Hedge Funds May Go Cool on Film
Hedge funds and investment banks have been courting Hollywood with big money deals over the past couple of years Now though, rather than just lending to the studios, they are betting on a share of potential box office hits by investing in a share of film revenues.
The Lexington Film Fund recently brought this concept to Britain. The fund is headed by writer-director Gregory Mackenzie and former Morgan Stanley analyst Brett Walsh, Lexington will provide funding for films in their early stages in return for a share of later profits.
It has gathered £500,000 (E730,973, $920,456) to fund British films and plans to return between £1m and £3m by the end of June.
Every big Hollywood studio strikes deals with private equity firms. These agreements represent around $2.7bn and are raised mainly from hedge funds such as Stark Investments and Bank of America Capital Investors.
Returns on films are around 12% annually and one huge hit could double returns, but even with modest success at the box office, there is money to be made from films and the movie business offers an investment that won’t rise and fall with markets.
But it is a fickle business and there are concerns among investors that some film investments could be a gamble too far for hedge funds. Also, development of new distribution channels means box office returns and DVD sales may well decrease, because the public is unlikely to pay £8 to see a film they can download for far less.
From the investor viewpoint, what may be worse is that studios are often unwilling to put guaranteed hits on the table. The $264m agreement Legendary Pictures has with Warner Bros deliberately excludes the Harry Potter franchise. Warners get to keep all the profits there.
Legendary, which has just agreed a five-year deal with Warner Bros, argues that advanced computer software can predict films that will make money. Its first choice, 2005’s Batman Begins, was made on a $150m budget and generated $372m in ticket sales.
But given the shifts going on in the marketplace, hedge funds are more likely to think much more carefully before putting more of their investors’ cash into film.