How Business Managers Say No to Very Famous People
No is not a word often heard by A-list talent.
No. It's not a word often heard by A-list talent. But last year, New York-based business manager Evan Bell says he "begged and pleaded" when client Steven Soderbergh came to him and wanted to pour his savings into the development of a movie. The plan, explained Bell, would violate the cardinal rule of Hollywood: Never spend your own money. But Soderbergh didn't listen. He split the $6.5 million production budget with star-producer Channing Tatum, and the movie, Magic Mike, went on to gross more than $150 million globally this summer. "I looked foolish once again," jokes Bell.
Such is the tricky relationship Hollywood's top money managers have with clients whose careers are built on taking creative and, at times, financial risks. Often the voice of reason or devil's advocate on a star's team of representatives, the top business managers say it's better to appear too cautious than to explain an investment strategy that didn't turn out well.
Some in Hollywood might fancy themselves the next Ashton Kutcher, who made a killing when he invested in Skype, or Justin Timberlake, who has done well in the tech space. But there are horror stories, too. U2's Bono, who co-founded Elevation Partners, plowed $460 million into mobile device maker Palm before it hit trouble and $300 million into Forbes despite the tough advertising market. And even though he is in the black thanks to an early investment in Facebook, now that the company's stock is sinking, one financial website dubbed the singer "the worst investor in America."
Bono has competition on that front. Bell says he has a client who had made four terrible investments before signing with him. " 'Why go into that fourth?' " Bell recalls asking somewhat incredulously. "He answered, 'Statistically, I thought I had this one.' He was serious."
Business managers say entertainment clients present special challenges. Projecting a steady revenue stream is never wise, given the fickle nature of the business. So in choosing between high-risk, great-upside plays and low-risk, steady-reward moves, they'll typically opt for a more conservative approach. "You don't lose a client because you're only making a 1 percent return," says business manager Scott Feinstein. "On the other hand, if you start losing, you'll hear about it."
Feinstein, who reps Taylor Lautner, Mila Kunis and Breaking Bad's Aaron Paul, says a good money manager doesn't mind getting screamed at by clients. Requests to invest in restaurants are common, he says. But beware Burt Reynolds, Feinstein tells his clients, noting that the actor once went bankrupt after investing $15 million in the PoFolks restaurant chain. Similarly, Eva Longoria's Vegas steakhouse Beso was shuttered this year. Feinstein struggles to win arguments over these types of investments because entertainers are optimists by psychological disposition -- "maybe because they are used to having doors closed in their face every day," he says.
In assembling a star's portfolio, Feinstein likes to allocate no more than 50 percent in stocks and bonds, supplemented by the least sexy mutual funds imaginable. In addition, some stars might be surprised they are the proud owners of apartment buildings in such obscure locales as the San Fernando Valley. For some of his wealthier clients, Feinstein has also invested in private equity firms like the Blackstone Group.
Alan Goldman at Goldman & Knell says he divides up money between assets that will pay out dividends on a regular basis and wealth managers who can invest with an eye toward the long term. Those long-term assets include things like retail shopping centers, warehouses and business parks. But Goldman says he doesn't recommend his actors and directors hold individual rental units because "being someone's landlord is not something that many people are comfortable doing."
Bell, whose clients include Bill O'Reilly and Amanda Seyfried, sets up limited partnerships, investing in properties like apartment buildings in Manhattan's East Village. Other business managers don't like to pool investments, but they have ways of sharing the upside. "We do not recommend a real estate deal that we do not ourselves invest in," says Michael Karlin. "A partner here will participate pro rata to the investor."
Some celebrity investments are more splashy. Leonardo DiCaprio put $4 million into Mobli, a photo-sharing startup. Lady Gaga sank millions into a social network for celebs like herself. Fergie of the Black Eyed Peas has taken equity in a low-calorie vodka company. Perhaps the latest poster child for celebrity investor is Justin Bieber, who holds significant shares in a dozen companies including Spotify. But not even the celebrity association of Biebermania could help drive OPMG -- a software company that disables text-messaging while driving -- into anything more than just a penny stock.
Top money managers typically charge clients 5 percent of their earnings -- similar to the fees entertainment lawyers charge -- but they don't take extra commissions if investments deliver big returns. When sitting down with a star client, they first ask detailed financial questions, figure out the person's possible career trajectory, and arrive at what the investment risk tolerance should be. The truth is, despite the glamour, Hollywood as a class tends to be some of the most conservative investors on the planet -- thanks in part to business managers. "Today it's about protecting the principal," says Karlin. "These clients take risks in their day-to-day profession. That's where the risk is. Investments shouldn't be risky."
That's not to say that celebrities don't get some "play money" to chase dreams of becoming Hollywood's next great venture capitalist. "Let's call it the Las Vegas account," Goldman says he tells clients. "Take all your stock tips and you can play."