Movie funds in Asia on the decline

Private-sector plan has failed thus far

Movie investment funds in parts of Asia outside South Korea have so far failed to live up to their hype. In the past year, plans for a half-dozen private-sector funds were announced, but few have completed raising the finance they sought. Fewer still have yet made an impact on the movie industry.

Those that made public launch announcements include Ambassador Media, Magnet MB and A3 Intl. Others such as Australia’s Macquarie group kept their fundraising exercises more closely guarded and principally addressed the financial community without flashy announcements. But for both contingents, triumphal press statements announcing that coffers have been filled have been rare. The Weinstein fund, spearheaded by film mavens Harvey and Bob Weinstein and which attracted $285 million, stands out as a notable exception.

To be fair to the fund managers, equity finance takes longer to raise than debt and can easily take a year to put together — some have been in the movie finance business as long as that. The slow going stands in contrast to the case of South Korea, where between 1998 and the end of 2005, 48 venture capital funds were launched worth a combined $535 million.

The Korean funds have long been a special case. First they were locally focused, and second, they were able to participate in the Korean industry’s paradigm-shifting development from movie backwater to the region’s category leader. Today’s fund managers cannot offer that.

Moreover, the Korean funds enjoyed co-investment participation by the government’s Small Business Corp. and by the Korean Film Council (Kofic). SBC put up roughly a fifth of the VC funds’ capital and was prepared to take a greater share of losses when funds underperformed. Kofic invested $46 million in the same period on terms similar to the VC funds. (And new Korean funds keep coming on stream. Conglomerate Hanhwa barged into the media field with a $13 million punt tying up associations with CJ Entertainment, CJ Media and Yellow Entertainment. Sidus FNH and its Korea Telecom parent put together the $32 million Vanex to accelerate Sidus’ own production slate.)

Tender documents for the other new Asian funds have typically shown managers seeking to raise between $75 million and $200 million as a mixture of equity and debt. Their plans for employment of the funds raised have typically suggested a mixture of production slate funding and private equity investment in content and distribution companies. Recent months have highlighted potential snags at both fund-raising and disbursement stages.

While growth of organized private equity has fueled mergers and acquisitions booms in the U.S. and Europe and VC funds have long backed Asian tech and infrastructure plays, they have found investing in Asia’s content sector a step too far.

Reasons have much to do with trends in the capital markets and attitude toward the Asian movie sector. Conventional asset classes such as the region’s stock and property markets are booming and are easier to understand. Content funds are positioned as alternative or exotic investments.

“I spend most of my time explaining how this works to people who have never invested in film before,” says one fund promoter, who has the beginnings of a slate, but not the Weinsteins’ commitment to 21 pictures over six years. “Yet I know that many of the films will not make their money back.”

Asian corporations from outside the sector have regularly dabbled in film investment, but often on a project-by-project basis, driven by personal considerations and in a manner akin to “angel financing.”

At a corporate level, Asian movie players have been able to do without the funds and have successfully tapped capital markets through initial public offerings and takeovers.

Over the past two years Korean talent management companies and production companies floated on the local stock market, though flow of IPOs has dried up as companies have delivered uneven results or exited the market.

India has also seen a steady stream of exhibitors come to market offering investors visible cash flow, though shares have slipped in many cases. Indian content companies such as Eros, UTV and the Network 18/Viacom-backed Indian Film Co. chose to list in London instead.

For fund mangers, the recent turmoil in the world’s credit markets has made it both harder to raise the debt portion of proposed movie funds and more expensive.

While Asian economies are booming and the region still has plenty of liquidity, the instances where Asian investors from outside the sector have backed productions have often been for personal or project-specific reasons. As a group, however, Asian investors have largely yet to be persuaded that film is a serious investment proposition with measurable risk and predictable returns.

There is a sense, too, that time is running out for the Asian fund launches. “The (investment) banks tell me that we have got until the end of the year,” says one producer-turned-fund promoter. “After that the nervousness of investors outside the region will spread to Asia and the window will close.”

Peculiarities of the Weinstein fund highlight the issues for others. Coin raised was largely debt, not equity ($245 million of the $285 million total according to its documents). Fortuitously, it completed its fund-raising only weeks before the problems in the U.S. subprime mortgage sector turned into a worldwide credit crunch. Despite road show presentations that took place in China, Singapore, Bangkok and Hong Kong, most of the money came from non-Asian investors such as the Israel Discount Bank of New York and experienced film financier Comerica.

Critically, too, the fund could point to a diverse slate of movie investments with distribution in place. Lineup includes assorted rights to an already completed pic by arthouse maven Wong Kar Wai an in-production actioner with box office darlings Jackie Chan and Jet Li and “Ong-Bak 2,” with Thai martial-arts star Tony Jaa.

Other funds without that kind of slate and seeking confidence of equity investors have found it slower going.

“The structure of the funds whose documents have crossed my desk appear to be right, but for the most part they have not had a slate or only the beginnings of one,” says a leading entertainment banker in Hong Kong.

Being an end user of the content being backed puts the Weinstein fund much closer to other firms that in the last couple of years have become significant movie investors. These include Japanese advertising agency and content rights trader Dentsu, Japan’s music and talent management group Avex and Taiwan’s CMC, a disc manufacturer that is invested in mainland Chinese movies including Chen Kaige’s “Mei lan fang” and John Woo’s “Red Cliff.”

The most notable exception to date has been Fireworks Intl., an operation launched by Dutch bank ABN-Amro. The company has backed South Korea’s Taewon Entertainment with share purchases and co-investments and taken a controlling stake in Hong Kong free-to-air broadcaster Asia Television. Likely to move into music too, Fireworks’ managers promise not to be passive investors, but to act more like private equity firms that implement operational efficiencies and seek synergies between its holdings.

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