Tag Archives: equity investors

Black Box Dealmaking

"RFID closed" by AMagill

Over the past 18 months, I’ve watched countless film projects rise, flounder and fall with the promise of financing. The prevailing wisdom is that things have gotten so bad with oil, gas and real estate investment that film finance actually looks like a safe bet for equity investors. Oh, if it were only so. Film investment for equity players continues to be a very risky play.

Although debt financing continues to be a dim prospect, Comerica Bank, Union Bank and National Bank of California continue to back certain films from reliable players. From my perspective however, the end of debt financing of motion pictures came almost three months after the collapse of AIG and Lehman Brothers when the US rescued the bank in mid-finance of a movie I was working on. The bank ultimately financed the picture though I like to think that the collective efforts of the lawyers, the bank executives and the producers involved had a hand in getting the deal done.

Depending on the day, sheer will to make things happen is either over-rated or under-rated. And so it goes with film financing.

I’ve reviewed countless Stand By Letters of Credit (SBLC’s), real estate investments restructured for film finance, Sole Trader deals out of the UK, nine figure film funds from – depending on the day – Vancouver, Taipei, Shanghai and New Jersey and sources of black box financing where, for reasons not entirely clear to me, the identities of the investors and the financing methods used are veiled in secrecy. Not one of these sources of financing has come through. For its part, black box financing may be illegal or even dangerous. In a post-Bernie Madoff world, you just can’t leave the risk of financial games to chance. Get transparency or don’t do the deal.

Some of these prospective investors may prove to be the real deal but at best, they are all long shots. Do your due diligence so you know who you’re dealing with, the sources of financing and whether the investor is prepared to provide you with references (i.e., prior projects they’ve financed) and proof that their funds actually exist through escrow or bank confirmation. Some financiers may be more forthcoming than others and at some point, given the limited resources of time, money, knowledge and passion, you may have to go with your gut in deciding whether to proceed.

I have to believe that a number of would-be film investors are earnest and either don’t know that they don’t have money to invest or get cold feet at the prospect of closing; while others may be lookey-loos who simply want to do lunch at The Ivy and play the producer game but really don’t have any money to invest.

But still they come with promises that entice producers and other creatives. Just make sure you don’t get stuck picking up the check.

Waiting For The Dough

"Commute, N Judah" courtesy of Heather

I decided not to attend the Cannes Film Festival back in May because of the dismal economy and what I expected to be a poor showing there. I learned things were even worse than expected when my colleagues in distribution reported from the near-empty beaches of the Cote d’Azur that the bottom had fallen out of the pre-sales market.

The Toronto Film Festival was supposed to be different. Four months after Cannes, with the banks flush with TARP funds and individual investors reportedly swapping oil and gas investments for classic cars, surely an uptick in motion picture finance had to be right around the corner.

I thought that Toronto would present a sea change in the degrading economics of the business; that the credit markets would thaw; and the cash equity of retired Silicon Valley and Wall Street insiders, the Chinese, the Indians and institutional investors would make the trek up to Canada in droves.

But Toronto felt like a bad dream about a big party that everyone attends but the host forgets to cater. People took meetings, did lunch, partied, went to screenings and generally did the things one does at a film market except buying, selling and investing in films. All of the elements for a successful market were there except cash. The money, it turned out, stayed at home.

Looking back at it now, I was overly optimisitic but hardly alone in my rosey outlook.

Yes, there were well-publicized exceptions to the lack of a market at the market. However, to the rank and file independent producer, the prospects remained bleak. Although the independent film business has been subject to business cycles in the past, many I spoke with in Toronto believe that business won’t bounce back to pre-recession levels.

The Internet is the double edged sword at play in any recovery. On the one hand, the Internet provides new sources of distribution revenues through streaming and digital downloads. On the other hand, the Internet’s ability to stream content is eroding traditional exploitation windows and risks shortening the profitability period for the typical commercial motion picture.

Still, the credit markets continue to thaw, albeit slower than many anticipated. New distribution models are rapidly evolving and with it, new deal points in the licensing of distribution rights.

And . . . the American Film Market is less than two months away. Maybe, just maybe then, producers will finally be able to get the money shot that they’ve been waiting for.

The Bail Out

No matter our behavior, the economy fluctuates from boom to bust on a fairly predicable basis. However, the severity of a bust is based in part on group (read: global market) psychology and bad, unregulated choices (don’t get me started on so-called “free market” thinking!).

Right now, the group think is pretty pessimistic and we’re in dire need of the equivalent of a global prescription for Prozac. A downturn is not a question at this point; only the extent of the damage and the timing of the recovery remain up for grabs.

The bail out measure before Congress will by no means prove to be a panacea. I keep hoping they will find a better way since the legislation – despite all the money – will not alter the landscape of losses or willingness to lend. However, it will remove a barrier to lending and mitigate some of the negative thinking. So, the sooner Congress works it out, the better for all of us.

I was recently assured by an elder statesman in the business that the industry will continue to flourish as it has in prior recessions and during the Great Depression since people continue to spend on entertainment as an escape from bad news. Peter Bart smugly approved in his column in Monday’s Variety:

Compared to the turmoil on Wall Street, Hollywood seems like an object lesson in prudent management. That’s why billions keep flowing into the movie business even when other industries are starved for capital.

OK, I know that’s really not the reason. Sucker money traditionally flows to Hollywood because investors want to meet girls, attend parties with movie stars and say they’re business partners with Steven Spielberg. Nonetheless, it’s still surprising to count the big bucks involved in the DreamWorks deal or in Ryan Kavanaugh’s Relativity Media or in Media Rights Capital’s portfolio at a time when the rest of the economy is locked in a liquidity crisis.

Suddenly, Hollywood’s managers seem downright austere compared with the crazies at Lehman Brothers. And movie-star salaries are pathetic relative to Wall Street payouts.

I’m not sure I agree since the entertainment business – like most businesses – requires access to credit to run. MGM is already struggling to service its existing debt and like the banks and other financial businesses, may be unrecognizable from its present form down the road.

Even before the current market crisis, Dave McNary wrote in last week’s Variety :

Start with plenty of labor unrest, add in the global credit crunch along with the consequences of too many movies in the market, and combine that with foreign distributors getting cold feet for anything but blockbuster Hollywood product.

“Any one of these factors would depress the business, so having all of them at once was something of a perfect storm,” notes Charles Heaphy, senior VP at City National Bank’s entertainment division. “This is like being in a rowboat while there’s a hurricane going on.”

With respect to startups, Jason Calacanis wrote:

It’s my believe [sic] that the economic downturn will be much worse than it is today, and that 50-80% of the venture-backed startups currently operating will shut down or go on life-support (i.e. 3-4 folks working on them) within the next 18 months.

Make a list of every Web 2.0 startup to raise an A or B round and cross 80% of them off the list, because they will not make it to their next round of funding or profitability.

Tough times like these will require media and entertainment companies as well as startups to rethink their strategies for investment and growth for the foreseeable future.

It all sounds really, really bad.

It’s not enough that it’s hard to finance movies or a good idea; contend with getting distribution or vacillating VC’s; now you’ll have to work that much harder to even find potential investment let alone actual investors.

But the news may not be all bad. Money abhors a vacuum. There’s a lot of money out there sitting on the sidelines and plenty of people looking for places to put it; some of it from the most unlikely of places.

I’ve spoken to personal money managers whose sole duty is to make at least 20% on client money in good times and bad. Some of this money previously invested in oil, gas and securities but with these markets in turmoil, these investors are now looking for new investment opportunities. If bank financing dries up, private equity (e.g., hedge funds) – already a big player in motion picture financing – will likely replace it. Moreover, I recently had several discussions at the Toronto Film Festival and elsewhere with several emerging market financiers who all viewed the current US economic situation as a unique investment opportunity.

Let’s hope their optimism is contagious.

Smart Money vs. Dumb Money

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One of my web start-up clients recently extolled the virtues of smart money over dumb money.

My client asserted that smart money is the best way to grow a start-up. In addition to capital, smart money may provide infrastructure, personnel and the input of boards of directors and advisers. These boards provide additional expertise and guidance. Moreover the optics or perception of their association with the start-up increases the venture’s curb appeal and chances for success.

Dumb money, he cautioned, isn’t pejorative; it merely describes a cash investment with little or no oversight of the actual use of the funds other than initial approval of certain elements, cash flow and the overall budget.

To be fair, it’s like comparing apples and oranges. Smart and dumb money deals are structured in different ways to address different risks and expected returns of very different investors. Nevertheless, I was struck by the disparate thinking of movie producers and start-up entrepreneurs; film financiers and venture capitalists in their capital preferences.

My start up client preferred working with smart money from VC investors because he could leverage greater resources into the growth of his company than he could with the same amount of dumb money.

I explained that smart money is anathema to movie people unless it comes with distribution and even then, they’re never thrilled with an investor armed with approval rights over talent, budget and distribution. Dumb money shuts up and stays out of the way.

That said, we both agreed that if an investor offers up smart money, dumb money or any other kind of money, take it (provided it’s legal).