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.
During that 2007 Cannes film festival, our most valuable acquisition was not a film with the hottest actor or celebrity director, but a 10 gigabyte database with info related to the performance of US films in foreign territories. That’s all we needed to fine-tune the model we had been refining to forecast the value of movies before they are produced. IF such as model could be created, validated, and calibrated, the go/no go decision would be a lot easier.
A movie that has not been created yet is an intangible asset with many unknown variables. Like I said before, financing it without quantifying its value is a risky business. You know what filmmakers do? To recap the first post of this series, they find films that they think are similar to their own projects, and of course, pick the ones with the best numbers to show investors the box-office potential of their movies.
I know what the value of those movies is before any independent producer shows it to me: zero. Just like one of the components that accelerated the credit crisis, the value of an asset is what investors are willing to pay at that moment (that’s called mark-to-market). It does not matter if the asset is bars of gold embedded with diamonds, which might have a theoretical price. But if nobody is willing to put up capital for it when you are selling, the value is zero.
Do you think Lehman Brothers had “zero” value when it filed for bankruptcy? No way!..just the real estate properties in New York City had a value a lot higher than the market capitalization of the whole firm in its last few days. Nevertheless, the value of Lehman was “zero” because nobody was willing to buy Lehman’s assets, or lend money to Lehman against any collateral. FYI, Barclays and Nomura Securities made a great deal with the acquisition of Lehman assets in the US, Europe, and Asia at a DEEP discount, and without any of its major liabilities. As I see it, they basically bought the buildings and “we” – the people working there and survivors of many rounds of layoffs from Lehman- came as a free but disposable bonus.
So going back to the movie thing, a movie without proper distribution and advertisement is worth zero, no matter who the actor, director, etc. is. Now, if you have a well-capitalized hedge fund or bank, with the right quantitative model, and that can afford the right inputs (creative cast, directors, distribution, advertisement, genre, season of release, etc.) dictated by the model, you have the potential of becoming the new wunderkid on Hollywood’s block.
That’s what we were aiming for by the end of the Cannes Film Festival in 2007. That’s why we were so happy to start working in that area right after the festival with what we thought at that time were the right backers: Ginepri Capital Partners and Lehman Brothers.
Ginepri was a quantitative hedge fund investing in CDOs and other credit risk products, interested in the media space and with risk capital for films. Lehman Brothers was also interested in the media space and in advisors with the right algorithms to price intellectual property. In addition, Lehman had the willingness and was able to provide senior and mezzanine debt funding for the right equity risk holder. All the pieces were starting to fit…
Little did I know that a few months after we started to put this things in motion, Marc Cuban’s Content Partners was going to be one of a few funds profiting from Lehman’s nascent efforts in the movie business, Lehman was not going to exist, and my new employer was going to lay off most of the Senior staff it inherited, of course, after learning key aspects of what we did for Lehman and its clients..