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The Context of Innovative Film Finance
You have a great script, right? You have an incredible director, cast and team, right? You’re passionate about making this film, right? Sounds like a slam dunk, right? Wrong! You still need the money! (And, in an ideal world, the distribution to pay it back!) Well, you ask yourself… How tough can that be?
Today, with all these digital technologies, it’s cheaper to make a film than ever before, not to mention distribute one. Additionally, in today’s fragmented marketplace, it’s easier to find an audience for your independent movie than ever before. Assuming you can make your movie at a cost and deliver it to your potential market, should raising money for an independent movie be the science that financiers and investors make it out to be? And if you couldn’t meet the above assumption, doesn’t that make the investment decision even less of a “science?”
Of course, we’re talking about film—an asset class known to defy all logical reasons for investment. So herein lies the challenge: Finding “smart” money to defy logic and make the characteristically “dumb” decision to invest in film. (And, of course, finding the “dumb” money to continue to invest in it.)
Okay, so the above shouldn’t be news to you… Everyone knows how damn hard it is to raise money for an independent film. After all, aren’t you really asking smart money to behave in a dumb way, or hoping to find dumb money to continue to behave dumb? Both seem like hoping for a miracle, but the latter might seem more plausible in light of film’s historical attraction to “dumb” money. Nonetheless, over the last five years, a boom in the private equity and hedge fund industries has suddenly made film an extremely attractive asset class for “smart” equity investors.
Since August 2004, over $10 billion in capital has been committed to co-finance films, albeit largely studio films. While some of this capital came in the form of debt, a significant portion is equity or an ownership position in film. Is there something moviemakers can learn from these deals that can help them develop innovative ways to finance their own films? After all, understanding what attracts smart money to a traditionally dumb investment opportunity can only bode well in understanding what might attract even more dumb money to the asset class moving forward—understanding, of course, that that the nuances of independent films make the investment decision even riskier than studio films. Independent films, after all, have no dough for the talent traditionally driven to studio films… and the talent that traditionally attracts mass market audiences. In any event, there are lessons to be learned from the evolution of film investment that provide the context to develop the art of film finance as something that is capable of defying the logic of film investment.
Context: The Evolution of Film Investment
Third-party financing began in the 1970s, when unique tax incentives within the U.S. tax code made it attractive for studios and individuals to engage in limited partnerships. However this specific method of financing basically went away in 1986 due to tax reform.
The next wave of capital came from large pension funds and insurance companies. Almost all of their investments were in the form of debt. This continued through the 1990s and into 2000. Along the way, there was an increase in foreign investment in the U.S. film industry as investors sought to take advantage of our tax credits. For the most part, before the influx of private equity/hedge fund money, film co-finance deals where really only attractive to investors seeking a tax advantage or large risk averse institutions (debt). This dynamic has changed recently for a number of reasons.
First, the private equity and hedge fund industries have grown exponentially over the last five years. These investors have been forced to be more creative and aggressive in sourcing interesting investment opportunities. Across the industries firms are dealing with significantly more capital than they have had in the past and they are doing so in a much more competitive environment. As a result, firms have had to pay higher prices for deals in order to have sufficient deal flow. As capital continues to become available, private equity and hedge funds become “commoditized.” Recognizing this issue, investors proactively began to pursue industries that had historically not absorbed significant amounts of equity capital with the rationale that they might offer better opportunity. Film was initially thought to be an ideal target.
As is highlighted above, with little equity capital being committed in the past there were no private equity firms or hedge funds with deep roots in the industry. Furthermore, the film business is capital-intensive in nature, which bodes well for investors looking to deploy sizeable amounts of capital. One of the biggest concerns for funds going into new industries/market is whether the investment potential of that industry is large enough to really support the effort. Firms do not want to commit to networking and learning a new industry if their investment would represent only a small percentage of their overall fund. The film industry has an almost limitless need for capital so there was a logical marriage from that perspective.
Finally, a collective belief was formed within the film and investment communities that you could apply the “portfolio theory” to films. Slate financing, for instance, are now commonly sliced into a variety of different branches allowing for a variety of different investors to participate. Deals have also involved larger slates providing greater diversification. This portfolio theory approach has helped private equity firms/hedge funds become more comfortable with film as an asset class. With fewer capital inflows, a large appetite for capital and frameworks for higher risk-adjusted returns, the film industry seemed ripe for increased attention from external capital sources.
Even though demand has increased and investors have become increasingly sophisticated in their approach, significant risks remain. First, there is the issue of information as studios control the lion’s share of data on film distribution, P&A and other ancillary costs (much of which is not publicly available). It follows that it is therefore extremely difficult for private equity firms or hedge funds to monitor how efficiently capital is being put to use across 20 to 25 films. Minor changes in areas like P&A or distribution, or the positioning of those items on the cash flow waterfall, can lead to dramatic swings in returns.
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COMMENTS | POST A COMMENT 
- Comment by Flood Damage on 12/02/08 at 9:38 am
My 18 year old son is in film school right now. I wanted him to follow his dreams, but the thought of him having a viable career concerns me. I know he is talented and smart, but producing quality films and finding investors will be tough.
- Comment by Mortgage Advisor on 12/17/08 at 11:29 am
Its even harder to raise finance now we have had the world credit crunch. Creativity will always be curtailed by the cold world of business and finance. Good luck with the porject
- Comment by yuri rutman on 1/13/09 at 2:41 pm
With hedge funds and senior debt vanishing, more film makers will either have to rely on Robert Rodriguez-esue budget films (ala El Mariachi) or use CPPI and Section 181 benefits for larger private equity backers
- Comment by Council Mortgage on 8/13/09 at 2:34 am
Good luck with raising the finance.
- Comment by rentenversicherung on 12/02/09 at 7:24 am
Perhaps the city pension fund board came to the conclusion that the only way that they could make this work was to invest in risky investments. It probably would not have worked any other way. So basically they rolled the dice and are hoping that they win. However there is a much bigger chance that they will loose. I don’t think it is ethical since it is risky but business is business.
- Comment by Okey oyunu on 5/12/11 at 7:10 am
Okey dünyanın en zevkli oyunlarından birisidir. On binlerce üyenin bir arada buluduğu okey oyunu dünyasına katılmak, artık çok kolay. Ücretsiz olarak okey oyunu oynayabileceğiniz mükemmel bir site sizleri bekliyor. Sizde hemen http://www.okey-oyunu.com adresinden oyunu indirebilir ve muhteşem okey oyunu dünyasına katılabilirsiniz. Online olarak dünyanın her bölgesinden insanlar ile kıyasıya mücadele içerisine girerek, kendinizi ispat edebilirsiniz.
- Comment by AllanBrouwer on 6/30/11 at 8:24 am
Making a film is indeed a big investment but I always thought that it is a constructive thing to do since I consider it art. It takes a lot of time, money and knowledge on how to invest your financial resources. I have read some tips about making these kinds of investments, I have become very interested in it and found information on Online Forex Broker and other websites.
- Comment by SinCityFinancier on 7/19/11 at 11:45 am
It’s not that there is no money out there but the rules are shifting in favor of the P/E and other funding sources after taking a beating from sloppy “Hollywood accounting” practices. We list 400 finance topics/sources on http://SinCityFinancier.posterous.com
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This story was published in the Guide to Making Movies 2007 MovieMaker Magazine. The headline was:
Dumb and Dumber/The Context of Innovative Film Finance
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