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Hedge Funds Target Film Productions

By Kellie Schmitt
September 01, 2006

Hedge funds have gone Hollywood. Chasing high returns, money managers are plunking down hundreds of millions of dollars to finance films such as 'Superman Returns' and 'Nanny McPhee.' At the same time, the influx of money from hedge funds and private-equity firms is reshaping film-financing deals, leading entertainment lawyers toward lucrative transactions and new clients who might want a little glamour-by-association. [Editor's Note: Hedge funds are typically private partnerships in which general partners manage limited partners' investments and seek large profits from higher-risk investments.]

'All of a sudden, we've become the focus of East Coast money looking for high returns,' says Michael Mayerson, L.A.-based co-chairman of Loeb & Loeb's entertainment group. 'Almost every weekend, there's a movie in the box office backed with hedge-fund money.'

Among the recent, large-scale private-equity-funded deals:

  • Legendary Pictures, a vehicle for a number of hedge funds, has put up $500 million for 25 Warner Brothers' films, including 'Superman Returns' and 'Lady in the Water.'
  • 'hrough its Gun Hill subsidiary, Re-lativity Media has invested $600 million to co-finance 18 films at Sony and Universal, including 'RV' and 'Nanny McPhee.' In May, Relativity announced that its Gun Hill Road II fund would invest $385 million in 11 Sony films, and $315 million in nine from Universal.
  • Dune Entertainment, an affiliate of Dune Capital Management, has invested $325 million, betting on 28 films at 20th Century Fox. Among Dune Entertainment's credits thus far: 'X-Men: The Last Stand' and 'The Hills Have Eyes.'

While some predict the hedge funds could see double-digit returns, picking winners is a notoriously tricky business, even for experienced studio heads. Already there's been at least one notable failure. The hedge-fund-backed company Virtual Studios reportedly lost $50 million on its $125 million investment in the box-office bomb 'Poseidon.' Investing in a portfolio of films can help. 'The risk of one film tanking will be minimized over the time the slate will perform,' says Robert Darwell, a partner in Sheppard, Mullin, Richter & Hampton's Century City (L.A.) office who represented one of the hedge funds investing in the Legendary deal.

Unlike a private investor pouring money into one picture as a vanity play, a hedge fund's finance-heavy approach leads to more complicated legal work. That often means cranking out individual financial models for the deal ” factoring in economic predictions, DVD sales and cable-distribution fees. Studios typically are looking for a partner to put up anywhere from 25% to 50% of the total production costs. Some investors won't invest in big-budget movies, figuring the greater risks outweigh the possibility of greater returns.

The complicated financial structures make hedge-fund transactions intriguing, says Stephen Scharf, an entertainment partner at O'Melveny & Myers' Century City office. 'This is the opposite of a cookie-cutter practice,' says Scharf. 'They're never the same even though people start out saying they'll do it similarly.'

Lawyers are rarely called on to choose which films to back. But they've picked up a few pointers. 'The idea is to avoid so-called 'cherry picking,' where studios pick films for you that they have less confidence in,' says L.A.-based Lawrence Ulman, co-chairman of the entertainment group at Gibson, Dunn & Crutcher. Ulman, who represented Fox in the Dune Entertainment deal, acknowledged: 'I always like to see that a studio has a significant investment in the movie.' He cautioned investors against pet projects that have sat on the shelf, as well as vanity films a studio is backing at the behest of a particular actor.

One tactic is to pick a successful studio and ride with them on a series of films for a year. Or an investor could choose a particular genre, such as horror, and bet on a suite of thrillers. But studios can exclude films that will likely be highly successful, such as sequels like 'Pirates of the Caribbean: Dead Man's Chest.' When representing studios, Ulman says lawyers steer them toward passive investors who won't interfere too much when it comes time to make and market the film.

The handful of L.A. firms working with hedge-fund film financing mostly have strong entertainment transaction and corporate practices. O'Melveny has worked on about 10 of these deals over the past year, while Gibson, Dunn did about five, lawyers there say.


Kellie Schmitt is a reporter for The Recorder, the San Francisco-based daily legal newspaper ALM affiliate publication of Entertainment Law & Finance.

Hedge funds have gone Hollywood. Chasing high returns, money managers are plunking down hundreds of millions of dollars to finance films such as 'Superman Returns' and 'Nanny McPhee.' At the same time, the influx of money from hedge funds and private-equity firms is reshaping film-financing deals, leading entertainment lawyers toward lucrative transactions and new clients who might want a little glamour-by-association. [Editor's Note: Hedge funds are typically private partnerships in which general partners manage limited partners' investments and seek large profits from higher-risk investments.]

'All of a sudden, we've become the focus of East Coast money looking for high returns,' says Michael Mayerson, L.A.-based co-chairman of Loeb & Loeb's entertainment group. 'Almost every weekend, there's a movie in the box office backed with hedge-fund money.'

Among the recent, large-scale private-equity-funded deals:

  • Legendary Pictures, a vehicle for a number of hedge funds, has put up $500 million for 25 Warner Brothers' films, including 'Superman Returns' and 'Lady in the Water.'
  • 'hrough its Gun Hill subsidiary, Re-lativity Media has invested $600 million to co-finance 18 films at Sony and Universal, including 'RV' and 'Nanny McPhee.' In May, Relativity announced that its Gun Hill Road II fund would invest $385 million in 11 Sony films, and $315 million in nine from Universal.
  • Dune Entertainment, an affiliate of Dune Capital Management, has invested $325 million, betting on 28 films at 20th Century Fox. Among Dune Entertainment's credits thus far: 'X-Men: The Last Stand' and 'The Hills Have Eyes.'

While some predict the hedge funds could see double-digit returns, picking winners is a notoriously tricky business, even for experienced studio heads. Already there's been at least one notable failure. The hedge-fund-backed company Virtual Studios reportedly lost $50 million on its $125 million investment in the box-office bomb 'Poseidon.' Investing in a portfolio of films can help. 'The risk of one film tanking will be minimized over the time the slate will perform,' says Robert Darwell, a partner in Sheppard, Mullin, Richter & Hampton's Century City (L.A.) office who represented one of the hedge funds investing in the Legendary deal.

Unlike a private investor pouring money into one picture as a vanity play, a hedge fund's finance-heavy approach leads to more complicated legal work. That often means cranking out individual financial models for the deal ” factoring in economic predictions, DVD sales and cable-distribution fees. Studios typically are looking for a partner to put up anywhere from 25% to 50% of the total production costs. Some investors won't invest in big-budget movies, figuring the greater risks outweigh the possibility of greater returns.

The complicated financial structures make hedge-fund transactions intriguing, says Stephen Scharf, an entertainment partner at O'Melveny & Myers' Century City office. 'This is the opposite of a cookie-cutter practice,' says Scharf. 'They're never the same even though people start out saying they'll do it similarly.'

Lawyers are rarely called on to choose which films to back. But they've picked up a few pointers. 'The idea is to avoid so-called 'cherry picking,' where studios pick films for you that they have less confidence in,' says L.A.-based Lawrence Ulman, co-chairman of the entertainment group at Gibson, Dunn & Crutcher. Ulman, who represented Fox in the Dune Entertainment deal, acknowledged: 'I always like to see that a studio has a significant investment in the movie.' He cautioned investors against pet projects that have sat on the shelf, as well as vanity films a studio is backing at the behest of a particular actor.

One tactic is to pick a successful studio and ride with them on a series of films for a year. Or an investor could choose a particular genre, such as horror, and bet on a suite of thrillers. But studios can exclude films that will likely be highly successful, such as sequels like 'Pirates of the Caribbean: Dead Man's Chest.' When representing studios, Ulman says lawyers steer them toward passive investors who won't interfere too much when it comes time to make and market the film.

The handful of L.A. firms working with hedge-fund film financing mostly have strong entertainment transaction and corporate practices. O'Melveny has worked on about 10 of these deals over the past year, while Gibson, Dunn did about five, lawyers there say.


Kellie Schmitt is a reporter for The Recorder, the San Francisco-based daily legal newspaper ALM affiliate publication of Entertainment Law & Finance.

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