Gina Keating - Thursday, July 26, 2007 - www.reuters.com/article
New investor wave buys into films after early kinks

LOS ANGELES (Reuters) - A new wave of investors is scooping up stakes in films from private equity and hedge funds that have poured $10 billion into Hollywood but are losing patience with long wait for profits, industry watchers say.
Hedge funds and private equity firms bought up pieces of many Hollywood films, both big budget and art house-sized, in recent years, and money keeps pouring in from all over the world -- fattening film budgets and adding more titles to theater marquees.

Byzantine movie accounting rules provide that lenders, distributors, theaters and profit participants such as actors and directors, take the first cut of profits, so that a film that clears $100 million at the box office may not immediately return money to its private equity and hedge fund backers.

Movie profits trickle in over nearly a decade of releases to theaters, DVD, television and cable TV. That time frame may not suit investors typically used to five-year returns, said Tom Adams, who heads Adams Media Research.

"(Movies) take two to three years to make and then they're in the red for substantial amounts of time," Adams said.

Hedge funds, which buy and sell securities rapidly, have even shorter time horizons for expected returns -- a factor that may make them uneasy partners with Hollywood.

Attorney Alan Schwartz of Greenberg Traurig in Los Angeles, who has represented both sides -- producers and financiers -- said that the movie industry's long cycle also makes it hard to tell if film slates are profitable.

"(Investors) are beginning to shows signs, in some cases, of irritation and concerns: 'The pictures all did terribly -- what the hell is going on here?'" Schwartz said.

BOX OFFICE RISK

Movies financed with private equity and hedge fund dollars include huge moneymakers like Warner Bros.' (TWX.N: Quote, Profile, Research) "300," which grossed $456 million at global box offices, and the studio's "Blood Diamond" and "Poseidon" titles, considered flops that grossed $171 million and $181 million, respectively.

Each of the six major Hollywood studios has made at least one deal to share film production costs with private equity investors who have purchased shares of a film fund.

The fund typically invests in a slate of 12 to 20-plus movies to be produced and released over several years and reaps a share of profits after expenses are paid.

Echoing other studio chiefs, Lion's Gate Entertainment Group (LGF.N: Quote, Profile, Research) Chief Executive Jon Feltheimer in May touted slate financing as a way "to maintain our conservative risk profile" while growing the company's film business.

In a report set for release in August, Adams Media Research concludes that while the studios' film costs are flat, private equity is picking up the tab for bigger-budget productions that are taking longer to pay back investors.

Despite the fact that no clear picture has emerged about whether film funds are profitable, investors around the world still want a piece of Tinseltown, Schwartz said.

And the global boom in private equity and hedge fund investing has left these firms with deep pockets.

"There is a tremendous amount of money around in the market ... the economy is growing and no one knows what to do with it," Schwartz said. "This is not dying right now, this is accelerating."

EXIT STRATEGY

A number of investors -- whose slates may have had mixed results at theaters but have not yet finished DVD and TV distribution cycles -- have approached investment banker Stephen Prough to explore unwinding their stakes. He declined to identify who was considering pulling out.

Prough, founder and managing director of Salem Partners, said his boutique investment bank typically is contacted by the bank that set up the film fund to evaluate a slate's ongoing value after the whole slate has been released to theaters.

"The equity players like the fact that it is a highly volatile investment," Prough said. "Once the slate has been released and the volatility has changed, they want to go somewhere else."

Investors have the option of borrowing against the film slate's future earnings or selling their shares in the fund -- some worth hundreds of millions -- to one yield-oriented buyer, he said.

Content Partners LLC, a second-hand buyer of film equity, last year started scooping up profit participation stakes of films that have already had theater runs from actors, directors and producers, and has approached private equity funds.

Steven Blume, the firm's chief operating officer and chief financial officer, said Content Partners plans to accumulate and hold the film equity as a sort of library. It is betting that digital and other distribution routes will boost returns.

"Once the films have been released, why wait to get your money?" Blume said. "When the timing is right and they are looking for their exit, they know we are here."