Hedging on Hollywood

Talladega Nights poster

KAI RYSSDAL: Anybody else sick and tired of all the Oscar hype yet? If you believe what you read, about the only big award still up in the air is Best Picture. And when the golden statues are handed out on Sunday odds are at least one of them will go to a film backed by a hedge fund. Hedge funds and private equity groups are becoming the stars of Hollywood film financing. To the tune of billions of dollars. Pat Loeb reports.


PAT LOEB: They used to call it dumb money — rich people writing a big check to back a movie in hopes of buying in to the glamour of Hollywood. It seldom paid off. But dealmaker Ryan Kavanaugh says those were the old days.
RYAN KAVANAUGH: We're not in this business to go hang out with actors and go hang out on a movie set.

Kavanaugh is the founder of Relativity Media. He calls his company the "bridge" between Wall Street and Hollywood. Kavanaugh arranges deals with movie studios for large investors, such as hedge funds. He deals with such solid institutions as Citigroup and Deutsche Bank. It's a far cry from the star-struck millionaire backing a particular movie. But it's still a tricky business.

KAVANAUGH: There's a huge barrier to entry in Hollywood. There's very few access points.

That's where Kavanaugh comes in. He grew up in Hollywood, the son of a successful doctor, so he has a social "in." When studios began looking around for some third-party funding, he was someone they trusted.

There are few people like that in Hollywood. Another major player is Thomas Tull of Legendary Pictures. And movie star Tom Cruise attracted private equity investment for his own movie ventures.

The funds are secretive about what kinds of returns they are getting. None of the banks or investors would comment for this story. One of the first movies financed with hedge-fund money was "Poseidon."

Yes, the film sank, much like the ship. And the investors lost money. On that one. But the hallmark of these newer investments is that the funds back a slate of several films coming out of a particular studio. And some of those films have done very well.

Kavanaugh's Relativity Media arranged financing for Will Farrell's "Talladega Nights." Think what you will about it, it made money for the investors.

Kavanaugh is 32. He has red hair and freckles and looks barely old enough to shave, let alone play with billions of dollars. But he has a formula for picking movies that he says will be solid investments.

KAVANAUGH: We look at it like we would any other product, whether it's real estate, or roads, or bridges, or oil, or venture capital, or distressed debt. . . . You know, our goal and our belief is that Hollywood can become that.

Kavanaugh has an exhaustive database of movies in his computer, and he uses standard banking tools such as regression analysis to look at a host of variables — who stars, who co-stars, who directs. He runs thousands of different scenarios on proposed films to decide whether to put them in his slate.

Some analysts are skeptical of that approach. Mark Kimsey of K and Z Partners has raised money for media projects in Hollywood.

MARK KIMSEY: There's a lot of factors that make it a very bizarre business. And a lot of people think that they can figure out how to make it more efficient.

But Kimsey says there are inherent conflicts: Studios want to keep money for themselves, and investors want to share in the profits.

Kavanaugh says, again, those were the old days and Hollywood is changing in order to keep investment money rolling in.

KAVANAUGH: I don't think the studios actually expected the capital to be as big and as consistent as it is. So I think they're also really now, for the first time, saying, "These are our partners for a long time, and we better take care of 'em.

In Los Angeles, I'm Pat Loeb for Marketplace.

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