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Investors
Motion
picture investors finance either production or development. There are
massive differences between these two opportunities in risk, return
of investment timing, and historical performance. The next few paragraphs
reveal these differences, explain their performance dynamics and offer
pragmatic counsel that may qualify investment capital and secure enhanced
returns.
One should unfailingly remember this reality: If there is no risk, the
funding will come from a bank. The very nature of private offerings
affirms there is risk. The question is whether the risk is reasonable
in relation to one's portfolio and the possible reward.
Approximately ninety percent (90%) of all US motion picture investments fund production. In 1999 there were approximately 2300 private US motion picture production offerings funded. This total financing exceeded a stunning $2 billion. Historically, well over half of these investments are not returned to their funders, and most of these do not return any investor capital. The reason these investments predominate is that they flood the marketplace (with over 10,000 on the street annually), and they are pitched passionately by producers and their excited representatives.
Last year US private investors financed approximately forty motion picture development offerings for a low nine figures in development capital to producers. By contrast, most of these offerings returned their investment capital and some profits.
There is a reason for these high losses as well as for these predictable returns. The next few paragraphs explain how, the dynamics of these processes and will be a convincing dialogue to all who read, to never, regardless of the investment scenario or script, participate in the high risk dynamic associated with production financing.
Bank Production Financing
The most successful and powerful production companies obtain their production financing from banks. The greatest advantage to the picture and its participants is not the retained equity or the substantially lower interest. The greatest advantage is derived by the necessity of collateral. Like all loans, these are fully collateralized. All or most of this collateral is in the form of presales. Today most of these are foreign territory presales, and are typically 'seasoned' with a US studio distribution agreement that is not a part of the loan collateral.
Simply stated, bank loans drive producers to develop and produce their pictures in close collaboration with foreign and US distributors. This collaboration assures each picture's maturing in the major global markets over several months preceding its production, and importantly almost guarantees its major distribution.
Private Production Financing
Producers using non-bank financing can produce their pictures without major territory collaboration. Releasing motion pictures theatrically is sophisticated and costly. The average motion picture US theatrical release expenses in 1999 exceeded $24 million each picture. Motion pictures are slated on studio release schedule twelve to thirty months in advance.
Ancillary sales including books, soundtracks and merchandise must be set seven to fourteen months in advance of the theatrical release. Producers waiting until after their picture is in production, place themselves in the poorest negotiating position and their pictures earnings at risk.
Producers seeking private production financing may be excellent filmmakers, but they clearly lack the business capacity and experience to engage the global marketplace to exploit the abundance and advantages of bank financing.
Private Development Financing
Producers using bank financing most often use private development funding. This funding delivers them a substantial advantage in the most challenging development aspects. These include being able to option literary properties, attach directing and acting talent and culture multi-territory relationships for their pictures. Critically, this funding also allows them to develop and produce multiple picture slates and own the copyrights to their pictures.
Development funding is usually accomplished through subscribing investors in multi-picture development company offerings. The development company is owned by the production company and the investors. These offerings prescribe a pre-set purchase price for each developed picture, by the production company. The number of pictures developed and the purchase price of each picture is established in a manner to return the investors capital before the pictures are produced or distributed, and to provide a safety net allowing for one or more of the pictures to not complete development without destabilizing the development company.
There are a variety of development offering scenarios, but most of them deliver the investors returns from the development sale until they recoup their investment and allows them to participate in the completed pictures' earnings.
The
Most Important Question To Ask
The Producer or Their Representative:
Are these investment funds principally for production or development?
If the offering is for production funding and they do not have a US theatrical negative pick-up relationship, or foreign license agreements that total more than the picture's cost, walk away. Remember these statistics: In its highest distributor pick-up year, the Sundance Film Festival odds were one in four hundred. Approximately 2,000 pictures in all categories applied, approximately 200 were accepted and five were picked-up. The lowest year was two pick-ups. That was one in one thousand odds. This is not a reasonable investment arena.
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