Forrest Capital Management

Structured Media Finance

Apr

28

Investment in Film

By ddelpercio

Like most other areas of high finance, film financing seems to come in waves. On an international basis, if you go back 30 years, you

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see the Japanese coming through in film investment; 20 years ago, insurance companies couldn’t get enough of it; 10 years ago, German film funds who had tax reasons for investing in films; and then this last decade, hedge funds have become the drivers. The UK currently has the popular “EIS” or, “Enterprise Investment Scheme” – commonly used in film finance.

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 lease them back to distributors. They could accelerate the depreciation and amortization of the asset just purchased to defer income and other taxes. There was a significant DVD market as well as a well developed rental channel.

Insurance companies, during their 1990’s Hollywood period 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% of film budgets. Many banks even opened film finance subspecialty departments.

The German wave was underwritten by the German government, which developed a public market in tax-shelter vehicles—the Neuer Market — that raised money from wealthy German investors. Large German film funds like Helkon and Kinowelt invested hundreds of millions of euros in independent production companies like Newmarket and New Line Cinema. The Neuer Market melted down in 2001, due to a

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spate of bankruptcies and insider-trading scandals – this collapse took the film funds with it when the well of funds dried up. The collapse left major studios and large independents looking for new sources of production financing.

Fast-forward to today: between 2004 and 2008, an estimated $15 billion was invested in slates of films. Financial powerhouses 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 are mostly U.S.-based and mostly on Wall Street. The financial crisis chilled the sector somewhat, but money is once again flowing back into the film industry.

Through all of the cycles of financial investors, there’s one group of investors that can always be counted on. These ‘investors’ are people “using methods of analysis that don’t relate to the statistical success rate of films,” – ‘Vanity Investors’. “My son is in the film”, “my son has always wanted to be a film producer”, “my neice wrote the script”, “my wife wants to be a movie star”. Such investors, he says, go into the business for “emotional

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