Hollywood’s Next Round of Financing
By: Julia Boorstin, Dec 13, 2011
As the year draws to a close it’s more clear than ever that the era of mega slate deals funded by Wall Street is coming to an end. Studios simply no longer rely on Wall Street for co-financing: investors in Paramount’s “Melrose 2” fund are suing the studio over fraud and unfair business practices and Sony’s deal with hedge-fund backed Relativity expires in April.
After $12 billion plus — mostly from private equity and hedge funds — poured into Hollywood between 2005 and 2008, since then that number has shrunk to just $2 billion, according to Clear Scope Partners.
Why the decline? It can partly be attributed to Wall Street trends — private equity investors have less capital under management and can’t access the high leverage that was easily available in the last decade. Plus, many deals didn’t yield expected returns. The industry has struggled with DVDs’ decline and always-unpredictable box office results. But that’s not all: investors failed to secure favorable terms — bearing the weight of studio fees and the fact that they often couldn’t participate in studios’ sure-thing blockbusters.
Clear Scope Partners Clark Hallren estimates that over 80 percent of transactions disappointed investors. And he tells me that even deals that did work out won’t necessarily bring investors back — he’s had a number of people who turned a profit tell him that they feel like they just got lucky.
Wall Street’s financing pull back has impacted Hollywood studios — they’ve brought down budgets and are cutting back on stars huge paydays. Plus, they’re simply producing fewer films.
But there a slew of *new* investors looking to pump hundreds of millions of dollars into movies. The next wave of money is coming from overseas. Sources tell me investors from Saudi Arabia, Abu Dhabi, India, Russia and China are each looking to invest hundreds of millions of dollars into movies. We’re seeing a growing number of these overseas deals. We’ve already seen some of this overseas money: In August Hemisphere Fund, which is backed by a Korean company and two Japanese companies announced its investing hundreds of millions of dollars in a dozen tent poles, starting with Sony and Paramount films including Smurfs and TinTin. And in June, Legendary Entertainment struck a deal with Chinese investors for co-productions.
The foreign money, more often than not, comes with strings attached — requirements for local production or local distribution rights, or limits on the type of content. But that can work in US production companies’ favor, as we saw with Legendary. Its China deal allows the company to circumvent China’s limits on the number of foreign films that can be distributed in the country, allowing it to tap into the fast-growing Chinese movie going market.
Another source of Hollywood money: high net worth individuals. Wealthy individuals have a history of financing artier fare — eBay billionaire Jeff Skoll focuses on movies with a message. He financed “Good Night and Good Luck” and “Syriana.” But now we’re seeing the shift to studio tentpoles. Larry Ellison’s son David Ellison has a $350 million fund at Paramount which is co-producing the likes of the upcoming “Mission Impossible: Ghost Protocol.” But Ellison isn’t passively investing as many hedge funds did — he’s a producer of the films.
The new money flowing into Hollywood is unlikely to add up to the $12 billion we saw in the last decade, but as always seems to be the case with Hollywood, there’s no shortage of interested investors. The question for studios is just what kind of terms they’re demanding.