US-styled Development Fund To Back British Film
Lexington’s London push marks the latest entry of alternative investments into the business of financing films, a niche that has exploded in the US over the past few years. For example Capote, which won a best actor Oscar for Philip Seymour Hoffman, was backed by a private equity fund.
While the moneyed classes have been drawn to movie investing since the days of Howard Hughes, hedge funds and private equity firms are a new breed. They are less interested in the patina of glamour that comes with movies and are more focused on wringing out profits from the inefficient markets for film financing.
Like many US ventures, Lexington is structured to provide tax benefits, with up to a 40 per cent tax relief from income and gains. But Lexington’s founders say they are in the business of getting movies on screen. “This isn’t about simply having a tax benefit by investing in films that will never see the light of day – we want to make movies,” said Mr Mackenzie.
Their fund is structured to profit from getting promising films out of development hell and into production. In exchange for crucial seed money to help with casting, location scouting and other early-stage matters, Lexington plans to get its investment returned in full plus a 50 per cent profit on its investment on the first day of filming, as well as a percentage of the profits if and when the film makes it to cinemas. The funding for development costs, which run far less than actual production costs, should help Lexington keeps its investments lean and efficient.
“The fund’s focus is on profiting from the inefficiencies of the system, such as when promising projects languish for lack of money early on,” Mr Walsh said. “We have found the London film community is very receptive to our model because they recognise that there’s nobody out there doing what we do.”
The initial fund aims to help provide financing for seven or eight films in the early stage of development in its three-year life. Lexington benefits from some friends in high places. The fund’s advisory board includes Edward Pressman, a producer of more than 50 films including the classics Badlands, Das Boot and Wall Street, and the well-known casting director John Hubbard. Mr Walsh noted that having industry heavyweights behind them will enable Lexington to help speed the development of films it is backing, such as enlisting Mr Hubbard to help lock in top-shelf casting talent.
"there’s nobody out there doing what we do.”
Messrs Walsh and Mackenzie, meanwhile, have demonstrated success with Golconda Films, their independent production company. Golconda has two films under way. Both, appropriately enough, feature both British and American actors in leading roles: Camille, starring Sienna Miller and Harvey Keitel, is shooting; Little Green Men, based on the richly comic novel by Christopher Buckley and with a script by Mr Mackenzie, is set to star John Malkovich and Michael Gambon.
Investing in films has always been a hit or miss affair, but massive changes that are under way in the industry have led more sophisticated investors to believe they now have a better shot at making a profit. George Lucas, the creator of Star Wars who helped form the blockbuster template, recently speculated that the blockbuster movie is dying and that low-budget films with novel financing will become the norm. Further, lower-cost digital film is increasingly gaining acceptance. These are the classic market inefficiencies that good hedge funds exploit.
Hedge funds and private equity firms have been active in Hollywood for several years – ranging from early investment funds to the recent news that the hedge fund legend George Soros is buying Dreamworks’ film library. However, London, which enjoys a robust hedge fund community that is smaller and younger than its US counterpart, has not seen the same level of frenetic activity.
Independent British filmmakers have relied heavily on the government-backed Film Council, but Mr Walsh suggests that Lexington may help kick-start a growth in alternative sources of capital for UK filmmakers.
While the duo behind Lexington are clearly interested in turning a profit for investors, Mr Mackenzie adds they are also interested in quality. “Part of the reason we started this was to find a way to profit from ensuring more good movies get made.”
See Also: Film Angels Fly a New UK Investment Slate