Springtime in Europe, China Calling

Walking the dogs by the beach this morning, we strolled by a mini-European village being set up: streetlights, sidewalk cafes, French flags flying and a fleet of classic European cars. It’s always refreshing and inspiring to see movies shooting on location. So much seems to happen in a short space of time – they’re usually set up in the morning and gone by evening – and yet you see mostly a lot of inaction, with bunches of crew hanging around the mess wagons. But although it’s mostly a lot of waiting around for the right light or combination of director, crew and talent getting things exactly right, scenes get shot and movies get made.

We recently worked on the financing package for a movie shooting on location in New Mexico, where most of the drama occurred in the month or so before the shoot. We were arranging for the final gap finance to drop into place before the production could begin, and the producers had their two major stars on hold in a window that was closing fast. The financing deal for the final $1.5 million was set to close but the producers weren’t able to get comfortable with the terms. Although the money was to be delivered via an escrow account at a law firm, somehow it wasn’t working for them. To complicate matters the producers’ hands were tied by the presence of a couple of dominant private equity investors in their movie who were looking out for an opportunity to play a more active role, which the producers were trying to avoid. As in any business it’s good to get your investors’ money but it can become a pain in the neck when the investors want to start looking over your shoulder. In our case, when the deadline arrived the producers had to bite the bullet and get over their discomfort, but they got their movie made.

It’s been Chinese New Year around the world this week, with much of Asia just drifting back to work now. So we were pleasantly surprised to receive a call yesterday from the Chinese partner on our prospective new China film fund. It’s a great opportunity to break in at ground level in the domestic film business in China which has been so far impossible even for the Studios to do. Hollywood and all other international movies are limited to 20 titles a year in the fastest-growing country in the world, and although China is obliged by the WTO to open up its markets over time to foreign movies, domestic Chinese film producers are currently being given all sorts of incentives to step up and make more and better movies that will compete with the expected influx. However, with Chinese consumers preferring to watch homegrown movies and the sheer numbers involved, we believe the opportunity in China is boundless for many years to come.

The idea of a film fund as an investment opportunity is unprecedented in China, and from the producers’ point of view commercial third-party finance is also fairly novel, with most of the regional production groups being government-owned up to this point. So we’ll be seeing many new doors open and our keystone is solid investment from a few market leaders. We have commitments from a couple of institutions which we believe will create a snowball effect and the fund will take wings when these are tied up. So it’s all go for now as we complete our initial preparation work and get agreements in place.

It’s quite an adventure and on the phone this morning one of our dearest friends said “ I do wish I could go back to live in Asia again, that’s where it’s all happening in the world now”. The future is Asia.

The Out Of Obscurity team.

Happy New Year

Chinese New Year fell on February 14th this year, so Valentine’s Day was a double celebration across much of Asia. Most of this week will be quiet in Asia as families enjoy their major holiday of the year, so Gong Xi Fa Cai to anyone celebrating.

Asia’s looming large at the moment, both in our own little world and in the bigger picture of where the movie business is heading. We noticed that the Singapore MDA has just financed its first picture in a recent co-production deal with Australia, a shark thriller to be filmed in 3D. With the success of Avatar it seems that all of the studios’ tentpole properties are going to get the 3D treatment: Spider-Man, Twilight et al are all being re-booted for 3D, and not just because it seems like a fad, but because 3D commands a higher price at the box office, at least for now.

They’re building new movie screens all over China now and we’re hoping to participate in the boom. For a while now we’ve been in discussion with a Chinese investment group planning to launch a new domestic film fund in the next six months. Even putting a timeframe on the project has been a challenge, and we’re well aware that in China things take time. Our partners have a few other investment funds in the market and were seeking Hollywood knowledge and film fund expertise to complement their base. With investment commited from one of the state-run film bodies the opportunity augurs well, but there’s a long way to go. Ideally, it kicks off with seed capital in place and an audience eager to take part in the magic of the movies. Chinese movies will dominate theatres and audience appetite for the foreseeable future and the pipeline of projects is locked in. We’re bound to face a few hurdles along the way but we’re optimistic right now.

This weekend’s Presidents Day holiday in the US brought yet another revenue record at the box office, with theatres generating the highest-grossing Presidents Day on record, and the movie Valentine’s Day having the biggest opening of any movie in this weekend, even after adjusting for ticket price inflation. So the trend of rising movie revenues is very definitely continuing, and with a shift to 3D production profitability will increase further. Just another pointer towards movie investment as a compelling alternative asset strategy, one that we never tire of highlighting.

In addition to the rapid expansion in 3D screens and movie production other shifts in movie economics are taking place, as exemplified by last week’s announcement that Tom Cruise will return to his role in Mission: Impossible IV. This time he is producing again, as he did last time out, but he’s no longer getting 22.5% of gross revenue: - yes, 22.5%, really. It’s no wonder that Paramount was miffed after its big hit movie Mission: Impossible III was left barely breaking even, with Cruise taking home at least $80 million for his efforts. This time out he’ll still earn $25 million, $20m of that up-front, but he won’t participate so generously in profit. The studios these days are much less inclined to pay top-dollar for stars’ basic salaries, preferring to structure profit deals where they limit basic costs and share some of the potential profits. This is undoubtedly good business sense and also cleans up the table for investors like ourselves. As a co-financier on a major project, the last thing you want to see is the bulk of the revenue being swept away by first-dollar participants before any costs are paid. Much better to cover costs and share profits at a reasonable level, with all stakeholders sharing the benefit, including investors and talent. That’s becoming a much more common model and is most welcome at the investor level.

The Out Of Obscurity team

Movies Making Money

Walking with the dogs today we noticed they’re beginning to set up the big tent down by the beach for the annual Independent Spirit Awards later this month. It’s always quite a raucous event with a bunch of genuine people who are really passionate about their movies. There are so many great indie movies around every year and we began to wonder just how many of them might actually make a profit for their investors.

It’s got a lot to do the intent of the producers when they go into the process, whether they’ve thought about their film making money or are they just trying to get it made. Of course most producers believe they have a compelling story that needs to be told and they’ll do whatever it takes to get their movie funded and shown to the world. But some savvy producers will develop a plan that demonstrates just how their investors will make money within a couple of different distribution strategies, and some bottom line option that gives investors a fair crack of the whip. The Section 181 tax write-off which we mentioned a few weeks back is a good place to start, as it assures your investor that he cannot lose all of his money with a 100% tax credit. Offering equity investors an early share of revenues until their capital is covered is a standard strategy and if there are any distribution deals in place up-front then investors can feel more comfortable that there is a revenue stream that will at least cover costs. Then of course, when your movie has paid for itself in whatever territories you’ve sold it, or the DVD and TV deals have kicked in and revenue comes in, the investors will be happy to share profits in some equitable manner with the producers, and everyone’s happy.

Well that’s how we’d like to think it happens but of course we all hear about the many people – producers as well as investors – who lose money on movie projects, whether it’s because of non-commercial movies that don’t get sold, skewed investment deals, bad management of the process or any number of reasons why things go wrong. Investors don’t always invest into movies simply to make money, and there’s always a host of folks who have made their money lining up to become the next big-time producers. But we like to think of this as a business in which our principal goal is to make money for our investors and partners, and in the process make a lot of movies that people will actually see. An investment fund doesn’t have the luxury of funding art for art’s sake.

We believe the movie sector is still one of best investment choices and even though we know that some movies in our slate won’t do well, we structure our positions so that we won’t lose too much on any losing picture, and stand to gain a lot on the profitable ones. Taking a portfolio approach is something that individual investors don’t always have the ability to do but it’s one of the only ways of giving yourself the best possible chance of making a lot of money in the movie business.

The Out Of Obscurity team.

Groundhog Day Again

 
Ever topical here at Movie Beach, we thought it worth mentioning that February 2nd is Groundhog Day, when Punxsutawney Phil – a Pennsylvania rodent - pops his head up out of the ground and forecasts the weather. This year he saw his shadow, meaning six more weeks of winter, at least in Pennsylvania. You may know the movie Groundhog Day, it’s one of our favourites as Bill Murray battles for his mental freedom while he’s trapped living the same day over and over again. Sometimes it feels like we’re waking up to the same day as yesterday but a brisk walk down by the beach with the pups usually takes care of all that.

Not on quite the same scale as Groundhog Day, we have noticed quite a number of film fund issues coming to the fore lately. We’re always interested in what’s going on around the world, and in the UAE the Imagenation group we mentioned a while back is releasing its movie My Name Is Khan as a co-production with Bollywood group Fox Star. Imagenation has co-financing deals in Hollywood, India and Singapore, among them a $250 million venture with the truly global Ashok Amritraj’s Hyde Park Entertainment, based in Singapore. Out Of Obscurity was founded in Singapore but we do most of our work internationally. However, we still consider Singapore our home base, it’s a fantastic place to work and travel from. We’re currently looking at movie and film fund opportunities in Thailand and China, as well as Europe and the US, and a spell back at the ranch may be just the ticket.

The government in Spain just announced a 5-year $800 million film fund to develop independent Spanish movies, which may cheer movie theatre owners in Catalonia, the independently-minded province dominated by Barcelona. Most of the region’s screens went blank on February 1st in a strike by owners at a directive that at least 50% of foreign movies must be dubbed into the minority Catalan language rather than Spanish. They fear a big drop in attendances if the proposed law goes into effect, and fewer movies from international distributors. We can only agree that imposing minority politics on the majority is never a good thing anywhere in the world, and movie-goers will inevitably vote with their feet.

It’s been interesting to read about the potential fate of Miramax, which was unfortunately run down and then closed down by Disney last week. Naturally, the Weinsteins would like to have their name back and potentially the library which they built up. But there are other bidders and a vigorous discussion going on about what those assets may be worth. It’s highly relevant for any film investor or fund manager like ourselves, as Disney is said to be asking $700 million for the assets which may earn anything from $50 million to $300 million annually. That’s a big range with the majority feeling it’s nearer the $50-100 million level, making it a tough payback at the asking price. The value of film libraries has declined a lot recently as the DVD sales part of the equation has stabilized. We don’t share the “doom and gloom” view of the DVD issue which some feel has spiraled down from a peak, never to return. Sure, early sales rates were astronomical but things always settle down, and sales in other channels will in time take up the slack. Movie revenues are steadily on the up and that’s good for movie investors. In our view it’s still a great time to invest into quality movie assets, and someone’s going to get a good deal on the Miramax library if they pay the right price.

The Out Of Obscurity team.

Film Incentives West & East

We commented recently about the introduction of filming incentives in California. Despite being the home of Hollywood and modern movie-making, California has been losing productions year on year to other locales offering advantageous tax or rebate deals, and film-makers had long been calling for the state to introduce some kind of incentive scheme to level the playing field and allow them to continue making movies in California.

So, last year's announcement that California would indeed provide incentives for producers not to join the “Runaway Production” bandwagon was greeted warmly by all involved in the industry. Of course there were a few gripes that the big studios were better positioned to take advantage right away, and some hoops had to be jumped through to get to the money, but in general it looked like a good thing to keep film and TV production in California. Well, today the LA Times announced that the “state of California’s much ballyhooed film incentive program has run out of cash – at least for the next six months.” The program had set aside $500 million in tax credits over five years but it has so far allocated $200 million to 60 projects, effectively eating up the first two years' worth of money. There was no shortage of demand for the 20%-25% tax credits but there won’t be any new allocations granted until before June. We don’t think anyone expected the money to go all that far but the fact that California stepped up to the plate was enough for a lot of participants to look into maintaining productions in and around Hollywood.

Meanwhile in Beijing, Variety tells us that China has announced a 5-year plan to encourage a Great Leap Forward in its domestic film business. With financial and regulatory assistance to encourage locally-made movies the plan seeks to ensure that Chinese cinemas devote at least two thirds of screening time to Chinese films. While not exactly encouraging to foreign film-makers trying to overcome the existing barrier of only 20 permitted foreign films a year, there may be some light in the tunnel as the overall cinema pie grows in China. And, just as the WTO has ruled that China must open its doors to foreign content, this plan is intended to allay domestic fears by encouraging Chinese film-makers to compete with established international studios on what might not be exactly a level playing field, but perhaps a less skewed one.

You never know quite what the business landscape’s going to look like next in China, but we’re still excited about getting back over there to have a look and see for ourselves.

The Out Of Obscurity team.

China Opportunities?

We always like to keep an eye on what’s going on in the movie business around the world and lately there’s been a lot. Over the course of 2009 movie revenues have continued to rise in almost every country, continuing a now long-established trend. And some places are expanding faster than others, in particular China, where they’re in the process of building thousands of new movie screens around the country. More than half of all box office revenue is earned by Chinese-made movies, and income is growing by more than 40% annually, according to the Wall Street Journal.

However all is not as it seems, since new screens doesn’t mean increased access for Hollywood movies and the state-controlled China Film Group is the sole arbiter of which foreign movies are allowed to play in the country. For years Hollywood has complained that China limits the access of foreign movies – currently only 20 titles a year, up from the previous 10 – and just last week Chinese cinemas were ordered to stop showing 2-D versions of Avatar, the runaway global box-office behemoth. Avatar, apparently, was doing too well in the lead up to the Chinese New Year holiday and was replaced by a local language biopic of Confucius.

A December ruling by the WTO stipulates that China must open up its market to foreign films within a year. Going back a decade or more China was concerned that flooding the market with foreign movies could hinder the local movie sector, but the demand for locally produced movies is now strong and the quality has risen considerably. China is on target this year to overtake Korea as Asia’s largest movie market and will surpass Japan within five years. This exponential rise in movie-going and the likely opening up of the market to international films means the opportunities are too exciting to ignore.

One key factor to doing business in China has always been having the right local partner. Recently, we were approached by a well-connected Chinese group seeking to co-produce 3-D films for the fast-expanding 3-D and IMAX sector, as well as to co-manage a new film fund targeting the Chinese market. We’re well aware of the challenges of accomplishing such goals – the right partners, administrative red-tape, differing expectations and cultural idiosyncrasies – along with the time it can take to get things done in a country where they definitely take the long view. Our Movie Portfolio Fund is an international vehicle with its roots in Asia, so we’re comfortable doing business in the region and the challenge of getting something new done right in China is too great to pass up.

We were invited to work on a China fund a few years back and all in all we spent more than a year in planning, discussing, and structuring the right sort of investment vehicle, and in making presentations back and forward with a different government-linked group. The fund didn’t fly, our partner changed their priorities as time passed, and the opportunity was missed. However we’re optimistic this time that we can get something done. Gong Xi Fa Cai!

The Out Of Obscurity team.

What Crisis?

We’re always reading that some crisis or other is about to engulf the movie business. Whether it’s the withdrawal of the latest round of easy money from hedge funds, banks or German tax funds, the decline in DVD sales or piracy in developing markets, something’s always just about ready to eat the studios’ lunch. However with the movie business posting the biggest year ever in international revenue for 2009 and the prospects going forward looking very strong, we believe that there’s never been a better time to be making money in the movie business.

Not all investors do make money or get the right access to movie assets. The structure of your deal, or investment into the business, has to be right. There’s no point sitting on a “profit” participation deal on a one-picture slate when we all know movies rarely make what the real world of business calls “profit”. Investors need to be sure that they’re invested across a slate of movies over time with reputable producers, on which they’ll be sharing all revenues (a different beast from profits) on an equal basis with the producers. In this way everybody benefits from the capital that gets the movies made in the first place.

However, people always want to be a part of the movie business, and when one source of money dries up Hollywood always finds another. The wave of hedge fund slate finance deals with the studios has receded lately but we’re now seeing new deals from motivated investors using sophisticated structures, and cleverer equity investments ensuring that that participation by a principal financier actually means something. Movie investors haven’t always made smart investment decisions, and even the best and brightest had the wool pulled over their eyes by the studios as the majority of their slam-dunk blockbuster movies such as Spider-Man and Harry Potter were held back from third-party financier deals.

There’s always a smart way to make an investment and with a little less money on the table now there’s surely even better opportunity for investors to strike advantageous deals. Film-makers just want to get their movies made and they’re generally amenable to working with financiers to get the job done. Studios have a little more luxury since they have much deeper corporate pockets and some have walked away from what they felt were less than favourable investment and banking deals recently. But the experience of the recent wave of slate deals was that it helps the studios a lot to have co-financing partners, not only to lay off the basic risks of making big movies, but to help them focus their businesses on the part they actually make the most money from, distribution. So we’re going to continue to see different co-financing arrangements with some or all of the studios maintaining slate deals with financing groups.

In today’s Los Angeles Times, James Cameron commented that Hollywood exec’s will always claim some crisis or another, but historically that’s always been the way. In the 1950’s the scare was that TV would replace movies, in the 1980’s it was VCR’s, but now there are more movie theatres around the world than ever. So some sources of money dry up like the German funds, and others will take their place. In the last week alone we’ve seen a new $100 million film fund set up in Europe, and the announcement of a couple of $1 billion funds in the US. The opportunities for smart movie investors are too good to be ignored.

The Out Of Obscurity team.

Section 181 Revisited

Film producers are always looking for ways to raise money to close the gap in their production budgets, so they seek to utilise any and all incentives, credits and allowances they can get their hands on to get their movies made. In recent years you can’t get a movie financed without making maximum use of these incentives which can form quite a significant portion of a movie’s budget. Producers will go to any reasonable lengths including relocating their production to Eastern Europe, Australia, New Mexico, Louisiana or Canada to take advantage of such schemes.

One incentive that hasn’t had as much press is Section 181 of the Internal Revenue Code, a nifty little scheme originally approved in 2004 allowing investors to claim 100% of their investment into film or TV productions (the first $15 million on any film, $20m in deprived areas, or the first 44 episodes of a TV series) against income tax in the same year. Now, we know from experience that the hardest question to overcome when dealing with a potential investor is “Will I lose my money?” And of course it’s a fair question as most investors will consider first not “How much will I make?” but “Can I lose this money?” By showing your investor that he can immediately deduct the full cost of his investment from his taxable income you’re giving him a significant reason to write that cheque. He immediately saves a chunk of cash on his tax bill and maintains the same potential to gain from your movies, so his upside multiple has just increased significantly.

Section 181 was originally set to expire in 2008 but was extended as part of the Federal Bail-out Plan for one more year until the end of 2009. However, we hear it on good authority from a senior source at the IRS in Washington that not only do they expect the provision to be extended further, as it has been passed in the House and is awaiting Senate approval, but that it will be retroactive when finalised. And, our source tells us that they recognise how beneficial this provision is and they wish more people knew about it. Another source tells us they think that perhaps the major studios and TV companies have been monopolising the provision – as well they should – but that mainstream producers should intensify their efforts to get 100% deductions for their investors too. Sounds like a no-brainer to us.

The Out Of Obscurity team.

Distribution Is Key

Things always seem to take a while to get going in January, so we’re doing as much as we can to get the ball rolling on a few movie projects right now. It’s also a good time of the year to clean house and get the PC in order, unfortunately our computer took it upon itself to crash for most of the festive period and it’s only now coming up for air with, we think, everything back in order.

Among the Christmas and New Year messages we received over the last couple of weeks was this sweet comment from a dear friend in the Bahamas: “movies are the best news - where else can one make a fortune nowadays?”. If you’ve read any of our comments over the last few months you’ll know that we couldn’t agree more. It’s one of our main hobby-horses that investing into movies - a portfolio of movie assets - is just about the best thing you can do with your investment dollars. Movie assets continue to make money in perpetuity and the opportunities to sell movies via multiple formats and territories are continuing to expand, creating lots more opportunities for movie investors to profit. Thanks a lot Minnie!

We’re working with a couple of projects shooting in and around Thailand and Japan, and aiming to close some financing on those from Asian investor groups. There’s a keen interest in movies all around Asia with not only some ground-breaking films being made in Japan, Korea and Thailand, but also some of the highest per capita movie-going in the world happening in places like Singapore and elsewhere. People just love going to the movies and that feeds the growth that we’ve seen in international revenue opportunities for movie investors to profit from.

Different investors have different outlooks: we’re talking to some private investors looking to profit from successful movies as well as some industry experts whose interest is more in securing the rights to distribute the movies in a few countries around Asia. They know that this will cover any investment they make and generate healthy profits. Distributor relationships in particular are important because good distribution is the make-or-break factor for the success of a movie and the success for our investors. Happy investors will invest again, so we’ll be happy to keep good distributors on side if they can bring results across key territories.

A few years back we co-financed a promising Japanese manga movie, an adaptation of a successful comic-book series and a movie which appeared to have real breakout promise. The animation studio and director were extremely hot, there was excellent awareness and anticipation of the story in Japan, and we had brought in a production partner in the US with a major studio deal to take on the movie internationally for theatrical and DVD sales. Our Japanese partner had engaged one of the top Japanese distributors so our hopes were high. We held a launch party at an Asian film festival and anticipated the grand release. However the release came and went with something of a whimper, it fell completely flat for a variety of reasons, none of which made much sense to us at the time. It could have been the wrong time to release the film, they might have allocated some not-so favourable screens for our movie, or our local partners might just have done a less-than optimal deal with the distributor. The truth was probably somewhere in the middle but we felt that the groundwork hadn’t really been done properly in advance. When it came to seeking the US release we found to our dismay that virtually no thought had gone into creating a suitable package for the DVD, leaving us little opportunity to hit the market properly. The whole experience taught us some big lessons, most importantly that it’s vital to know and trust your partners well and to rely on their work as if it were your own. No doubt one reason why so many folks find it difficult to delegate, but in the movie business it has to happen.

The Out Of Obscurity team.

Investment Gold

It’s been a quieter couple of weeks observing what’s going on in the movie world and waiting for people to get back in business mode. It’s encouraging to see that it’s not only Avatar that’s eating up the box-offices around the world but that revenues are up in most territories, with healthy gains in Europe and a 44% increase in China. This is of course on the back of a healthy expansion in screens as new theatres are built, but great news nonetheless.

In recent days new investment deals have been announced, with groups in India and elsewhere making big-ticket commitments to making movies. As we’re fond of saying in this column we strongly believe in the profit potential of movies and the movie business in general as it expands into new formats and territories. Investors into movie content, with the right structure and revenue sharing arrangements, stand to do very well indeed on their investment. In fact with Avatar raising the bar in so many ways we’d suggest that potential investor returns have never been better, even amid the continuing economic turmoil in other sectors.

We run into all sorts of discussions with prospective investors interested in our fund. If you’ve ever been involved in sales it may come as no surprise to you that sometimes potential investors don’t actually do what they say they would do, and in some cases weren’t really telling the truth in the first place. We recently had an inquiry from a North American group of private investors interested in partnering with our fund. All went well till they came back with a few questions, which we discussed, and then finally gave us their considered “no”. It wasn’t their decision that surprised us but the excuse they gave: they said they had done some research into the movie business and come across an occasion where a private investor was disadvantaged in an investment deal with a studio and its star producer. They were shocked to discover that the studio had taken out is distribution fees and participation first, then the producer got paid her share, all before the investor had a look at the profit pie. To their surprise the investor made no money and they claimed this story was enough to put them off investing. Of course nothing about this story is at all surprising and in the movie world you need to be sure you’re getting into the right deal with the right people at the right level. However, investors sometimes look for an easy out on something they don’t have a full understanding of, or when they aren’t prepared to give you their honest reasons for not participating.

The right investors with the right structures recognise the merits of investing in movie assets: sometimes you just have to dig a little deeper to find those gold nuggets.

The Out Of Obscurity Team

New Horizons

We run an international movie investment fund, so we’re not always focused merely on Hollywood. Of course from a long-term investment point of view we are strongly focused on Hollywood assets but we’re always excited to look at new developments and opportunities around the world. As Hollywood has grown over the past few decades its international reach has become even greater, and from being a smaller piece of the overall pie some years back international revenue now outstrips domestic US revenue for Hollywood movies. That’s great news not just for movie-goers worldwide but also for potential investors in movie assets since the reach of the business continues to expand, and so does the variety of revenue and profit opportunities in the movie business.

We receive many inquiries from movie-makers all over the world looking for help with their films of all shapes and sizes. We’ve also been approached regularly in recent years to talk about helping to run movie funds in various parts of the world like South Africa, Europe, India – several potential Bollywood movie funds just haven’t seemed to get off the ground – the Middle East and in particular China. It’s a compelling idea to utilise our fund concept and apply it to a new setting using local expertise and real market potential. We have a lengthy history in Asia and our main office in Singapore and, although we don’t focus on Asian movies per se, it would be great to be involved in financing all sorts of movies from an Asian context. We recently looked at packaging a movie project in Japan and we’re currently reviewing projects to be shot in Thailand. However China is a tough place as there’s probably more growth opportunity there than anyplace in the world these days, and yet it’s notoriously difficult to do business there and to succeed. The government keeps a tight lid on what content people may watch, and to do business there you need local partners, which usually means working with government-sponsored companies.

A while back we were involved in lengthy discussions about managing a fund in China which seemed like quite an exciting project. We were assured that our partners had cast-iron Chinese government connections that would ensure our success. Well, suffice it to say that things didn’t quite work out as planned. We were particularly interested in using Hong Kong as a quasi-offshore financial centre for managing Chinese investors’ funds, enabling them to make international investments without their money physically leaving China. Usually that’s a break point when local investors are unable to invest into international managed funds, effectively ruling out an international Hollywood fund option.

However a new potential fund was presented to us recently with a China-based group seeking to make movies in China – Hollywood as well as local content – for the international market. This may be a good first step from our fund’s perspective as the money could be raised and invested in China. A host of other issues such as offshore revenues, profits and repatriation of Hollywood participants’ shares inevitably raise their heads, but most issues can be worked out if there’s a will to get the actual structure in place. So, that’s one that we’ll be watching carefully in the New Year. People everywhere want to watch movies, just look at the bumper revenues Hollywood has earned in 2009, and we strongly believe there’s also a great appetite from investors everywhere to share in the profit that the movie sector generates.

The Out Of Obscurity team.

Seasons Greetings!

By now we’ve all read that Hollywood has had a bumper year in 2009, raking up over $10 billion in US box-office revenue for the first time with corresponding record increases in revenue internationally. Revenue is up on admissions as well as ticket sales, so more people actually went out to see movies this year which augurs well for the strength of the business. And, even though DVD sales are notably down after the runaway sales when that format was introduced, they will stabilise and other channels such as VoD and other Internet sales will balance and help grow the overall revenue pool.

Despite the global recession movie-going continues to grow and of course we believe that investing in movie content is a smart thing to do for investors seeking great returns and some shelter from the storms of stocks, commodities, property and other investment fluctuations. Movie financing has traditionally come from a small pool of generally wealthy sources including studios, banks and recently wealth funds but this year it’s been encouraging to see major funding initiatives come out of new international sources, particularly in Abu Dhabi, Bahrain and Dubai, as well as India, Singapore and others. It’s great to see international financiers look to slates of Hollywood movies as a way to establish their own brand in the international market, rather than financing strictly local, specialty movies as has traditionally been the case.

We have been invited by institutions in Europe, Malaysia, Australia, China and elsewhere to discuss partnering on new film funds with investment raised in local markets being directed towards international movies. There’s real potential for fundraising in newly-expanded European markets – we recently met a young film-maker from Eastern Europe who was confident he could raise $30-50 million for a feature from contacts in his country – and around Asia, where wealthy private investors have not had exposure to movie assets. With our base in Singapore we’re always excited to see new international initiatives and we hope to see a lot more international expansion in 2010.

For now, however, we’re kicking back just a little to enjoy the slower pace over the holidays. Thanks for being with us on Movie Beach, and we’ll see you again in 2010.

The Out Of Obscurity team.

No Recession At The Movies

It’s looking like movie revenues will be up around 10% in the US this year to a record $10.5 billion and also by significant amounts internationally, so thanks to the LA Times for our headline which was too good not to pinch. It’s a fitting snapshot of not just the social effect that movie-going has on people in good times and in bad, but it also sums up neatly the investment proposition that we constantly hammer home when talking about the movie sector to potential investors .

Aside from the fun, excitement and glamour associated with movies themselves and the visibility of your investment product up on the screen, on TV or on a DVD box, the investment potential of the movie sector is unrivalled. It’s a classic alternative investment, with the potential to perform extremely well whether the stock market or any other market is going up or down. Investing in a sensible movie portfolio can build great returns and balance investors’ exposure to things like stocks, property and virtually everything else. It just makes sense, the movie sector is expanding in revenues and importantly in the number of ways people choose to watch movies.

Part of our pitch has always been that the movie business makes a lot of money for a few people, and a lot of folks who invest into movies do it the wrong way and have lost a lot of their money by getting sucked in to the wrong sort of investments. We maintain that if you can line up a good slate of projects with the right sort of financial access for investors and share the burden with responsible producers then, over time, you will make a lot of money for your investors. That’s how our movie fund operates. We’ve all heard many scary stories about the Hollywood blockbusters which took hundreds of millions in revenue but never made a buck for investors because the studios managed to claim that they never made a “profit”. Well, we know the difference between revenue and profit, and whose overheads get to water down the cut, and if you can show your investors a way to split revenues with responsible producers on a formula that’s fair to all then investors will profit and return to finance your next slate.

In today’s LA Times Patrick Goldstein argues that not only is going to the movies a cheap night out for recession-hit families but there has been a greater number of mid-range movies doing well this year, with studios giving younger directors more creative leeway on movies like The Hangover. There will always be monsters like Avatar, which everyone in Hollywood is hoping like crazy actually delivers, but a bigger batch of movies doing well is great for everyone. The more opportunity we can offer investors to profit from the business then the better we’re able to finance more movies and keep the ball rolling. It’s great when making money makes everyone happy.

The Out Of Obscurity team.

Big Plans, Short-Term Decisions

We’re all familiar with the fate of most corporate business plans – they look great in theory but when practice takes over it’s a whole new ball game. Sometimes things work out but other times something nasty comes out of the woodwork to scupper the best-laid plans. So it is in Dubai at present, whose economy and stock market are reeling from last month’s Dubai World debt announcement, and where the government has just shelved indefinitely its plans to offer subsidies to filmmakers. Too bad they’d already scheduled their annual film festival this week or that too might have been postponed to sunnier times. With regional powers Abu Dhabi and Qatar stepping up with cash funding for Hollywood projects recently Dubai is looking out in the cold with a less than friendly movie-making environment, having refused access to a couple of high-profile Hollywood productions on content grounds. It’s not just Dubai skyscrapers and theme park plans are biting the dust these days, but it looks like its fledgling film hub is stuttering as well. Excellent long-term plans sacrificed to short-term financial concerns, which is a shame. You can’t argue with global economic conditions but producers do have a lot of international options, including welcoming State incentives in the US, so it’s going to take a lot of push next time around to float the dream.

We spoke a few weeks back about a friend who’s planning a slate of micro-budget movies, and it seems everyone’s been talking about this for the past couple of months. The lure of shooting fast, cheap and good, not to mention the faint hope of winning the lottery with a breakout hit like Paranormal Activity is a strong one. Well now the studios are jumping aboard the bandwagon, perhaps inevitably, with Paramount planning to start a division to produce up to 20 micro-budget movies at around $100k each. Great idea, especially if they can pull it off without costs spiraling upwards to the studio level. But their plans aren’t quite as spartan as your average indie director who aims to get a release wherever he can and spread the word among Internet networks to hopefully make a buck on his movie. Paramount plans to use the division to develop projects and make “calling card” movies for new talent, and perhaps some of the films may even get a release. All in all it sounds like smart thinking and let’s face it, for such a relatively small investment how can they lose? OK, it’s hard for divisions of big companies ever to behave like small, entrepreneurial ventures and too much money will be spent, and of course Paramount may lose interest when the current fashion passes and the economy improves. However, good on them, we hope it sees the light of day and doesn’t go the way the specialty divisions already have.

Talking of corporate budgets and decision-making – which we didn’t sign up to do, really – isn’t it a shame how many good business discussions fall apart because of miscommunication or just plain bad management? Failure to follow up is the single most corrosive behavior that winds us up, but that’s just the tip of the iceberg. This week a project we were keeping an eye on came within a whisker of raising its final chunk of finance only to fall apart with both principals feeling that the other guy didn’t follow up on their final discussion points. Oh well, it happens all the time and we shouldn’t be surprised, but it is disappointing and always avoidable. Professionalism in the movie business, now that would be a nice long-term goal.

The Out Of Obscurity team.

Trust and Deals

Last week we were at the LA Film School, addressing a town hall meeting of the IIFF on film financing. It was an erudite panel featuring some truly impressive speakers, with senior figures from legal, production, agency, talent management and casting circles as well as a bona fide rocket scientist and ex-Google pioneer. It was attended by a lively group of film-makers with projects at various stages of production, looking for up-to-date advice on financing their movies.

One of the more unusual questions was how a producer might trust the banks not to go bust and lose his money before he completes his movie – not something you’d normally anticipate coming up in a film finance discussion, but a sign of the times nonetheless. There were some great comments and projects, including an eastern European director seeking to transform his 30-minute short into a full-scale $50 million blockbuster. He was studying at the LA Film School to brush up on technique but he told us he’d already had $30 million pledged by investors in his home country! Several discussion points touched on how to find the first money for movies and how to follow through to complete those all-important early deals, and the bottom line is trusting the people you go to for key finance.

We’ve all seen cases of funders pulling out leaving productions in jeopardy, and it’s vitally important to know who you can rely on. It’s not much different in the movie business from life in general, and the lessons are the same: people always tend to promise big and deliver small. So when you know that you can count on your investor making that crucial deposit when he says he’s going to, then you’ve really got a partner you can trust. You also have to trust where the money’s coming from in order to be comfortable with your own deal.

Lately we’ve been working with a group of enthusiastic producers on a decent-sized movie with a couple of big movie stars all ready to go. It’s been held up by a shortage of funds and a little internal confusion about who’s sitting where in the money pile. Last week we had them all set to conclude a deal to provide their missing money and start shooting but at the last minute they decided they couldn’t close the deal. It seemed that everything added up, they had signed agreements to proceed but they couldn’t get across the finishing line in their own minds. At very short notice we had helped them raise the money they needed but at such short notice their level of trust just wasn’t where it needed to be to seal the deal. They may raise their missing $2 million without us and maybe not, and we’ll be happy to assist them next time around, by which time hopefully they’ve crossed that bridge by themselves.

Meanwhile we’re looking forward to seeing what might result from some of the interesting projects we met at the LA Film School.

The Out Of Obscurity team.

Movie Revenues Rising

Variety this week is forecasting that the domestic US Box Office revenues look like being 8-10% up on 2008 and over $10 billion for the first time. And it was in 2008, as quoted in Variety, when Hollywood prospered while the economy sunk, so the current year looks like being a bumper one. It’s good news not just for theatre chains and studios but for everyone involved in the business. People are going to movies the world over and the demand for movie content is growing whether it’s at the box office, on video and DVD, or on the many new channels like Video on Demand and Internet streaming. Long may it continue.

Despite lingering gloom in the economy, movies are commodities that people want to buy in ever greater quantities and in ever-expanding territories and formats. From an investment fund standpoint we’ve always banged the gong for the movie sector as an intelligent investment. It’s a great non-correlated asset and an excellent hedge for investors to give themselves some balance in their portfolios. Of course on a simple level we like being a part of the movie business and being able to provide the opportunity for folks to make money from it as well.

Yesterday we were speaking at the IIFF film finance seminar at the LA Film School in Hollywood, where there was a lively discussion on current movie funding strategies. Producers and directors are always seeking new strategies to finance and distribute their movies so it was interesting to hear so many different angles on this ever-changing issue. Distribution is now more vital than ever and with the demise of most of the Hollywood “mini-majors” there are fewer go-to companies for indie distribution. A well thought out distribution strategy now needs to be built in from day 1 with an absolute focus on the target audience and how to reach it. It sounds obvious and sensible business practice, but it’s all about mitigating as much risk as you can throughout the life of your project. If you can show an investor a watertight plan for how, when and where your movie is going to play, you’ll surely have a much better chance of having him or her write that cheque.

The Out Of Obscurity team

Back To Business

It’s been a quieter week on Movie Beach as things slowed down over the Thanksgiving holiday, so we put our feet up just a little. However we did see some encouraging progress on one of the projects we mentioned last time. Although we had been talking about the vagaries of movie financing and the reliability or otherwise of some investment partners we come across, we’re optimistic folks who generally hope for the best. So it was nice to receive a bank confirmation last thing on Friday showing that our friends’ production had indeed received its promised funding. Interestingly this time they raised $2.5 million instead of $2 million, just a little number dance that happens all the time in movie financing, but we’re now hoping to be able to help them raise the final gap for their movie if the playing field stays level for long enough.

Getting back to business this week we’re going to be at the film financing seminar in Hollywood put on by the guys at the IIFF, they always have a good attendance and lively discussion. It’ll be good to meet some friends and pick up on what’s new in the business, for one thing it seems that everyone in the indie sector these days is looking to put together a slate of micro-budgeted films. The technology’s certainly there to get movies made quickly and cheaply and we’ve seen plenty of articles lately about newer and cleverer marketing strategies to get your movie noticed even from before the first frame is shot. It’s all good and film-makers these days need to be aware of all aspects of their craft. It’s ironic that the sales process has come around to be one of the first things to be considered, but if it helps you to become a better business-person out of the process then that’s surely a benefit. However the simple challenges always remain, making quality movies that people will want to see, and finding the money to meet even those micro-budgets. In our opinion quality content will guide you, so get the script right and that should help focus the sales process. Whether you’re selling brushes door-to-door or pitching movies the same truth applies: if you’re selling something good, people will buy it.

Just one final follow-up from our last posting, the long-lost investor we mentioned finally called our producer friend to reaffirm his commitment with business to follow shortly. It’s an encouraging sign and he did seem genuine but we’re not betting the farm on it yet. However, watch this space and we’ll bring you the latest as this one unfolds.

The Out Of Obscurity team.

All About Commitment

It’s a beautiful Monday in Movie Beach, a nice time of the year when the boardwalks are quiet and the sun’s still shining bright. Great weather for early morning walks and contemplation . . . So, isn’t it annoying that just when you’re enjoying the blissful feel of the sun coming up and the dogs running free in front of you, a little thought crops into your head: will that money be in today? We’ve all seen it somewhere along the line, that all-important promise of investment waiting to close any day now. Sometimes it’s just timing and paperwork, sometimes genuine investors are depending on other events and other times there are real doubts about an investor’s integrity. Of course there’s every kind of excuse under the sun along the scale from genuine delay to scam-artist but the last thing we all want to see is the grinding inertia of waiting for the money to close.

We’re working with a production right now with big-name talent on board that’s had to postpone shooting for a few weeks awaiting funds from a “name” investor. Those funds will then trigger the opportunity for us to help close the final $2 million gap so we’re waiting on the people who’re waiting. It’s only been a week since we were told “the money’s in today” so we’re not even near the stage of starting to question the package, this is par for the course. We passed the “proof of funds” stage a while back, when we were shown a letter from a bank to the effect that Investor X does indeed have money in the bank and has said that he’s interested in the movie production. Joining the dots, we could see that this was just a stretch away from a meaningful commitment of money. Oh well, back to the bank. Meanwhile the producer presented his own “proof of funds”, saying that his bank statements would show the production had $2 million in the bank, a requirement for us to bring the final $2 mil. However the statements showed that, while they had indeed spent $2 million in pre-production so far, they were sitting on a total of $345 in the bank: not quite what the situation required. Ever optimistic, we continue to jot this one down to just a timing difference and they’ll get the job done.

A good friend is producing a movie waiting on an altogether more sizeable commitment to hit the decks for around $50 million. This will fund the construction of a major real estate location for a big-budget sports movie with full production budget already in place. They’re waiting to go and have been told that the funds were closing “next week” for quite a while now. Our guy subsequently ascertained that the investor is himself depending on receiving proceeds from the sale of a bond that’s still going through a tortuous booking process on Wall St and, while he’s completely genuine in his commitment to the movie, there’s not a lot he can do to hurry up the money: it could be days or months away.

And, at what just might be the wrong end of the scale, a producer friend has come to an agreement with an investor after several months of negotiation to finance a slate of movies. It’s a nice deal with the partners raising the funds together and co-financing movies they’re both passionate about. However a couple of deadlines have come and gone and despite endless discussion and repeated commitments the phone is ringing less and less and the investor hasn’t answered his phone in the last week or so. No doubt he’s been busy and hey, maybe he's had the swine flu: he says he’s as committed as ever. But things just aren’t getting done and that is the big worry. Never wishing to think the worst of people or situations we continue to fly the flag on this one, but with one eye on the next real deal. Lose the ones you don't need.

The Out Of Obscurity team.

Creative Movie Money

It’s been an interesting week in the movie financing business. Mega-financier Ryan Kavanaugh has been all over the news this week with a profile in Esquire and blanket coverage in Variety following his Producer Of The Year award at the Hollywood Film Festival. For a guy with a chequered past and an unclear reputation still, he’s been incredibly successful and we are in awe of his ability to get deals done. He has blown Hollywood convention away by almost single-handedly creating the wave of investment into movies by hedge funds and banks via his Legendary Pictures and he has opened wide the discussion on film finance. He’s also helping to change the structure of movie funding deals by ensuring that key talent and directors share in the project’s revenues rather than take excessive up-front salaries. This is classic indie moviemaking and frankly it’s good business sense in a business not known for sensible financial structures. There’s obviously a mix of skill and delivery and Kavanaugh has got it.

We had a call today with a director and his partner who are putting together a business plan for a low-budget slate, aiming to have a stream of content ready within a year. It’s a noble venture and something that can be readily done now with digital technology and the new economics of movie-making, and the readiness of cast and crew to work more flexibly than ever before. And, with advance marketing – even designing Internet slots before the movies are shot – to build up audience awareness from ground level, they believe they can create a viable and lucrative business. Forecasts say there will be a shortage of movie content within the next year, a direct effect of the drastic cutback in production during the past couple of years, and so they’re hoping to be ready with a pipeline of projects to work with by then. It’s a neat plan and our next challenge will be to find the $20 million required, so we’re now putting on our thinking caps.

Another director friend we’re working with to finance a small slate passed on an amusing comment he’d received from a funding source he’d been talking to. After several months of discussion the broker finally came to the table to say that his investor was now ready to look seriously at financing the movie slate. Great news – except that the first investor would require a $25k fee for him to visit our guy and carry out due diligence on his projects. “Don’t worry”, said the broker, “the guy has already financed a couple of property deals we’re doing and it’s a good sign that he’s interested in your project”. It’s pretty certain that you’ve heard this one before, haven’t we all, but the number one rule in raising money is never to pay anyone in advance for doing it. In any field of business if fundraisers can perform they will, but they rarely do once they’ve been paid and of course most fees of this sort are scams. It’s tough to find them but it’s important to work with trustworthy partners and if they can raise money for your ventures then they’ll share in the rewards. Of course we all consider every possible option on the way to getting movies made but some are just not worth the headache.

The Out Of Obscurity team

New Outlook for Film Financing?

International film finance is what Movie Beach is all about and it’s always positive to see the movie financing world expanding. It looks like more international investors are now recognising the merits of investing into Hollywood. During the recent AFM, a financing conference heard that film funding will come increasingly from emerging markets in the coming years, following on from India’s Reliance Group’s $800 million investment in Steven Spielberg’s new Dreamworks. Reliance is leading the charge, and they have also struck development deals with a number of high-profile Hollywood players to acquire a number of movie projects that may end up being co-produced with Hollywood studios. But a number of other government and private funds are emerging in Asia and the Middle East as investors grow more aware and interested in Hollywood assets.

New international investment is now flowing from groups like Abu Dhabi’s Imagenation fund which has done a number of deals with mainstream Hollywood talent recently, and is just one of a number of groups vying for attention. Qatar just wrapped up its inaugural film festival which boasted major attendees like Robert de Niro and the announcement of its own strategic investment fund. Foreign investors are likely to be choosy in the companies they work with based on capability and track record. Also important is attitude, as underlined by Ashok Amritraj of Singapore-based Hyde Park Entertainment, which is the beneficiary of substantial backing from both Imagenation and Singapore’s MDA. He observed that Hollywood has been seen as not taking care of its investors, who need to see not only positive returns but also a little respect in order to become long-term partners.

It looks unlikely that hedge fund money will return to Hollywood any time soon, and not just because of the perception of under-performing studio slate deals done by eager funds and banks in recent years. In the final analysis the institutional investors who have the time to stick with their positions will see decent profits over the lives of those assets. But the recent wave was fuelled in part by excess liquidity in the markets looking for new investment opportunities, liquidity which has long since dried up. So Hollywood, ever hungry for cash, has had to look to new sources.

Among new international deals to come out of the AFM was the announcement of a 3-year development deal for major filmmaker Chris Columbus with South Korean group CJ Entertainment. Columbus already has a shot at Reliance’s development pot and this deal gives him a funding partner after a four-year search. It’s interesting that, while the headlines were dominated by studio slate deals in the last few years we’ve seen a number of producers enter negotiations with potential investors to finance their own companies and slates, with mixed results. Some have succeeded and others continue on a seemingly never-ending round of investor discussions. There are real deals to be had but also, it seems, a lot of false dawns where even the most successful producers frequently fail to close funding deals. This is true of every industry but in our observation the movie business seems to turn up more potential investors who never deliver on that potential. We continue to believe that if the deal is the right one, it’ll get done.

The Out Of Obscurity team