How to beat the indie financing system
Producers turn to overseas investors, wealthy backers
Anthony Millan knows how hard it is to make money in the independent film sector these days.
But after spending more than a decade as a financing consultant for Lionsgate, Relativity Media, Voltage Pictures and others, Millan recently took a major plunge anyway, raising nearly $10 million from associates and hedge funds to form Catch 22 Entertainment, his new full-service indie production, distribution and marketing outfit.
"It's the Wild West right now in terms of financing a film," says Millan, who hopes to invest in dozens of films with budgets ranging from $25,000-$25 million. "You have to look hard, but there are still great ways to find a nice reward, including making investments in small-budget films and gaining a profit from your own marketing and distribution."
Indeed, despite the stalled economy, fewer distribution slots and an exodus of bank and hedge fund money that has caused the number of movies released this year to plummet from only a few years ago, there are plenty of film financiers who believe that hard times beget great opportunity.
The new class of indie moneymen are realistic enough to acknowledge the risks, yet eager to pounce upon a dispirited marketplace.
Despite the sales activity at this month's Toronto International Film Festival, Millan knows that producers can no longer count on the largess of presales from foreign distributors, traditionally the life blood of indie films. In fact, he considers it barely worth his time to show up at AFM, hunting for a buyer.
Instead, as studios have cut their own indie prestige divisions, Millan has been "cherry-picking" talent, including execs at Paramount Vantage and other studios. For Catch 22's first film, the wrestling drama "Beyond the Mat," Millan is putting up about $15 million in P&A from his own side fund to prop up a film that cost only $250,000 to make.
In addition, he plans offset his risks by providing bridge loans to indie productions and advances against tax credits and finishing funds. Catch 22 will lend money to producers at virtually any stage of a production, depending on the opportunity.
Millan is an optimist in a time of overwhelming pessimism. Arguably, finding money for indie films has never been harder. From locating equity to securing gap loans to finally reaching distributors, producers are struggling. But money is still out there.
Rather than a bank or hedge fund, the first stop for indie producers now is often a high net-worth equity investor. Traditionally, people who made their money in other industries were willing to get into film based on a sheer love of art. But these days, as even the richest individuals struggle to maintain their wealth, the bargains are getting harder.
Consider Bill Perkins, a successful oil and gas venture capitalist, who for the past decade has been putting money into indie films. Perkins recently became a lot more conservative in his choice of film investments. He understands that fewer indie films get distributed domestically, and he isn't convinced that digital revenue streams represent real profits just yet.
"The problem I see, frankly, is that I don't have to take production risk," says Perkins, who is still investing in projects here and there. "I can go to Toronto and they'll have 10 horror movies, all looking for a buyer. I can buy a movie for zero and distribute it myself. And if I want to invest, going microbudget seems the place to be. I can have just as much fun making a $450,000 movie as I can making an $8 million movie. Much less risk there."
The lucky producers are the ones who find a guy like Gary Gilbert, co-owner of the Cleveland Cavaliers, who found success this summer with "The Kids Are All Right."
Gilbert is an industry optimist. He grew up loving movies like "Butch Cassidy & the Sundance Kid" and says he'll invest in scripts he loves and projects in which he can play a meaningful role in the development phase. This attitude has made him a popular man of late.
"I've certainly been seeing three or four times as many script submissions in the last six months as I was a few years ago," he says. "That's a good thing."
Gilbert only takes on about two projects a year, though. And even with a big-ticket moneyman on board, producers are asking talent and crew to work for less and attempting to get financial commitments from states like Michigan, which offer tremendous tax incentives.
"We're starting to see adjustments on the cost side but a lot more needs to be done to attract financiers," says David Molner at Aramid Capital, which has participated in 40 film projects during the past three years and is the largest debt provider to Summit. "I think a lot of the complaining about the current environment for film financing is driven by people whose projects aren't financeable. It really comes down to the product."
Lately, some producers have been trying to attract foreign companies, sovereign wealth funds, and even governments who might put up some equity.
"Overseas sources have certainly been stepping up of late," says attorney Lindsay Conner at Mannatt. "China is becoming much more active in entertainment finance, and we're starting to see more activity from India and the Middle East."
Lauren Versel, a producer on the upcoming indie "Vamps," found equity investors from Brazil, England and Poland. "We got really fortunate," she says. "It's getting tougher and tougher to raise money."
Even if producers can cobble together an international consortium of equity investors, it still is often not enough.
That's because fewer financiers are willing to float bridge loans.
A few years ago, there were more than 40 banks doing gap lending in entertainment. These days, it's down to about 10. Many institutional hedge funds also have pulled out.
Jean-Luc De Fanti at Winchester Capital Partners, one of indie film's leading creditors, believes this is the biggest problem haunting the indie space.
"Those in the gap business were lending against the promise of territorial sales," De Fanti says. "In 2007, investors starting seeing sharply declining sales at AFM, Cannes and Toronto. Some of the big funds like JPMorgan doing gap financing had poor results and were terminated. A lot of the money dried up, adding fuel to the fire."
Part of what has happened is cyclical, De Fanti notes, but most bridge lenders won't be back until foreign distributors show renewed interest in picking up indies for foreign distribution. That might only happen when domestic distribution of indies heats up.
Gary Gilbert’s production outfit Gilbert Films backed “The Kids Are All Right.”
"One can hardly expect the world to finance American movies that Americans don't want to see themselves," he says.
That assessment is as gloomy as it comes. But on the flip side is Peter Graham at 120dB Films, who, like many of today's finance optimists, believes this is a very ripe time to invest.
His company is sinking millions of gap financing dollars into dozens of films. He'll only get involved with a "perfect" combination of elements -- name-brand stars, a strong sales company and some equity backing. But thanks to a lack of banks in the space, he says he's getting the "benefit of the last man standing."
"When I started there was a ton of money from hedge funds and those without experience," Graham says. "Now that they've withdrawn, our main competitors are subprime lending outfits. We're now doing bigger projects."
Producers like those behind "Vamps" are going to Graham because he's a little more flexible and responsive than a typical bank, willing to provide quicker access to capital in return for a slightly higher interest fee.
A few years ago, when the indie film world was flush with cash, producers were getting better deals from their lenders, but these days, they'll largely take what they can get.
Of course, even if indie producers manage to line up equity financing and bridge loans, they're still not quite to the finishing line.
In the past, money from domestic distributors often provided finishing funds (not to mention marketing might). These days, producers are going to festivals with only the tiniest hope that one of the dwindling number of domestic distributors will bite. As a result, some producers are raising P&A money themselves by offering financiers the opportunity to be the first investors to recoup money after the theatrical release.
Here too there are new investors seeing a chance to profit.
ATO, a venture partly owned by musician Dave Matthews, started out sinking money into the production side of indie film development. But partner Temple Fennell says the firm quickly realized the best position was to be on the distribution side. Partnering with Samuel Goldwyn Films and arranging a put deal with Fox, ATO now has several distribution slots to offer indie film producers. The firm picked up "Casino Jack" at Toronto and its first release, Bruce Beresford's "Mao's Last Dancer," came out in late August.
Fennell has a few reasons for his own optimism about the vitality of the indie film sector. He cites demographic changes including an increasingly older population and believes that films targeted to specific niches can thrive. He thinks the Dave Matthews Band is an example of an artistic endeavor that first found a core audience and spread by word-of-mouth, and he hopes that formula can be replicated for indie films.
"Once we have done a full analysis and have figured out how much it's going to cost to release, we'll greenlight," he promises. "We'll put up 15%-30% of a budget, prebuying rights."
Optimism among people like Fennell is causing other investors to be a bit more confident about their own approach. Many think of themselves as the clear-headed savants who are seeing opportunity just as others are running for the exit door.
Matty Beckerman at Natural Selection is one of those financiers. He just raised $100 million from investors including Saadi Gaddafi, the son of the leader of Libya, to make 20 films with budgets as high as $40 million during the next five years. The company's first film is "Isolation," directed by Stephen Kay, which just wrapped shooting.
Beckerman calls this a "terrific time" to invest in movies and says his investors are eager to make some noise.
"At a time when much of the indie film world is contracting, we find ourselves among the few," he says. "This puts us in tremendous position to create high-end movies at realistic prices, and at the end of the day, it's still all about the product. If we create something special, there will be people lining up to see it. It's easier than ever to stand out."
How to put together an indie film, in six easy steps
by Gregg Goldstein
STEP 1: ASSEMBLING THE PACKAGE
"It is critical to assess the global market's appetite for a package in advance of budgeting and shopping it to financiers. Presenting an unrealistic package or budget can kill a project's momentum." -- Micah Green and Roeg Sutherland, CAA
STEP 2: SECURING THE MONEY
"Seek out financiers that share the same vision as you on the script, cast, final cut, even the tone and genre. When calculating the cost of financing, make sure the timetable for returning production equity (like a bank loan) is calculated properly -- sometimes filmmakers expect returns in 12 months, for example, when a realistic time frame is 18-24 months. Get a realistic schedule for production, delivery and collecting funds from the distributor -- this will help you avoid unexpected interest costs or a lender foreclosing." -- Graham Taylor, WME Global
STEP 3: EVALUATING THE DEAL
"Highly structured, multiparty deals can appear attractive because they may provide more creative freedom, a higher budget and/or more economic upside. However, these deals can fall apart when one piece of the financing falls out, leading to hefty transaction costs to put Humpty Dumpty back together. A single equity source or a co-financing with a distributor is often the more prudent option." -- Andrew Hurwitz, Schreck Rose Dapello Adams & Hurwitz
STEP 4: GETTING GOOD ADVICE
"The tax credit situation in America is volatile -- some states are running out of money for their programs, and vetting them is a whole business in itself. You also have agents desperately trying to do pay-or-play deals for their clients, so you need to know the point when you can commit to key actors without being on the hook for a lawsuit. Surround yourself with as many professionals as possible -- attorneys, equity financiers, tax credit buyers and international sales agents." -- Cassian Elwes, film finance packager
STEP 5: FIELDING THE OFFER
"Oftentimes a filmmaker will come to us excited about a $4 million offer, but it's not real until it's in the bank. Since you sometimes can't vet a financial source, you should put their money in a safe escrow account overseen by a solid, neutral attorney. Make sure the funds are designated for the film and can't be removed just because they change their mind." -- Rena Ronson, UTA Independent Film Group
STEP 6: GETTING RIGHTS BACK
"Filmmakers should seek to negotiate into the financing and distribution deals clear milestones which, if not achieved by a certain date, allow the filmmaker to terminate the agreement and reacquire his rights in the film free and clear." -- Andrew Hurwitz
FIVE ACTIVE FILM FINANCIERS TO GET TO KNOW
President and CEO, Gilbert Films
Background: As co-owner of the Cleveland Cavaliers (with his brother Dan) and a veteran of mortgage banking giant Quicken Loans, Gilbert knows about high-risk investments. With vp production and development Jordan Horowitz, he aims to partly or fully fund two to three films a year, with budgets of anywhere from $3 million-$30 million.
Films financed: Lisa Cholodenko's awards contender "The Kids Are All Right," "Garden State," "Meet Monica Velour"
Business philosophy: "We're a very rare breed in that we're both a financier as well as producers, which are two very different hats," he says. "We never just finance a film -- we always produce as well. Jordan and I have always been very selective -- we've got to love the script and story, truly believe in the filmmakers' vision and believe the filmmaker can deliver their vision with the cast and other players involved -- even more so now than four or five years ago."
Founder, United Pictures
Background: The former Capital One exec launched his company in 2005 but really branched out in 2008 by hiring indie veteran Ann Dubinet to head a foreign sales arm that handles indie titles including the upcoming David Lynch/Werner Herzog collaboration "My Son, My Son, What Have Ye Done." Unified recently took another left turn, backing "Noah's Ark," a $35 million animated musical written by Philip LaZebnik ("The Prince of Egypt") that began production last year.
Films financed: "Bob Funk" (2009), a drama starring Rachael Leigh Cook, and writer-director David M. Rosenthal's "Janie Jones," about a young woman (Abigail Breslin) trying to connect with her fading rock star father, which premiered in Toronto.
Business philosophy: "You have to abide by the rules that most businessmen abide by but most producers ignore," Kjarval says. "And that's making sure you're not making a $20 million film when you should be making an $8 million film."
Co-founder, Cross Creek Prods.
Background: A former vp at Propaganda Films (where he produced Paul Schrader's 2002 film "Auto Focus"), Oliver launched the private-equity fund Cross Creek in 2009 with a small group of high-wealth individuals led by Louisiana-based Timmy Thompson. Although his last production entity was cheekily titled Arthaus Pictures, this time, Oliver is looking to make films with a more nakedly broad appeal. The company plans to produce and co-finance three to five films per year with budgets ranging from $5 million-$60 million, including a Steve McQueen biopic, the thriller "Delivering Gen" (penned by "Sons of Anarchy" creator Kurt Sutter) and "Woman in Black," set to star Daniel Radcliffe.
Films financed: Darren Aronofsky's "Black Swan," which premiered at Venice.
Business philosophy: "The way films are normally put together outside the studios, you assemble these transient pieces, whether it's tax credits or foreign sales, then everybody goes and looks for that piece of equity that gets the movie made," Oliver says. "We're kind of doing it in reverse. We start with the hardest part, the equity, then we can partner with a foreign sales company and figure out what territory gives us the best incentive, as long as it works creatively with the film."
Co-founder, Mimran Schur
Background: Schur worked at his family's real estate business in New York before segueing into music as the founder of Flip Records, where he launched bands like Limp Bizkit. In 1999, he became president of Geffen Records. While guiding the label's A-list roster, he found himself involved several film deals, including helping set up Rob Zombie's directorial debut "House of 1000 Corpses" at Lionsgate. Longing for independence, in 2006 he launched Suretone Entertainment Group, a record label (the Cure, Angels & Airwaves) and production company (MTV's "Buzzin' "). Now he's shifted his focus to Mimran Schur, co-founded last year with David J. Mimran, vice chairman of the multibillion-dollar fund Breeden Partners. They plan to make to make two to four films a year in the $15 million-20 million range.
Films financed: The thriller "Stone," starring Robert De Niro and Edward Norton, and "Henry's Crime," with Keanu Reeves and Vera Farmiga, both of which premiered at Toronto
Business philosophy: "David felt strongly about putting our names on the company and having a lot of pride about the library we're going to build," Schur says. "We're certainly interested in commercial viability, but we really want to make great films."
Founder and CEO, Queen Nefertari Prods.
Background: If success in the film business is like winning the lottery, Stafford is one step ahead of the game. She took the $112 million she won in 2007 from a $2 ticket and created a company that last year launched a $30 million film fund (repped by Gersh). With her production president Jeff Kalligheri, Stafford aims to back three to four films a year in the $25 million-$35 million range.
Films Financed: "Polish Bar," "The Gathering"
Business philosophy: "When I started, I had a brief conversation with David Geffen and his advice was to be smart in the way I'm investing in movies," she says. "I'm not taking all the risk -- I'm sharing it. It's great to have a good role model like Geffen, who wasn't raised in the business and built himself up from nothing. Have a great team behind you, believe in yourself and your projects, and never give up on your goals and dreams."
Gregg Goldstein and Todd Longwell contributed to this report
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