In 2007, the Cannes Film festival had a record number of bankers attending the famous festival. Everybody was schmoozing everybody. I have to admit, my business partner and I were caught up in the movie mania, too.
But while most hedge fund managers and investment bankers were talking to the Harvey Weinsteins, Ryan Kavanaughs, Steven Spielbergs, and Angelina Jolies of the Hollywood scene, we were talking to a less glamorous crowd: independent film distributors, boutique financing firms, accountants for Hollywood and indie films, theater owners, and data freaks with a passion for numbers.
So, it looked to me that Hollywood could finance an asset (movie), by selling “options” (pre-sales), in a very specialized, over-the-counter market. That meant that the risk of a movie (like Lara Croft’s Tombraider) being a box-office disappointment was passed to third parties, in exchange for those guys getting the distribution rights in their respective territories.
My analysis also showed that the pricing mechanism was very inefficient, because it was not based on any analytical techniques, but on subjective opinions about the ‘hot’ stars, genres & directors of the moment. As an additional hurdle, Hollywood was subject to the capital constraints of their parent corporations, which are exposed to risks larger and diverse than those faced by their Hollywood branches.
The Google search “How to get in shape under a rational approach” that I did almost 3 years ago brought back disappointing results. I remember exactly when and where I was when I typed that search: September 15, 2008, on the trading floor at Lehman Brothers, my former employer. The bank had collapsed, and financial markets all over the world were in turmoil. I remember exactly what I was doing: I had returned to my desk after a meeting with Jami Miscik, the former CIA Intelligence Chief during the George W. Bush administration.
Jami and her team had completed an extremely good research report which I had requested a couple of weeks earlier. I wanted to thank her personally, and as it turned out, this was the first time that fit both our schedules.
Steve’s proposal was sitting on my desk in my office at 110 Wall Street for weeks, and the more I read it, the less I liked it. I said to myself: This doesn’t make any business sense!
How is somebody going to invest in an ‘asset’ that doesn’t even exist yet, without a risk profile and expected returns via an analytical framework? Where is the value here? How do you price this? The more I read Steve’s proposal, the more frustrated I became.
In 2006, my hedge fund advisory firm SAGA Capital was approached by a Hollywood actor-turned-independent-producer who had worked with John Travolta in one of his more notorious films.
He had also produced a moderately successful film that was acquired by Showtime. Let’s call him ‘Steve’. Steve was looking to finance a slate of 10 films, in which he had some actors committed, as well as some ‘pre-sales’ financing in place, decent screenplays (yes, I actually read them) by good writers for most of his films.
The picture shows unemployed men outside a soup kitchen in Depression-era Chicago in 1931, with the unemployment trend going strong. Today, the unemployment numbers recently released by the US Department of Labor indicate that the current unemployment trend is still strong, and that long-term unemployment is still a mayor problem. 16.2% of African Americans, and 11.9% of the Hispanics are unemployed, vs, 8% for Whites and 7% for Asians.
Finally, after all the diet programs I tried failed, I knew I had to find a different way. As if I needed more motivation, I suddenly remembered something: over the course of my career at investment banks and hedge funds, three of my colleagues (two younger and one older, none of them fat) had died of sudden heart attacks while at work.
Did you know that top tier investment banks have defibrillators on every trading floor? That was a brutal shock, my subconscious mind letting me know I had better do something.