Only a cash-strapped movie mogul or a gambler would say that film is a prudent investment choice in a bear market. But even the most cautious investor would have to admit that Hollywood has proved more resilient to recession than the rest of the media sector.
This year's Cannes Film Festival may have been more subdued than previous years, with fewer parties and thinner film slates, but buyers were still out in force cherry picking the latest new releases. Titles that were snapped up by distributors early on included Ken Loach's Looking For Eric and Lars Von Trier's controversial horror Antichrist.
If the deal makers didn't bring a smile to the lips of anxious studio bosses at least they could take comfort from better than anticipated box office takings. Attendance so far this year is up 16% from a year earlier and there are still plenty of potential blockbusters to be released over the traditionally buoyant summer and autumn months.
We may be tightening our belts but film is still viewed as an affordable luxury and more of us are hitting the cinema to escape the recessionary gloom. Analysts at professional services outfit PriceWaterHouseCoopers predicted that global box office spend would grow from £1.8 billion to £24 billion over the next four years.
On the minus side, DVD sales seem to be losing pace and the costs associated with producing films continue to climb. But industry observers believe technological advances will lead to increased revenues from other media such as Blue-Ray and Video On Demand. Also, the cost of distributing film is set to decline as more cinemas install digital projection systems.
At a time when every other asset class has been left reeling from the effects of the financial crisis, film is starting to look like a worthy gamble.
Yuri Rutman, head of Los Angeles-based film production and structured finance company Noci Entertainment, is keen to encourage more investors – particularly high net worth investors - to take a serious look at film finance as part of their asset allocation. "The movie industry is uncorrelated with the economy and has unparalleled revenue potential," he stressed.
Film is an increasingly global commodity that has revenue potential from many countries and media. If you Factor in the tax breaks that are available on film investments, investors could easily be looking at a 60 –100% return on investment before a film shows profit, according to Rutman.
He may have a point, but be prepared to do some serious research first before committing any money to a venture – however seductive it may look on paper.
Hollywood is littered with the corpses of investors who thought they could make a killing in the film business. Even the big guns - banks, hedge funds and private equity firms – have been left with egg on their corporate faces when deals imploded unexpectedly, such as Deutsche Bank's planned $450 million partnership with Paramount Pictures. No-one knows for sure why the deal foundered last summer but it is thought that Deutsche Bank was unable to persuade other banks to join the venture.
With many of the major film financiers out of the funding loop because of the contraction in capital markets, studios may have to accept less favourable terms from their financial sponsors. This is music to the ears of Roger Smith, executive editor of Global Media Intelligence in New York. "Studios have a long history of structuring deals so that they come out on top financially," he says. "The studio attitude is that if investors are dumb enough to hand over their cash they shouldn't whine when things go wrong."
Rutman has some sympathy with Smith's comments. "A lot of funds have been raised using multi-tranches of senior/mezzanine debt and investor equity to finance films in the $50-100 million range," he says. "If the first people to get paid back are the debt holders and the last are the junior equity investors it is very hard to see any monies flow to the bottom rung on these kinds of budgets."
The studios may have a lot to answer for but then many investors have been their own worst enemies, as Smith pointed out: "When the hedge funds and private equity houses piled into the industry in 2006-2007 they devised hugely complex models to justify their investment. These models were based on aberrant data collated between 2000 and 2005. Asset managers looked at DVD sales over this period and projected future sales based on their findings. Superficially the investment case for film based on box office receipts and DVD sales looked very alluring on paper but the period was an atypical one. After five years of exponential growth DVD sales started to level off, rendering the investment models worthless."
Which is not to say that film finance is a mug's game. Everyone goes to the cinema and film has a long shelf life. It's a Wonderful Life may have tanked at the box office back in 1946 but it is now a regular Christmas staple on US, European and Asian TV networks. Also, barriers to entry in this business are high. There are not that many studios with the financial clout and contacts to be able to market and distribute their products globally. Outside the major players such as Fox, Sony and Paramount there are only two main independent competitors – Lions Gate and Summit.
Even Smith is not averse to having a punt on the movies. "If studios can keep costs under control and offer investors a better deal than they have in the past then film finance may be an asset class worth considering," he says. "But I would want to be high up in the capital structure – ideally last in and first out."
Rutman reckons that investing in film is all about mitigating risk through tax breaks and structured finance deals. "In our situation, if we minimise 100% of invested equity to a 20-30% risk up-front, allocate 50% of all revenues from 40 films to investors, then exit in five years time by selling the entire library of assets and films for five times invested capital the job is a good one."
Anthony Mosawi, head of Mayhem Entertainment, a production and finance company which is also based in Los Angeles, stressed that there are many other routes into film finance that do not involve passive investment in a slate of films. "I look to see where I can bring value to the production and distribution process," he says. "We are not investing in a slate as such but collaborating with the studios and partnering them on a number of projects in different territories."
Although Mosawi is based in Los Angeles he has worked extensively in Europe, which he believes gives him an edge. If a film project is perceived to have a particular appeal in Britain or Germany, say, Mosawi will leverage his knowledge of these markets to Mayhem Entertainment's advantage. He says: "When we look at a project we consider how it will perform overseas as this is where investors make most of their money. We may decide to buy the foreign film rights and partner with a foreign distributor. Or, we may choose to strike a deal with the studio. Both routes have worked for us in the past."
When Mosawi was chief operating officer of Mutual Film Company back in 2000 Mutual bought the foreign film rights to Tomb Raider. Mutual Film created a pre-territory distribution strategy for the territories outside of the US, which involves both minimising risk through sales in some territories and maximising returns through partnerships with Paramount and others. The success of this approach led to Mutual's investors participating with Paramount in the sequel a few years later.
On another occasion Mosawi asked a syndicate of film distributors what they were looking for in their next purchase. Based on their answers Mosawi developed a project – the successful dance film Make It Happen and sold it to the syndicate. The film was made on the back of pre-sale contracts and made a healthy return for Mayhem's investors.
Duncan Reid, commercial director of Ingenious Media, a London-based film finance company, believes the investor's relationship with the studio is the key to financial success. "Studios have raised a lot of money by trading off their glamour and potential for high returns," he says. "If you are investing in this business you need to make sure your interests are aligned with those of the studios."
Reid has turned down many financing deals because the studio was reluctant to let Ingenious Media participate in sequels. "Disney had an interesting film fund but we couldn't justify investing in it because the studio bosses would not allow us to participate in blockbusters such as Pirates Of The Caribbean," he says.
Ingenious has found a willing and supportive partner in Fox. "As well as having a great track record, Fox is prepared to let us invest in a range of projects including sequels," Reid notes. "We also work with Vertigo, a low budget production company that has a brilliant track record and a supportive attitude towards investors."
Many private investors are persuaded to finance a one off film produced by an independent film production company. The return on investment can be huge. Consider My Big Fat Greek Wedding, which cost $1.5 million to make and has so far grossed $200 million at the box office. Or The Stranger, starring Liv Tyler, which made $81 million worldwide in just eight months on a budget of $9 million.
Let's also consider the turkeys – Shanghai Surprise, Swept Away and Gigli are three such examples, and these are the films that actually made it off the cutting room floor. The plain truth is that for every Slumdog Millionaire there are thousands of duds that lose investors their money.
Tips for successful investing
It is possible to make a decent return from films provided you keep your ego out of the frame and exhaust all avenues of enquiry. Here are some quick tips from the contributors to this article.
• Always negotiate a percentage of ownership that is commensurate to the percentage of money you are investing in the film's total cost.
• Pore over the production packet. If it is unclear or vague in any way alarm bells should ring.
• Be clear on exactly how the movie bosses plan to recoup costs and make money. This will involve investigating marketing and distribution plans. Serious producers and financiers will spend the same amount on marketing and distribution as they would on production.
• Investigate what studios are doing to control costs as this will have a huge bearing on your profit margins.
• If you are investing with a major studio ensure that you have a right to participate in sequels.
If investing with an independent producer the list of checks would constitute a novella, but here are a few to whet appetites:
• Consider the track record of the producer and actors. Do they have experience with the genre of film you are investing in?
• Consider whether the project has a commercial element that will appeal to foreign distributors – this is where you make your mega bucks.
• Check out the strength of the sales team – are they interfacing with the market and negotiating pre-sales? Remember, this business is about mitigating risk.
• Ask yourself why the studio is making this film at this particular time – is it in the zeitgeist? Horror flicks were trendy a few years back but the horror market has probably topped out. Dance movies have also lost their lustre. You don't want to be investing with a studio that has no imagination or take on the future.
• Get to know the other investors. Any chance of them pulling finance at the last moment? This is kiss of death to a movie – and your investment.