Indies find favor with foreign financiers
EmptyRead about how Wall Street funds the indies
Fourteen months ago, Mark Gill was in Cambridge, Mass., as keynote speaker at the Harvard Business School's annual conference on media and entertainment. He struck up a conversation with another guest, Yael Taqqu, a partner in McKinsey & Co.'s global media and entertainment practice.
Taqqu suggested that Gill call her if he ever went out on his own. "What do you know," Gill reflected wryly, "a month later, I did."
That was the beginning of a yearlong odyssey for the specialty movies executive as he exited his post as president of Warner Independent Pictures and sought to raise money for a new production and worldwide sales company, the Film Department. And it led him directly to Sheikh Waleed al Ibrahim of Dubai.
Today, Sheikh Waleed is one of the key backers of Gill's company, investing millions of dollars in the venture. (Gill declined to say precisely how much.) In plunging into filmmaking, the media magnate, who also is chairman of powerhouse network MBC (Middle East Broadcasting Center), is one of a number of foreign individuals and companies who are dipping their toes into independent American film.
"We used to see foreign money coming from (tax-driven funds) like Ingenious that would make investments in studio pictures; and, of course, we would see German tax money make investments, but aside from that, not much -- maybe a few investments from high-net-worth individuals from time to time," said John Burke, an attorney with Akin Gump who specializes in film finance. "What we have seen in the last six months or a year is an increased interest by the European institutional community -- the hedge and equity funds and investment banks -- and an increasing amount of attention from the Middle East, meaning places like Dubai and Abu Dhabi, Saudi Arabia, Jordan -- any place where there are significant amounts of wealth."
Among recent developments:
Producer Hunt Lowry has been negotiating with investors in Abu Dhabi to finance a whole slate of studio-budget films.
Harvey Weinstein went to China this year as one step in an ongoing attempt to raise $285 million to make Asian-themed movies that will be released through the Weinstein Co. in a deal that Goldman Sachs is putting together. (Reps for the Weinstein Co. declined comment.)
Wild Bunch, a major French production and distribution company, has invested in such independent films as Steven Soderbergh's upcoming pair of feature projects about Che Guevara and three Woody Allen movies. It also has signed a first-look deal with former Miramax staffer Agnes Mentre to find U.S. projects in which it can invest.
Double Edge Entertainment has accessed Taiwanese and Chinese money through its principals, Nina Yang and Bobby Sheng, who have invested in such films as director Vince Di Meglio's upcoming Dax Shepard-Mike White starrer "Smother" and 2004's "Mail Order Wife."
Producer Marina Grasic of Visitor Pictures has raised money from investment funds in Bahrain and Scandinavia to help finance four films (Miramax's planned 2007 release "Smart People," writer-director Rawson Marshall Thurber's upcoming "The Mysteries of Pittsburgh," Lionsgate's planned December release "The Return" and writer-director Baillie Walsh's upcoming "Flashbacks of a Fool.")
Bill Block, CEO of production and sales company QED International, is visiting Beijing this summer to meet with investors there. His company already has benefited from funding from U.K.-based Aramid Capital.
Russian billionaire Michel Litvak has funded several films, including 2006's "Bobby," through his Los Angeles-based company Bold Films. Other Russian billionaires investing in Hollywood include Len Blavatnik.
It would be wrong to overstate the level of this cash influx. Insiders put it at a total in the hundreds of millions, not billions.
"I spent a year of my life dealing with this and talked to people around the world," Gill said. "They all said the same thing: Here and there, there are little pockets of money, but most people (outside the U.S.) would prefer to invest in real estate or bonds or something more reliable than the movie business. They are not accustomed to (film), or else they don't have enough cash to say, 'Here is my 5%-10%. I don't expect to make a lot from it.' "
While foreign investors remain relatively sparse, they are nonetheless returning to Hollywood, particularly those in countries that have seen their economies grow stronger. "The Middle East and Russia are the two primary places," ICM's Hal Sadoff said. "We have also come across a few high-net-worth individuals from China and Taiwan who are investing in the business and some from Hong Kong."
Foreign money comes in three main forms: Hedge funds and similar investment funds; wealthy individuals; and production/distribution companies, usually based in France or England. These sources are stepping in after other, far larger foreign investors stepped out -- namely the overseas distribution companies that invested millions in such mini-majors as Revolution Studios and Phoenix Pictures and the German tax funds that have receded from Hollywood after changes in that nation's tax laws.
QED's Block expects these numbers to grow "following the demise of UIP (United International Pictures, the longtime foreign distributor of Paramount, DreamWorks and Universal) and the rise of strong indigenous distribution companies that are making lots of money distributing U.S. pictures."
After observing these distributors' success and in some cases participating in their profit, he said, "You go back to the mouth of the river, which is North American distribution. That is where the torrent starts. A picture that is going to open with a massive Hollywood machinery behind it gets a great jump start in the international market. If you can deliver that, they are there to invest."
Just how eager foreign backers are to invest became apparent to Burke this year when he moderated a seminar in London organized by Akin Gump and investment bank Dresdner Kleinwort. He was pleased with the turnout -- 100-plus British and European hedge fund managers attended.
"They wanted to learn more about the slate financing that they had been reading about over the last two years, where Wall Street has been funding Hollywood films," Burke said. "It was the beginning of an expression of interest from that community and indicated a willingness to explore film as an asset class for the purpose of investment."
These foreign hedge fund executives are interested in film for the same reasons as American hedge fund executives, he said. "Generally, the world is awash in liquidity, and the funds need to deploy large amounts of capital. The film business certainly requires large amounts of capital. These funds typically raise money, promising to invest in various things -- maybe 20% in real estate, 25% in energy and a certain percentage in 'alternative assets,' which is where they categorize film."
If they could invest in studio films, the funds would. But the studios have been flooded with money from U.S. hedge funds and are no longer interested in relatively small investments from elsewhere.
"Here is the problem," said Craig Jacobson, a partner with the law firm Hansen Jacobson. "If you go to a studio and say, 'I have a lot of money and I want to invest it,' Fox, Universal, Sony, Warner Bros. and Paramount will all say to you, 'We are fully financed. We have outside investors. We don't need your money.' A lot of the studios have $500 million-$1 billion of slate financing. They can't handle any more movies. Their distribution system can only handle 25-30 movies, and their pay TV deals only have a certain number of slots."
For those unable to invest in the studios, indie film is a viable alternative. "If someone wants to be in the business with $30 million, you can't make a dent in the studio marketplace, but you can in the indie marketplace," Grasic said. "The funds I am dealing with want to have an impact on the industry."
It is becoming easier for them to have an impact as more established producers turn toward independent film and as the cost of making those films declines along with the dollar. "As the dollar weakens, a lot of Europeans are thinking, 'I can probably get a good return by investing here,' " said Phil Alberstat of William Morris Independent, noting that it is not just European money taking advantage of the opportunities in independent film but also that "a lot of Mexican money is now coming in through companies like Nara Films."
"There is a global market of financiers investing in films that reach the global market and have a mixture of talent," said Paul Breuls, CEO of Corsan N.V., a financing, production and sales company based in Antwerp. "There is tremendous amount of money flowing into films that have American involvement but are not necessarily 'American' by the strictest definition."
Breuls' own investments include two tentative 2008 releases: "The Box Collector," starring Margot Kidder and directed by Los Angeles-based, British-born helmer John Daly, which is now shooting in Canada; and the $33 million Roland Joffe film "Singularity," starring Brendan Fraser and Aishwarya Rai, which is set to be filmed in India.
In terms of production entities getting into the act, Luc Besson's Paris-based EuropaCorp. is trying to raise €100 million (almost $140 million) through an upcoming initial public offering that will fund English-language pictures like Fox's planned 2008 release "Taken," starring Liam Neeson. Such other European companies as StudioCanal, the BBC, FilmFour, Wild Bunch and Pathe have invested selectively in U.S.-based material, though Pathe's Francois Ivernel said that he plans to stick mainly to what he knows best: European film.
Mentre, for one, believes that the influx of funds soon will dwindle as more European investors begin to adopt that same approach. "The movie business in Europe is much less glamorous than in America," she said. "Every billionaire in America wants to hang out with stars. That is not true in Europe."
Even with the euro so strong against the dollar, she cautioned, "The budgets in America are huge compared to European films, and European companies do not want to put $100 million in a movie. It is culturally not what they do."
Nor are investments quite as easy for foreign companies as they might appear. Many face complicated tax issues and sometimes can be doubly taxed, here and in their home base. "The tricky part with foreign companies," Burke said, "is that there's some fairly complicated tax structuring that you need to do in order to mitigate the tax consequences. If you are a non-U.S. person making an investment in something generating U.S. taxable income, you are subject to U.S. taxes. A foreign company has to take that into account. Sometimes the taxes are higher than they might be in other jurisdictions."
Then, of course, there is that ephemeral matter of trust. Despite Hollywood's eagerness to embrace foreign money, it is often less willing to embrace the people behind it. "There is always a level of wariness about getting into a direct relationship with an international financier on the part of the filmmaker," said Rich Klubeck, partner and co-head of UTA's independent film group. "If it's a well-known company like Pathe, there is a comfort level because they are so visible here and they have made an effort to become familiar. We know their tastes, their sensibility. But there is a group of companies that do not have their track record."
Such issues make raising foreign money vastly more complicated than it is for those who have become used to targeting the hedge funds or billionaires who have swarmed of late toward Hollywood, which is precisely what Gill has discovered during the past year. Putting together a $200 million package in this global environment "is like flying a statically imbalanced fighter jet," he said, referring to modern-day machines that are constructed to veer away from a straight line. "It is already inclined to go off course unless you turn the wheel. I would liken the process to that. If you don't hold on really tight, your jet is going to spin out sideways."