The World Bets On Hollywood

Signs are going up around Santa Monica for the forthcoming American Film Market (AFM) in early November. It’s always a time to rev up the juices and think of the great big world out there. Whether you’re talking foreign movies or not a great big part of our business is international these days and we’re well aware of it. We’re currently talking to potential fund partners in Japan, China and SouthEast Asia as well as Europe, aiming to co-manage money from investor sources close to home for them. They’re all seeking international exposure to the Hollywood movie machine, not just for the chance to own distribution rights in their territories, which some traditionally are, but to take the chance to make real money from investing into a bunch of assets that play all over the world.

There may not be another asset class in the investment world quite like the movie sector, which is currently expanding rapidly, selling more product to more people in more different places each year, and expanding exponentially the formats that enable consumers to watch movies. In a portfolio management sense the movie sector is non-correlated, meaning it doesn’t suffer from fluctuations in conventional investment markets, as has been proven lately. It’s certainly a great investment prospect, but we also like to think that participants all over the world are keen to tap into the excitement and glamour of an investment that they can not only make great money from but also enjoy on a simple level with their families.

Institutions around the world are now looking seriously at investing into movies not just for vanity reasons or to kick-start a local media business but as a serious way to build up a portfolio of money-making assets. Although some mainly US-based banks and hedge funds have pulled out of film financing deals in the last year, whether because of the financial crisis or simply bad decision making in getting into movie deals, we’ve always believed in the merits of long-term movie investing. So, it’s refreshing to see a shift in the way movie assets are now being seen as a serious investment category. Just this week another Middle Eastern state fund has been announced, the $200m Alnoor Fund from Qatar. It’s aiming squarely at Hollywood projects where the fund can make good commercial returns. Normally sovereign funds invest with a larger mission to expand their local film industry or artistic footprint, and Qatar is certainly doing that by launching the fund at its inaugural Film Festival. However it’s interesting that they chose to underscore their desire to invest in Hollywood, rather than regional or European movies, based on the simple belief that Hollywood offers the best potential investment proposition. We’ve been banging on for ages about the great opportunities in a smart portfolio of movie investments, it’s good to see this philosophy permeating investment decisions worldwide.

The Out Of Obscurity Team.

Shooting In Paradise

We love The Bahamas. We’ve had friends there for a number of years and whenever the AFM rolls around we always make a point of dropping in on the Bahamas Film Commission booth over at Lowes Hotel. As a social visit it’s better than most but we’re also working on good business reasons for spending time in the beautiful Bahamas.

We were invited a couple of years back to attend the Bahamas Film Festival, which is now in its sixth year, and intend to do so again when it opens in Nassau on December 10th. Our production arm is currently developing our feature The Diamond Runners, which zooms between Los Angeles, Las Vegas and back again. However, our subsequent project The Promise is a treasure-hunting caper set on the East coast, Florida Keys and The Bahamas. We’re already planning to base the production down in the islands, where we have access to the under-utilised Bahamas Film Studios (best known for the Pirates Of The Caribbean series) and some friends in the Film Commission.

There are logistical issues, of course, and it’s not an ideal location for every type of shoot, but for us it’s perfect for a pair of veteran treasure hunters on the trail of the “big one”, followed by a flotilla of tiny boats, narco-trafficer hoods, a CEO-kingpin in a shiny speedboat with twin babe lieutenants, a couple of hapless cops in the floating equivalent of a jalopy, and a budding romance formed by the accidental explosion of a vintage Mustang. We can’t wait to get down there again. Our Movie Portfolio Fund operates as an international offshore investment vehicle, and Nassau is an ideal financial services hub with most of the international banks represented there and a good fund management sector. It’s only a hop to Florida and a few hours to LA: it’s practically Hollywood adjacent.

It was reported this week in a Kagan report that bigger-budget movies make the most profit, with movies costing around $100 million earning about $118 million in profit, on average. Allowing for anyone and his dog’s definition of “profit” in the movie business, the headlines would suggest that you’d have to come up with $100 mil to stand a chance of making any money. Of course, a sensibly-budgeted high-quality movie with a proper distribution strategy will have good profit potential at any budget level but you never can tell. Our focus is on giving investors access to a portfolio of movie assets that will make them great returns by exposing them to various levels of risk and reward over time. Cross-collateralisation and diversification are obvious fund management tools which we believe work in films as in other asset classes.

The Out Of Obscurity Team.

Runaway Productions Returning?

Walking our dogs the other morning we met a friend in the production business. Down by the beach was a large production base camp working on a week-long location shoot, and she had phoned a friend on the shoot to say hi and chat about the scarcity of on-set jobs. She’s been in and out of work a lot lately and was bemoaning the decline in overall movie production, particularly in California. She was hoping California’s just-announced package of benefits to film-makers might help reverse the trend of productions taking the bait of subsidies and tax breaks from other states and countries like Australia and, of course, Canada. Unlike many other US states California has never before offered production subsidies to movie-makers, hoping that just being around Hollywood is cachet enough for producers.

There has certainly been a regular flow of productions hitting the highway including some high-profile ones like the Ugly Betty TV series. However there have also been some glitches such as states running out of subsidy dollars too quickly to make their plans sustainable, on-location resources not matching up to film-makers’ needs and more societal feedback from some places where it’s felt that giving money to highly-paid Hollywood types may not be the most politic thing to do. Some far-flung states have begun to show signs of “film finance fatigue” as it dawns on them that perhaps it isn’t going to be the boon they thought it might, with the economic benefit from inviting movies to town hard to quantify and, more importantly, to justify.

Most producers don’t set out looking for reasons not to film in California: in fact most who end up on location elsewhere for purely fiscal reasons would probably be quite happy filming closer to home. However money always talks and there are usually compelling reasons why productions relocate. Big subsidies do talk big. A major element in movie budgets these days regularly comes from subsidies and tax breaks so there’s no ignoring the obvious.

So, it was refreshing to see the announcement a few weeks back and yesterday’s hurrah from the Governor that already dozens of productions have remained in California that may have skipped town but for his recent package of measures. California has stepped up and the package does help, especially emotionally, but there’s always more than just getting the tax back. Hollywood is here, after all, and it’s got to be good for the business for studios and streets to be busy with moviemaking. We strongly believe that there are always new and innovative ways to finance movies, and getting the most for your money - subsidies and all - is only good sense. The formula morphs endlessly, we're all working on it.

The Out Of Obscurity Team.

Movie Finance - Guaranteed

We had a meeting in the Casa Del Mar the other day, one of the coolest places in town to sit down with friends or business colleagues. We’re developing an innovative new movie investment structure together with a company specialising in asset-backed bonds. It’s an exciting topic, perhaps the holy grail of film finance. If you can remove all elements of risk from the business of investing into movies then investors have a no-lose scenario. By combining a backstop guarantee on capital together with potentially unlimited upside from movie profits, investors can get access to the movies without any of the traditional downsides.

In the movie business a guarantee needs to remove not only the investor’s financial risk but also take out risks associated with producing movies, ranging from the production running out of money or the movie not getting a release, to releasing a stinker of a movie that earns no money and loses all of the investor’s capital. Investors all over the world turn to the movie business for many different reasons but they all have one thing in common: they realise they’re putting their money at significant risk. A properly structured guarantee protects their money and shifts the odds significantly in their favour.

We’ve seen many types of guarantees being offered in the film finance world over the past few years. Typically they’re backed by some sort of collateral like a property portfolio or government bonds. These structures looked alright and were offered up by legitimate banks but the crunch came when some of the offering banks themselves collapsed or the underlying securities proved to be less cast-iron than they had seemed. Our own Movie Portfolio Fund was actually discussing such a bond backed by Lehman Brothers with investor groups but mercifully hadn’t concluded a deal on it before the crash. Now, however, we’re working with an asset class that will provide a fail-safe guarantee to pay back investors’ capital, via an exchange-listed financial instrument, and give them a piece of the profits from a portfolio of mainstream movies.

In this way we’ll be able to do two main things: protect investor capital and channel sufficient funds into movie production to provide significant upside for investors and producers alike. The goal is always movie money, the solution is to give investors what they currently don’t have: absolute security for their money. See you at the Casa . . .

The Out Of Obscurity team.

Recsssion-Resistant Revenues

We’ve been banging on for ages about the recession-resistant nature of movie revenues. The movie business is one of those that does well in both good times and bad – quite simply people will still go out to the movies no matter what else is going on in their lives. Thankfully our theory has been proved in practice, with global movie revenues continuing to grow year-on-year. Our website quotes Variety’s observation that 2008 “would be remembered for prospering as the economy collapsed”. Now, a new report out this week has confirmed that 2009 movie revenues are currently 5% up on 2008, continuing the upward trend in revenue and international expansion.

With our financial hats on, the movie sector is a great proposition for investors because it’s classified as a non-correlated alternative asset class, meaning that its performance doesn’t generally fluctuate in line with the stock market, the economy, property or pretty much anything else. In fact that’s why investors should invest into assets like the movie sector, to be sure they continue to benefit even if other investments are falling.

So, we’ve been banging on about the movie sector because not only is it a classic alternative asset but it’s also got great potential to keep on growing and returning profit for investors. Of course the business is changing rapidly, and the challenge is to ensure movies make money across all of the various distribution platforms emerging today, including video-on-demand, Internet streaming, mobile content and who knows what else. That’s all happening right now, with monetizing of digital content one of the main themes at Variety’s Santa Monica conference this week. No doubt there will be opportunities missed as well as taken, but it seems to us that the movie business has been a lot smarter about this than the music industry a decade ago which tried in vain to combat rather than embrace digital distribution and has suffered greatly as a result.

There’s been quite a bit of coverage in the last year about banks and hedge funds pulling out of film funding. Our take on that is that they probably got into the wrong deals and couldn’t make it work for them. There are always good opportunities and smart investors know this. Just this week consortium of banks put up a further $300 million for an established studio slate on top of multiple previous commitments: they know that good movie deals pay off in spades. We believe the opportunity for investors to profit is as great as ever.

The Out Of Obscurity Team

Creative Financing Structures

We received an email this morning from a producer friend about a new financing structure he’d been presented with. For an up-front contribution of 2% he was told he can get his movie financed. So, for $100k down he gets to make a $5 million movie and choose to either pay back the $5m from his film’s profits, or treat it as an equity investment and give up 50% of his movie to the investor with no additional fees. Sounds like a good deal, possibly too good to be true.

There are a lot of creative financing structures being proposed around the film world these days. In days gone by it could be enough to pitch a good script to a producer or studio, and these guys had the resources to make the movie. Now, however, studios are in the risk-sharing business, regularly laying off chunks of major blockbusters to other studios to lessen their potential downside, while still allowing them to be in the big-ticket business without putting up all the “coin” required to seek big glory. In addition studios now regularly act merely as distributors for externally-financed movies. Producers need to bring money to the table to increase the chances of making their movie and many have lined up financing with external parties keen on both the glamour and high potential returns of the movies. This allows producers to keep greater control over the creative elements of their work and also to own some or all of their movie in perpetuity, making money year on year that the studio would otherwise own. The studios collect risk-free distribution fees without disturbing their corporate balance sheets, but there’s always a great demand for external money, hence some of the “creative” schemes we see.

OOO partners with a major studio production group to provide equity financing and to co-finance their movie slate. Our fund earns long-term revenues from movie assets, and it also has access to valid financing structures that can help raise production money on the back of 20%-30% initial capital, often with investors and producers sharing the profits 50:50. There are probably a lot more people out there talking about some 70:30 or 80:20 structure or other than guys who can really make it happen, and everyone has a tale to tell about the oddballs they encounter trying to raise money. Producers will always track down every lead in the search for production dollars and unfortunately there are some unscrupulous characters out there asking for up-front fees for services that don’t really occur, and making promises that don’t materialise.

With 25% or 30% up-front capital and a reputable partner there’s some logic and the potential to get your movie made, but 2% down sounds a little like a dream. We’re waiting to see the details on the 2% deal, if it’s real it could be a gold mine.

The Out Of Obscurity team.

International Movie Money

Hollywood has a knack of finding new sources of money just as others are drying up. There have been several waves of external finance in recent decades: in the last few years the hedge funds put their analytical nous on the line, following on from the generous German film funds who had bankrolled the studios for their own domestic tax reasons. Although no group of investors has ever really hit it big, and inevitably have retreated for some reason or another – changes in tax codes, the collapse of the banking sector – there has been no shortage of investors keen on Hollywood.

When we started OOO in Singapore we were recognized as a new kind of venture – we were accredited “Technopreneur” status as a new and innovative sort of company. We aimed to energise movie expertise in the region and manage investment money from our base. Subsequently movie companies like Lucas Films, Hyde Park Entertainment and many others have relocated to Singapore and the investment management industry has also focused on Singapore as a base from which to manage international money.

In the news this week is a slew of investments by the Abu Dhabi government’s Imagenation group, handing out deals to major producers like Jerry Bruckheimer and other studio stalwarts, as well as $250 million in funding to Participant Media and $75 million on top of last year’s $250 million to Ashok Amritraj’s Hyde Park Group. This in addition to kick-starting the $500 million fund it announced in 2007 in partnership with Warner Bros which has so far financed only one movie, Roberto Rodriguez’s Shorts. The Singapore government’s MDA is also a part of the Hyde Park deal, calling it a “never-before-seen combination of Hollywood, India, the Middle East and Asia. It’s like a belt around the world”.

Greater international co-operation can only be good and with real funding now beginning to flow from such partnerships we believe that bodes well for all parties in the movie finance world. We’re currently talking to investor groups in Tokyo, China, Europe and elsewhere, and aiming to get closer to all our partners at the upcoming American Film Market in November. Globalisation of fundraising and movie-making, it’s all good.

The Out Of Obscurity team.

Change is Good

Out Of Obscurity was set up as a community of partners in the movie business, focused on producing great movies, accessing finance for good projects and providing an innovative opportunity for investors around the world. That was before any of it was possible via online collaboration and the democratisation of film financing. So then social networking came along, all manner of financial institutions became involved in movie financing and our friends at Studio Beyond are now doing a great job of rolling out their international film-makers’ community featuring many of the elements we originally built into OOO. Practice catches up with inspiration. Our original vision of an online community is out there building itself and we’re happy to be part of it all. We’re now a movie company with an innovative funding structure that can work with people all over the world, and that’s where we want to be.

Nowadays right from the top down movies are being financed with many or all of the stakeholders taking a share of the risk and reward. Studios are using the opportunity to lower their talent costs, probably quite rightly so, and the whole playing field of film finance is constantly changing. Indie producers have always been the most creative in devising new ways to get their movies made, and now innovation and collaboration are the watch-words right across the board. We designed the Movie Portfolio Fund as a diversified financial structure to co-finance slates of movies, giving investors risk-reduced access to a novel asset class. We also saw it as a gateway to financing and producing our own movies. Partnering with a group of major Hollywood producers put us on the right track and we’ve helped to form a forthcoming Studio production company, with whom we will produce our own movies – starting with our first feature, The Diamond Runners.

The whole playing field of movie revenue opportunities is also changing, viz Variety’s conference on changing opportunities via technology. We’ve seen a recent wave of movie financing coming out of the Middle East and elsewhere: we like the advent of international financing input. OOO itself is currently in discussions to co-manage a film fund in China, as well as working with new fund partners in Europe the Middle East, Asia and Australia to tap into people’s desire to be a part of the lucrative Hollywood dream. It’s all changing for the good.

The Out Of Obscurity team

Out Of Obscurity in Hollywood

So here we are in Santa Monica running a film company, Out Of Obscurity Inc. and international film fund, the Movie Portfolio Fund. Movie Beach is an occasional look at what’s going on in our world as we put our movie projects into production and manage the ever-evolving landscape of film finance with our movie fund.

Since we’re originally European with a company based in Singapore and partners in Asia, Europe and the Middle East as well as Hollywood, we have a fairly international viewpoint on things. So Movie Beach will feature a wide range of discussion on matters to do with the movie business and the world in general.

Santa Monica is a pretty active hub for the movie business. A lot of movie folks live here and a bunch of film and movie-related companies are based here too. The annual Indie Spirit Awards are held in a big-top tent down at the beach and the American Film Market happens right here as well. Everyone likes Santa Monica so it’s a convenient place to get together with friends and colleagues whether in the movie business or not. So, we're able to have most of our meetings here with the occasional foray up to Beverly Hills and beyond.

The main thing we know from building up our business around the world is that there are innovative movie projects and talent all over the world, they’re not just all hanging around in Hollywood waiting to be discovered. So, stick with us as we develop our take on what it’s like to be a part of the movie business from a global perspective. We’ll be glad to meet you on Movie Beach.

The Out Of Obscurity team.