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.
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.