are skeptical about the future of German tax finance.

“The jig’s over in Germany,” said entertainment financing attorney Jeff Konvitz. “It’s not going to be the way it was. Whether the funds are completely gone or not, the good old days are over.”

German media funds don’t want out of the business.

But exploring the next big thing, financiers and media lawyers are talking up U.S. hedge funds, or post Section 42/48 U.K. equity investment, not German equity schemes.

Fearing a German government clampdown on tax-driven investment, some fund operators — Roland Pellegrino, for example — have already swapped tax-backed for equity investment.

“Everyone is struggling around for new inventive ideas and most of them are equity based,” said Konvitz.

Some examples:

  • Traditionally using tax breaks, Apollo Media is prepping a return-driven vehicle, similar to a private equity fund, to launch late 2005/early 2006, targeting distribution or P&A, whether tax advantages are withdrawn on not. It aims to raise a double-digit million euro sum for international non-studio and German product.

  • Film Development, an Austria-based company run by MD Steffen Aumuller, is looking to raise $65 million-$200 million from the creation of private equity investment companies, Aumuller said at Cannes. Coin would provide completion finance for film and TV across a range of product. (Film Development’s scheme would target far richer private investors — think sheiks, not dentists — ploughing several million dollars of equity into a fully established film company rather than a project or slate. Investors risk loss.)

  • Victory Film Production and Distribution has recently pulled down investment by transforming single investors into projects’ producers and owners.

  • Wolfgang Esenwein, who set up Studio Hamburg’s WorldWide Pictures equity fund in 2001, recently launched Motion Picture Invest, a private placement investment firm to back international feature films. He is financing an undisclosed $23 million studio film with the help of one Hamburg-based investor.

“Of all new options open to the funds, the most popular will be private placement targeting high net-worth individuals,” said media attorney Siegmar Pohl at Hammonds.

Trouble is, per most insiders consulted by Variety, these risk-exposed private placements will in no way prove to be anything like a real substitute in their financial scale for Germany’s highly advantageous tax-driven film finance.

In 2004, German tax funds raised an estimated $1.89 billion, 90% of which was used to fund studio or international indie movies.

“Most small investors were in this for the tax breaks, not the movies. Their money will now go elsewhere,” said Sytze van der Laan, head of Studio Hamburg Production.

The conservatives may win a crucial election in North Rhine-Westphalia on Sunday. Then, emboldened, in a show of strength, they could block Schroeder’s tax legislation’s passage through the opposition-dominated upper-house Bundesrat.

That’s a long shot, however, say most fund managers.

And even if they are reprieved, the tax funds would most probably be downscaled for U.S. movie financing, introducing a German film spend. And that’s really worrying.

“If you remove the U.K. and the German tax and subsidy mechanisms without the substitution of new pure equity structures, or a greater involvement of U.S majors and mini majors in the acquisition process early on, you will be dealing the independent film financing a major blow,” Konvitz said.