AFM: Independent Financing Evolves, Adapts to New Market Realities

With tried-and-true film financing models now far from reliable, with digital platforms offering a double-edged sword of bigger buying with aggressive competition, and with economic volatility overseas, many experts say global independent film financing is riskier than ever.

“We’re in a period of uncertainty, both domestically and internationally,” says IM Global CFO Miguel Palos, who’ll be speaking at the American Film Market’s Nov. 4 global film financing panel, the 360 View, which features industry heavyweights like Weinstein Co. COO/president David Glasser. “In the U.S., you [used to be able to] say, ‘If my budget is $30 [million]-$35 million and I spend $20 million on P&A, I’ll get a minimum amount from home video and a minimum MG from certain territories.’ Now Netflix, Hulu, Amazon, and others are creating so much content that it’s difficult to model out what return you’ll get on your investment.”

But these new realities — and the ways buyers, sellers, and financiers are adapting to them — shed light on where the market is heading and some possible ways to navigate it.

Though the landscape is shakier, some experts note that the opportunities are greater than ever. “Independent financiers are now instrumental in the underwriting of almost every kind of movie inside and outside of studio slates, and more often, they’re the originating financiers who greenlight many of the most successful commercial films,” says CAA’s co-head of film finance and 360 View panelist Micah Green. “That’s a pretty radical change. And every few years, you see studios acquire a content provider outright. This is not what the business looked like 10 years ago.”

Indeed, many studio releases that aren’t sequels or franchises — from “The Revenant” to “Sausage Party” — originate at companies like Annapurna, New Regency, RatPac, FilmNation, Black Label, and Cross Creek.

Yet the increased risk Palos and others cite is moving financiers to focus on either $10 million-and-under films, to partner with studios on select features above $60 million, or to try for projects in the $25 million-plus budget range, “where you can hopefully cover the majority of it from international presales,” Palos says. “Budgets are probably lower now for international distributors, and how much product they can acquire [has lessened].”

An informal survey of sellers points to some of the top buyers in key international territories: eOne in the U.K., Australia, and Canada, StudioCanal in France, Germany, and the U.K., along with several other well-capitalized distribs such as Universum, TeleMunchen, and Constantin in Germany, Metropolitan and SND in France, Roadshow in Australia, Elevation in Canada and Entertainment Film Distributors in the U.K.

“In a lot of cases, we’re selling to studios’ international divisions, whether it be Sony or Universal or Disney,” says Solution Entertainment Group co-founder and 360 View panelist Myles Nestel.

“China is obviously much more important,” Palos says, “and even though you get a smaller percentage of the box office with what the government gets to take, it’s only growing.”

Another trend is a move away from selling finished features at festivals. “There are now lots of buyers for quality independent films — every major studio, specialty divisions, independent studios, the major digital platforms, and [even] a host of independent financiers who now acquire movies for release,” Green says. “Most of these companies approach slate-building in an opportunistic way, finding their way into projects at every stage. Most buy completed films, [but] some of them finance and produce, and more are pre-buying during the production stage off of promo reels and selected footage. For agencies in the movie packaging/financing business that are able to transact with distributors at any point in the life cycle of a film, it’s a great paradigm. We’re doing distribution deals on a weekly basis.”

One producer/financier taking a new approach to the way they do business is Sidney Kimmel Entertainment. “When I started here 2½ years ago, there was seemingly one way we made films. We fully financed them and didn’t need foreign pre-sales in order to [get] cash flow, or need to sell them for distribution to greenlight them,” says SKE production president Carla Hacken. “That’s all still true, except now it feels like each movie has a creative personality where you think, ‘There are only three distributors that make sense, so shouldn’t we get one involved [early]?’ Or, ‘The gap funding is a bit scary — maybe we should take on a partner?’”

To that end, SKE, led by prez John Penotti, enlisted OddLot Entertainment late in pre-production on their pic “Hell or High Water” to bolster the film’s budget. And they’re now partnering with Amazon to co-finance the Ben Stiller-toplined Mike White comedy (produced with Plan B), “Brad’s Status.” For a fee, Amazon will set up a service deal with a theatrical distributor, “and the way we’re doing P&A with them is different from anything the company has done before,” Hacken says.

As for new trends in film financing, Nestel says while the basic formula has remained the same — a combination of debt and equity from P&A lenders, mezzanine lenders, and money providers — “there are several new mezzanine players in the marketplace who are taking a more aggressive position than traditional lenders like the banks would.”

He cites VX119, Aperture, Prescience, and Silver Reel as some of the key players who’ve made it a bit easier to get films off the ground.
You can also expect to see a growing reliance on incentives. “They can finance anywhere from 20%-40% of a film’s budget, so they’re still a big motivator for driving where productions go and how they get funded,” says EP Financial Solutions exec VP Joseph Chianese, who’s moderating the 360 View panel. He notes that there are some 35 U.S. jurisdictions and more than 50 countries offering them.

“Any producer looking at a program has to think about an incentive’s certainty in the law, in the process, and in the funding, to be sure the state or country actually has the money to pay you,” he says.

California, New York, and Georgia are now among the top choices due to their incentives and infrastructure, and he’s also witnessed a recent trend of producers heading to Canada to take advantage of a 20%-25% benefit based purely on favorable exchange rates, on top of federal and provincial incentives.
Chianese doesn’t forecast any real impact from Brexit on Brit productions until 2019.

“I don’t think it’s going to hurt U.S. productions going there — it may ultimately help them — but it could impact the U.K.’s co-production treaties with other European countries,” he says. “The big unknown is China.”

He sees Dalian Wanda Group and the Qingdao municipal government’s new 40% rebate (offering $750 million over five years to attract productions) potentially impacting U.S. productions that might otherwise go to Canada, Australia, the U.K., and other top areas with incentives.

The much-discussed emergence of Netflix and other high-end digital platforms has proven to be a mixed blessing.

“As the foreign markets continually contract and pre-sales become harder, a lot of independent films are now being picked up by Netflix and the like, which is really opening things up,” Nestel says. But these outlets sometimes make it harder for features to get made in the first place. “Everyone wants the same actors and a lot of them are doing TV, so with the proliferation of [higher quality] TV programming, it becomes harder to cast and finance these movies.”

They are also major new rivals for spec scripts. “If they subscribe and watch a few shows, Netflix can predict what audiences want next, so it makes it difficult to compete when we don’t have the same information as they do,” says IM Global’s Palos. “But they’re definitely a good content buyer and looking to expand their audience — we’ve noticed that on our Latin American and Chinese films, Netflix is looking at things that you wouldn’t necessarily think were up their alley. My experience has been that if you have a film at a certain price, you can get a finite investment return by flipping it to them.”

That creates a new dilemma for financiers and producers. “Filmmakers get a buyout of the backend because there is no backend,” says Hacken, who hasn’t been involved with any Netflix deals yet. “That’s great on the upfront, but it’s not the same thing as making a feature that’s definitely going to come out theatrically. At the same time, I have great respect for the quality of the material they’re making.”

Netflix is a much-appreciated buyer, “especially with U.S. distributors that have gone into bankruptcy in the last few years, and in this tumultuous period where you’re not sure if companies are going to be able to continue their services,” Palos notes.

An even bigger question several industry vets bring up is the potential impact of Netflix and others’ worldwide deals on foreign territories, especially as their platforms expand at the same time that local ones emerge. Sellers are keeping an eye on this, but don’t expect a clear picture to emerge for at least a couple of years.

The ways financiers and sellers are adapting reveal growing trends in global financing: more co-funding partnerships, more companies developing TV divisions, and a greater emphasis on developing projects with international appeal.

“Producers have to be open to change, take more risks, create content that’s not as U.S.-centric,” Palos says, “and not necessarily follow traditional models over the next few years, since things are up in the air.”

 

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