FMP will be at Cannes from 16 – 27 May. More details will follow, including information about a cocktail reception on board our boat.
Film Production Investment Strategies
Forrest Equity Management is preparing to launch a second round of finance for its new film capital fund. The fund will provide a mix of equity/debt finance to independent productions with budgets under $12/$15 million.
Don Bailey and Leslie Sheldon are off to LA from 4 – 11 March; for a series of meetings.
They are looking for co-finance and co-production partners. Forrest Motion Pictures is also looking to open an office in LA and will be back in the summer. During their stay in LA, Don and Leslie will be at the Film Finance Forum West at the Hollywood Roosevelt Hotel, hoping to meet old contacts and make some new ones.
Producers have a number of ways of financing their films:
- Equity. Equity turns a script into a film in progress. If an intelligent approach is maintained, Equity investors can see spectacular returns. The most famous example of such was The Blair Witch Project. This film was made for only about $60,000 by rank amateurs and went on to gross $249 million worldwide. Of course, such spectacular successes are not the rule, the potential in the film industry can surprise investors with blockbuster dynamics
- Senior Debt. Senior debt accounts for a significant portion modern film finance. Traditional providers of senior debt (such as JPMorgan Chase) require a security interest in the film and all revenue streams associated with it in priority to equity. So, before a film is completed, a producer might sell the distribution rights (including theatrical, home video/DVD, pay TV, free TV and other rights) for various countries. The producer can then use the value of these contracts as collateral against a production loan from a bank.
- Soft Dollars. ‘Soft dollars’ or tax credits for shooting your film in a certain state or country. Some years ago Germany offered such financing on their Neuer Markt – now, the UK has EIS (Enterprise Investment Scheme) which are often used in film finance.
In the USA, some states (Connecticut, for example) offer tax credits, but the film must actually be produced in that state, and the producer can only get the tax credits after documenting such. Some creative directors have tried to swap the right to the tax credit for cash that can be used to further finance or finish the film. To sweeten the deal, the producer/investor could ostensibly sell the tax credit at a discount. For this sort of deal to work, credits must be transferable—no financier will be interested if the rights can’t be assigned directly to him. The Connecticut tax break could only be used by a corporate tax payer with a tax obligation to the state.
Pennsylvania had a simliar scheme which would actualy cut you a check upon submitting expenditure documentation.
- Print and Advertising Financing. The typical P&A budget today can be equal to the film budget, if not higher! Such financiers can provide millions in senior debt at rates as high as 20%. P&A Financing has no security – more risk traditionally equals higher rewards. The rights in the film are not the security, but the debt is senior by virtue of the order of payment, which is effectively like being senior secured in that the revenue from the film—after the distributor is paid—pays P&A first. Last in, first out.”
- Slate Financing. A slate of films, as it’s called, is the safest way that investors can hedge their bets, as there is no 100% guarantee that a single film will be profitable.
Hedge funds and other investors entering the film-financing world decided to create their own slates. Slate financing is a “term of art” for a financing arrangement in which an investment group provides capital to film fund for financing a slate of films in an effort to spread risk.
Slate financing funds can offer senior, mezzanine or equity packages, depending on investor risk appetite.
Product Placement. Producers can also earn money from product placement (imagine having the rights to Mickey Mouse dolls, Darth Vader products, etc.).
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 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 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 reasons” and often end up with “an enormous pile of burnt cash.”
Leslie Sheldon and Don Bailey of Forrest Motion Pictures (FMP) will be at AFM 3-11 November.
Forrest has launched its first film fund with plans to add two more funds this winter. We are interested in meeting producers/directors with independent film projects in an advanced stage: such projects must fit commercial/popular genres, have their director and A/B cast committed and a budget up to $ 6million/£4 million.
We also wish to meet finance/investors, principals only/no intermediaries.
Forrest Motion Pictures plans to close its first fund by the time of the AFM. The ‘fund’ shall include three films, two American and one British. Two of the films are psycho-thrillers and a third is a comedy. The investors are well-known to the film and finance communities an official announcement will be made at AFM in November.
Two of the films feature first time directors with considerable experience which fits in with the Fund’s remit.
The films will be shot on the west coast of the US and in Canada.
Casting is almost complete.
The Motion Picture Association of America still has no clear front-running candidate for the position of Chief Executive after Dan Glickman resigned after his five year tenure at the helm. It has been difficult to identify star candidates for this very high profile position, even though it has been well-known for over a year by industry mavens.
The Motion Picture Assn. of America is the main lobbying organization for the six major Hollywood studios. They oversee the movie and TV ratings systems widely used in the USA.
Glickman was a Hollywood outsider – a former congressman from Kansas and secretary of Agriculture. He succeeded Jack Valenti, who led the MPAA for almost four decades and a high profile and well known presence in both Hollywood and Washington.
The Cannes Film Festival will be held from May 12th through May 23rd of 2010 – We look forward to seeing you there. Contact us to coordinate an activity, lunch or meeting.
We would like to thank all of our guests, partners and contacts who joined and/or met with us in Berlin for helping make this year’s visit to the film festival a success. We look forward to meeting up with you at the next Berlinale!
Leslie Sheldon and Don Bailey of Forrest Motion Pictures were in Berlin from 11 – 17 February for Berlinale. Phillida Langley of Baker Street International was there from 12 – 15 February.
The people from Forrest Motion Pictures have met with investors, distributors and producers with developed projects. The focus was be on film fund No.2 and its new film finance service based on the cash flow of tax credits and gap finance.
After Berlin, Leslie and Don will, both, be going to Cannes where it is expected Forrest will make some major announcements.