OC T O B E R 2 0 1 1 description have been done during this latest film-financing capital cycle, and they’ve frequently involved hedge fund managers, investment bankers, private equity fund managers and other alternative investment types. In fact, it’s these finance industry players that characterize the latest capital cycle (which dates to roughly 2004) and distinguish it from previous cycles. But before we continue, a word on previous cycles. Like cinematic movements, film financing seems to come in waves. A former hedge fund manager, who has extensive experience in the filmfinancing field but prefers not to be identified, summed it up this way: “If you go back 30 years, you see the Japanese coming through; 20 years ago, insurance companies; 10 years ago, German film funds who had tax reasons for investing in films; and then this last decade, it’s been hedge funds, largely.” Each investment wave has its own characteristics. In the early ’80s, much of the investment was tax driven: investors could purchase films as they were being completed and effectively lease them back to distributors. They could accelerate the depreciation and amortization of the asset just purchased to defer income and other taxes. Insurance companies, during their Hollywood period (roughly the early ’90s), offered to insure gap loans on films. Banks would provide gap financing to producers, then insure the loans in case sales targets were missed and producers couldn’t make good. Emboldened by their insurance policies, banks increased the gap loans to as much as 50 percent of film budgets. Many films failed to reach their sales targets, many insurance companies were called in to repay loans, some litigation ensued and, as a result, insurance-backed gap financing has become more rationalized since the height of the market. Past cycles have also been characterized by public underwriting. The German government, in response to the increasing domination of the U.S. studios, developed a public market in tax-shelter vehicles — the NeuerMarket —which raisedmoney from wealthy German investors. Large German film funds like Helkon and Kinowelt invested hundreds of millions of dollars in independent production companies like Newmarket and New Line Cinema. The funds sprang up like mushrooms, their trading prices soared, and then in 2001, the Neuer Market melted down, a victim of bankruptcies and insider-trading scandals, and with it went the film production financing funds. The collapse left major studios and large independents looking for new sources of production financing. And that brings us to this latest filmfinancing cycle. Between 2004 and 2008, an estimated $15 billion was invested in slates of films. Players like Merrill Lynch, Credit Suisse, Deutsche Bank, Goldman Sachs, Citigroup and JPMorgan all arranged co-financing deals with studios raising money from hedge funds and private equity firms. The players were mostly U.S.-based and mostly on Wall Street. The financial crisis had its effect on this sector, like all others, but after a lull, money is once again flowing back into the film industry. It should also be mentioned that, through all financing cycles, there’s one group of investors that can always be counted on: People using methods of analysis that don’t relate to the statistical success rate of films, i.e., my daughter is in the film, my son has always wanted to be a film producer, my son wrote the script, my wife wants to be a movie star. Such investors go into the business for emotional reasons and often end up with an enormous pile of burnt cash. Film financing is a complex business that requires good information, strong experience and a balanced approach that avoids emotion about being in the business. It is not for the faint of heart. So who is it for? Film investors fall into three main categories: First, there are “angel” investors — family and friends of the filmmaker who invest for other than strictly financial reasons. Second there are those who think they can “beat the house” by picking better films. The third category of investor is able, by virtue of scale of investment or some other means, to truly diversify across a number of different investment opportunities. This investor looks at films the way others look at real estate — knowing many things could go wrong, but that if he’s truly diversified and invests on a significant scale, and is very diligent, then over a reasonable period of time, he’ll reap a “very handsome return.” Which is basically what the studios do — although even the studios get it wrong. Producers have a number of ways of financing their films. First, and most basic, is equity: this is the earlystage financing that turns a script into a film in progress. As with much (Continued from Cover) Film Financing Models (Continued on Page 52) V I D E O • A G E 50
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