Investing in Movies: Strategies for Investors and Producers

INVESTING IN MOVIES

Investing in Movies: Strategies for Investors and Producers is a useful guide for investors and producers looking for an analytical framework to assess the opportunities and pitfalls of film investments. The book traces macroeconomic trends and the globalization of the business, as well as the impact these have on potential returns. It offers a broad range of guidelines on how to source interesting projects and advice on what kinds of projects to avoid, as well as numerous ways to maxi- mize risk-adjusted returns. While focusing primarily on investments in independent films, industry veteran and author Joseph Cohen also provides valuable insights into the studio and independent slate deals that have been marketed to the institutional investment community.

A graduate of Yale and Oxford, Joseph Cohen held senior positions at Salomon and Lehman Brothers before he became president of Largo Entertainment, a joint venture between JVC and producer Lawrence Gordon, in 1989. During Cohen’s tenure, Largo produced such hits as Point Break and Malcolm X . Cohen founded American Entertainment Investors (AEI) in 1996, which is best known for advising independent production companies, including Alcon, River Road and Black Label. AEI advised Goldman Sachs and Assured Guaranty in restruc- turing The Weinstein Company in 2010. Cohen is a member of the Motion Pic- ture Academy and has taught film finance at the Peter Stark Producing Program at the University of Southern California.

INVESTING IN MOVIES

Strategies for Investors and Producers

Joseph N. Cohen

FORMER ADJUNCT PROFESSOR OF FILM FINANCE IN THE PETER STARK PRODUCING PROGRAM AT THE USC GRADUATE SCHOOL OF CINEMATIC ARTS First published 2017 by Routledge 711 Third Avenue, New York, NY 10017 and by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Routledge is an imprint of the Taylor & Francis Group, an informa business © 2017 Taylor & Francis The right of Joseph Cohen to be identified as the author of this Work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice : Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. Library of Congress Cataloging-in-Publication Data Names: Cohen, Joseph N. author. Title: Investing in movies : strategies for investors and producers / Joseph N. Cohen. Description: New York, NY : Routledge, 2017. | Includes bibliographical references and index. Identifiers: LCCN 2016048952 (print) | LCCN 2017005916 (ebook) | ISBN 9780415791908 (hardback) | ISBN 9780415791915 (pbk.) | ISBN 9781315212159 (e-book) Subjects: LCSH: Motion pictures—Production and direction. | Motion picture industry—Finance. Classification: LCC PN1995.9.P7 C57 2017 (print) | LCC PN1995.9.P7 (ebook) | DDC 791.4302/32—dc23 LC record available at https://lccn.loc.gov/2016048952 ISBN: 978-0-415-79190-8 (hbk) ISBN: 978-0-415-79191-5 (pbk) ISBN: 978-1-315-21215-9 (ebk)

Typeset in Bembo by Apex CoVantage, LLC To my late mother, Matilde, and the sweetest dog, Daisy, anyone could ever have, who together never let me get discouraged in the early years of American Entertainment Investors’ existence when I was struggling to turn the corner financially. And to my daugh- ter Catriela, whom I can always rely on for some well-thought-out advice on new film projects.

CONTENTS

Acknowledgments ix

Introduction 1

1 Pros and Cons of Motion Picture Investment 13

2 Macroeconomic Trends and Studio Co-Financing 33

3 Tax and Other “Soft Money” Benefits and Limited Partnerships 40

4 Welcome to the World of Independents 50

5 The Evolution of Revenue Streams 59

6 Cast of Characters 67

7 Globalization of the Business 89

8 How to Have Fun and Not Lose Your Shirt 113

9 Managing Risk 130

10 Working the Banks 145 viii Contents

11 How to Beat the Odds: Niche Strategies 165

12 Evaluating Projects 176

13 Where You Should Be in the Food Chain: Distribution Versus Production 189

14 The Sinkhole of Development 204

15 Exit Strategies: The Value of Film Libraries 210

16 New Directions: The Digital World 216

17 Art Versus Commerce 223

Index 233 ACKNOWLEDGMENTS

I want to thank all my colleagues at American Entertainment Investors (AEI)— my brother Charles, Andra Gordon, Christopher Howland, Myriam Bocobza, Luiz Tassi and David Chasmar for their strong support and willingness to search for data I directed them to. In particular, I want to thank my colleague, John Smith, for his many valuable comments on the text and his invaluable collabora- tion in preparing the charts and graphs interspersed throughout the book. I also want to thank my editor at Taylor & Francis, Emily McCloskey, and her editorial assistant John Makowski, for their much-appreciated guidance in making the book more accessible to the broadest possible readership and for persuading me not to go with a “sexier” but less-Googleable title So You Want to Walk the Red Carpet? I want to especially acknowledge my peer reviewer, Milena Grozeva- Levy, who clearly spent many hours reading my draft and greatly contributed to reducing its opacity and reliance on technical jargon. Since the book was inspired by the course on film finance I taught for 16 years in the Peter Stark Producing Program at the USC Graduate School of Cinematic Arts, I would be remiss if I did not thank the longtime program director, Larry Turman, for his strong support of my teaching efforts during my tenure there. Finally, I want to thank all of AEI’s clients who kindly allowed me to comment on their business strategies in such a public forum.

INTRODUCTION

Summary— The introduction traces the career arc of the author from Wall Street to Hollywood via the UK and Canada. The author describes his seminal experience as president and chief operating officer of Largo Entertainment, one of the first of the well- capitalized independent production companies, and how he segued back into the financial advisory business, focusing on advising wealthy individuals who want to invest in the media space and incubating the companies they finance.

There are lots of books about the job of the motion picture producer. Many of them focus on creative packaging and production issues, but some offer a broader insight into the financing process as well. What the market is lacking, in my opinion, is a book that is directed at prospective investors in the film industry—both institutional and individual. I have attempted to address that shortcoming with this book. While the structure of the book does not exactly mirror the lecture sequence of my course on film finance, which I taught (and modified to accommodate changes in the marketplace) for 16 years in the Peter Stark Producing Program at the USC Graduate Film School (I retired in 2010), most of the concepts, analysis, issues and, to a lesser extent, financial models that I have introduced to my students can be found herein. One warning: I write like I lecture—circuitously. That is, I tend to return to subjects I brought up previously for further clarification and amplification. Hopefully, I will not be too repetitious. While this book is directed at the broadest possible audience, I recognize that the universe of prospective investors in the film industry is relatively small. This is not surprising given the enormous capital requirements of most films. Yes, you can make movies utilizing your credit cards, but the likelihood of anyone ever 2 Introduction viewing such films outside of film schools or obscure film festivals is minuscule, to say the least. I must admit that I am conflicted in writing this book. Given that I advise high-net-worth individuals in their investment adventures in motion pictures, it is obviously not in my interest to overemphasize the perils of investing in films. But the fact remains that most investors, particularly those who dabble in the space and don’t take it seriously, fail and lose money. I really believe you can make money on a systematic basis, but you have to be incredibly selective, incredibly careful and apply rigorous underwriting standards. Hopefully, this book will assist those interested investors in avoiding most of the pitfalls that abound. If I have one guiding maxim, it is “less is more.” You are lucky if you can find one or two or maybe three compelling projects a year that warrant an equity investment. The potential universe is larger with respect to mezzanine investment, which recoups ahead of equity, because the probability of loss is so much lower. I had one client several years ago who expressed an ambition to finance 8–10 films a year. I told him that made no sense: Even the studios have difficulty finding 8–10 attractive projects to make in a given year if we strip out sequels and acquisitions from their schedule. Not surprisingly, this former client stretched on too many projects, either opting in on projects with questionable commercial appeal or accepting budgets that were too high relative to projec- tions, resulting in an unfavorable breakeven analysis. He left a lot of money on the table before he imposed a more careful selection process, and, while he has not recouped anything close to his cumulative losses, he has probably recovered a meaningful portion of his overall investment—and he is still an active player in the space. Writing this book proved to be an invaluable exercise in compelling me to address many of the key challenges facing investors in the movie industry today. I retired from teaching the course on film finance at Peter Stark 6 years ago, and so much has changed in the industry since then. But I also had another reason for writing this book. As a young investment banker in London and New York, I was able to witness first hand the great marketing skills (and admittedly also contacts) that certain “rainmakers” exhibited in winning mandates for their firms, but I also witnessed how many transactions represented “walk in” business that old-line firms benefitted from as a result of their quality reputations. I run a small boutique media investment bank and we are referred business by producers, talent agencies, banks, law firms and accounting firms, but we are certainly not a household name when a hedge fund, family office or high-net worth individual is considering someone to seek advice from. To the extent this book gives such perspective clients a sense of the complexity of the issues they would face and the importance of soliciting objective advice (not that obtainable in Holly- wood where feedback is so often tarnished by the threat of conflicts of interest), I believe it will serve as a valuable door opener for new business. Fair enough? Introduction 3

Everyone has two businesses—their own and the movie business. This old saw is probably even more relevant today given the fact that virtually every local newspaper worth its salt publishes the weekend box office tallies. In addition, national newspapers like The New York Times and The Wall Street Journal frequently publish interesting business-related articles about the Biz. A little knowledge can be dangerous, and this little knowledge is compounded by greater access to databases related to film performance. One of my partners was once grilled by a hedge fund manager about prospective returns in the movie business. When he tried to weave a complex analysis on the trade-off of risk and return, the hedge fund manager cut him off with the simple explanation that “everyone knows studio films do three times their negative costs.” Oh, if it were only that easy! I was once an arrogant Wall Street investment banker too—primarily focused on the underwriting of sovereign debt and providing investment management services to central banks. Talk about a career shift: I started out as an academic in philosophy, teaching the paper on logic at Queen’s College Oxford to undergrad- uates in “Greats” and Politics, Philosophy and Economics. I had no knowledge of Hollywood and no interest in entering that world, although ironically one of the first deals I worked on as a young merchant banker at N.M. Rothschild was to handle the sale of the debentures that Paul McCartney received when the Beatles sold their music publishing operation Northern Songs to ATV. In those days the marginal tax rate on unearned income in the UK was 98%, so it didn’t make too much sense for McCartney to keep those debentures. My ex-wife can attest to the fact that my knowledge of contemporary music does not extend much beyond Motown of the 1960s, but I have had the privilege of working with some of the great musicians of our times to the extent they’ve been involved in the movie business. I handled the sale of George Harrison’s film company, Handmade Films. I executive-produced Bob Dylan’s cult classic Masked and Anonymous , I have been trying to put together a project for Mick Jagger’s film company, Jagged Films, for years (and I won’t give up because it is a great story set in China in the 1930s), and I advised Michael Jackson in an abortive venture in the movie business. When I woke up one morning and decided academics was not for me, I locked myself in a room and read Graham and Dodd on investment theory, and Samuelson on macroeconomics, and reinvented myself as an investment banker—first in London, then on Wall Street. When the economic debacle of the late 1970s–early 80s hit and short-term interest rates rose above 20%, I was running the London-based bond operation at Lehman Brothers under an ever- increasing stress level. What can you expect when your cost of carry on every position exceeded negative 700 basis points—in effect, I was virtually assured of losing on every bet if my trading desk held a position for longer than 10 minutes. Not surprisingly, I was drinking heavily. When my boss recalled me to New York to discuss shutting down the operation, I made a 3-hour presentation arguing that we could cut back dramatically and contain our losses without suffering the 4 Introduction embarrassment of withdrawing from the market. My boss took it all in, and never spoke to me again. He did not fire me, but all future communications between him and me were via intermediaries (one of whom, Dick Fuld, achieved much greater prominence—and notoriety!—long after I had left Wall Street). Needless to say, I saw the writing on the wall. My expected partnership was not to be. At the same time, the tax laws changed in the UK governing film amortiza- tion. The government in its beneficence now permitted a 100% write-off of a “qualified” film asset (one that met certain tests regarding UK content and labor contribution) in the year of its creation. An old buddy of mine from Oxford approached me to see if we could take advantage of this change in the tax laws. I researched the legislation and came up with the idea of creating a “sale and leaseback” structure to effectively transfer the tax benefits resulting from the creation of a film asset to tax-paying entities in the UK in exchange for a sub- sidized interest rate that we could monetize and convert into an upfront benefit to the production. In other words, we could “magically” generate cash to the production of between 10% and 20% of the budget. It was like buying a $100 suit for $80. To set the historical record straight, we came up with the idea at the same time that Barclays Bank did. But we had an advantage over Barclays. In those days, UK lessors demanded to be indemnified if they did not receive the anticipated capital allowances. Studios could issue such credible indemnities, but independent producers could not. My Oxford buddy and I managed to persuade a major UK insurance company to backstop such an indemnity. Thus, while the studios could bypass us, we were the only game in town for the independents. I left investment banking—actually I hedged my bets for a few years by joining another investment bank while continuing to finance films—to establish Albion Films with two partners. Albion became the “go-to” film financing company in the UK in the early 1980s. Not only did we close hundreds of millions of pounds worth of deals, but we also earned a significant windfall profit! Mrs. Thatcher reduced corporation tax during this period. Under the terms of the leases, we merely had to guarantee a certain after-tax rate of return to the lessor. These deals were all defeased (i.e., a certain percentage of the sale price was placed on deposit to secure the lease payments over the term). Since, with the reduction in corporation tax, we could reduce the cash flows required to the lessor and still deliver the same after-tax rate of return, we were able to retain a portion of the defeased amount for our own account. I personally earned a windfall profit of several million pounds. Then the Inland Revenue threw a spanner in the works. Tax bureaucrats in every country resent rich individuals and corporations being able to significantly reduce their tax bills. So in 1984–85 the Inland Revenue attacked the sale and leaseback structure on technical legal grounds. The studios fought the Inland Revenue all the way up to the House of Lords and won. However, one of our main corporate investors did not wish to challenge the Inland Revenue—why should it since it had our insurance-backed indemnity? So it called our indemnity Introduction 5 and while the insurance company paid up, we had issued a counter-indemnity to the insurance company. My windfall profit, which had miraculously appeared, just as miraculously disappeared. Ironically, the UK government and the Inland Revenue reintroduced the sale-and-leaseback structure several years later to support the British film industry, and this financing mechanism—which we arguably introduced—became an enormous source of funding for studio and independent films, and generated enormous revenues for the intermediaries who arranged the deals. But I was long gone from the UK by then. I actually lost twice by the Inland Revenue’s action. At roughly the same time, I structured a convertible preferred offering for New Line Cinema, just before it went public. I also committed to take down a significant piece of the offering, using the windfall profit I had earned in the UK. But when my nest egg disappeared, I wasn’t able to take up my shares, so I lost out on the huge profit I would have earned when Ted Turner later bought the company. Having “bankrupted” one exchequer, I moved on to another. Canada in those days was the true Wild West when it came to film finance. There were tax benefits for Canadian qualifying films that could be accessed on both the federal and provincial level, but for the most part they were utilized for low- budget, obscure Canadian films. Tax shelter money was raised in small amounts privately, largely by medium-size accounting firms and individual promoters. In 1987 I launched the first-ever public offering for films in Canada. The C$21 million raise represented by far the largest single film financing ever achieved in Canada to that date. I followed this up with several subsequent limited partnership offerings, but I chose not to accept an offer from Alliance, the largest independent film company in Canada and my partner on those deals, to jointly establish a specialty film finance division. Tax shelter financing can be very lucrative for the promoters, but intellectually it is rather arid, and I wanted to become more involved in mainstream Hollywood activities. In hindsight, passing on the invitation to partner in Alliance Equicap was a huge mistake on my part, since it generated enormous revenues over the 15 or so years it was in existence. Arguably, it represented the vast bulk of Alliance’s profits over that period. But I had already made the decision to move to Los Angeles, where the real action was. By this time, my career shift from Wall Street to Hollywood was a fait accompli, and I was determined to become involved in the making of movies, albeit from a financial structuring point of view. The movie-making process was as close to creation ex nihilo as I could imagine, although, unlike God, we financial engineers have to rely on the creative vision of writers, directors and producers to assemble our universe. My first client after I moved to Los Angeles was a small, but highly regarded, independent production/distribution company, Alive Films, which was an offshoot of a successful management company/record label run by a charming guy, Shep Gordon, whose client list included Luther Vandross and Alice Cooper. After I closed a major financing several years later for a new production entity, 6 Introduction

Largo Entertainment, which was run by a high-profile producer, Larry Gordon, Shep sent me a note: “Congratulations, but you raised money for the wrong Gordon.” Shep is my hero; he now lives in an Edenic house on Maui and practices his culinary skills, which are considerable. I was delighted to see that a documentary about Shep (who is the humblest guy in the industry regarding his success) was recently produced: Supermensch . I couldn’t agree more about the appropriateness of the title. Alive Films had a reputation as a tasteful arthouse producer/distributor (including such films as Choose Me , The Whales of August , The Moderns and Far North ), but its greatest commercial coup was linking up with noted genre directors Wes Craven and John Carpenter to do a series of low-budget horror films. Shep rec- ognized early on the appeal of the horror film genre for the teenage audience. He also realized that audiences were more director-driven than cast-driven in this genre. Shep was not locked into studio precedents when it came to doing deals: He was able to attract Carpenter and Craven for what were after all low-budget films by offering them a true partnership position in profits. I believe that Wes made more money on his two films with Shep than he did on all the Nightmare on Elm Street films, which grossed infinitely more. To put things into perspective, Alive’s first horror film, They Live , did $13 million U.S. box office on a budget of $4 million; the second film, Shocker , did $16.6 million on a budget of $5 million; and the third film, The People Under the Stairs , did $24.2 million on a budget of $6 million. 1 The key to Shep’s strategy was tight control of budgets, which is the first rule of success in the independent market. Largo for me represented an opportunity to segue from the financing area to becoming a full-fledged studio executive. In 1989, the prominent entertainment law firm of Bloom, Dekom & Hergott, recommended me to the Japa- nese hardware company JVC to advise them on the creation of what would become the first Japanese-funded film company in Hollywood (we preceded Sony’s acquisition of Columbia Pictures by several months). I used to kid around that the reason I left Wall Street was that I would never have to deal with the Japanese again (I was in charge of Japan at Salomon Brothers, where I worked before Lehman—actually I joined Kuhn Loeb after Salomon and soon afterwards KL merged with Lehman). In the mid 1970s when I worked at Salomon, the Japanese brokerage firms, banks and trading companies were just beginning to become actively involved on Wall Street. They had an insatiable thirst for knowledge concerning the world’s biggest financial market. Because they gave me a lot of business and I guess also because of my professional demeanor, I became the go-to source for such information—it was very gratifying to be so lionized but it sure tired me out. Bloom, Dekom had introduced Larry Gordon to JVC as a potential partner for the venture, and chose to represent Larry in the negotiations. I represented JVC. The good news was it paid me my fee at closing; the bad news was I was the Introduction 7 only acceptable candidate to both Larry and JVC to be chief operating officer of the new venture. Just kidding! I was delighted to be given this opportunity, because frankly, while I was an experienced investment banker and tax shelter film financier, I really had no hands-on experience in running a film company. My four-and-a-half years at Largo were an incredible learning experience. Business Affairs, Finance and International all reported to me. Larry retained full control over creative matters. I probably spent 2–3 hours every working day for 4 years in Larry’s office discussing corporate matters but also being regaled by Larry’s stories of his Hollywood experiences—and Larry is a great storyteller in the Southern and Jewish traditions. He grew up in Belzoni, Mississippi, the Catfish Capital of the world. I have worked with a lot of producers over the years, but Larry is as well-rounded as any I know. There are some good creative producers who don’t know a thing about financing movies. They have grown up in the studio environment and their job is to develop and package projects, which the studios will greenlight and finance, and then deliver a finished film to their studio masters. Larry started out with one of the original low-budget independents— American Independent Pictures—and while he went on to produce many big- budget action blockbusters, he never forgot his indie roots, which call for a careful assessment of revenue potential versus the cost of producing and marketing. Larry was the first producer who told me that he never started a film before he could envisage the movie poster (“the one sheet” in Hollywood parlance). Generally speaking, independent production companies, if they are to succeed, have to hit at least one “home run” within a reasonable period of time. “Grand slams”—like Blair Witch Project or My Big Fat Greek Wedding —are even better, but without the significant profit cushion that a home run can deliver, most independents run out of money at some point. There are exceptions to that rule: If the indie is exceptionally well-capitalized, can maintain a very tight control over operating costs, avoid over-spending on development and structure its deals so that even on unsuccessful films, it does not lose too much money, it can survive and maybe even prosper. My client, Alcon Entertainment, was an example of just such a successful independent production company that managed to generate an attractive rate of return for its investor over an initial 10-year period without ever having hit a home run. It did hit a number of singles and doubles, including P.S. I Love You , Sisterhood of the Traveling Pants , Insomnia and My Dog Skip . Alcon is very tight- fisted when it comes to operating costs and development and is very careful on its higher-budget films to generate a meaningful percentage of budget out of foreign presales(i.e., the securing of minimum guarantees from territorial distributors irrespective of the film’s performance). Minimum guarantees represent non-refundable advances paid by distributors upon delivery of a film, which are applied against contractual net revenue entitlements, so Alcon never has too much money at risk predicated upon U.S. and Canadian box office performance. One or two failures in a row would not break Alcon’s back. 8 Introduction

Success in the independent film world typically means being able to stay around long enough to hit that home run. In fact, after a 10-year run, Alcon did just that with the blockbuster hit, The Blind Side , which frankly came out of left field. The industry pundits never saw it coming, but, thanks to its broad appeal to all audiences—in industry parlance we call it a “four quadrant film” (i.e., it appeals to males under 25, males over 25, females under 25 and females over 25)—the film wound up generating domestic box office in excess of $225 million (on a budget of around $30 million taking into account subsidies from the state of Georgia). 2 In particular, The Blind Side brought out the evangelical audience in droves, because it was a “feel good” movie with an evangelical family as heroes—and it did not beat you over the head with an overtly religious message. Interestingly, Alcon has since modified its business plan to focus on higher-budget, star-driven and special effects-driven films with budgets of $100 million or more, particularly in response to the growing importance of the international market, which wants those kinds of films. 3 The company released Transcendence starring Johnny Depp in April 2014, and Christmas-time 2015 released a rebooted version of the cult action film Point Break (which ironically was produced under my aegis at Largo)—both to disappointing results—and is planning to launch its most ambitious project to date: a sequel to Ridley Scott’s dystopian sci-fi film Blade Runner , which despite disappointing box office (it achieved lifetime gross of less than $34 million 4 ) has attained cult status over the years. But Alcon is not totally forsaking its family film heritage: It also released a sequel to its hit film Dolphin Tale in September 2014, which was profitable, although it underperformed the original by some 40%. Largo had a similar track record—i.e., a number of singles and doubles, including Point Break , Unlawful Entry and Time Cop —but no home runs. We mitigated our per-picture risk significantly by negotiating a substantial minimum guarantee for non-North American rights from our worldwide distributor—first Twen- tieth Century Fox, then Universal. Largo’s business plan called for us to produce five films per year on average. Our annual overhead and development budget was geared to that volume of production. For whatever reason, we produced only roughly two and a half films per year. Larry told me early on that tem- peramentally our industry is divided up between sellers and buyers. He clearly identified himself as a seller (he was one of the great pitchmen in the business), so I should have been forewarned that he would always be hesitant before pulling the trigger on greenlighting projects. Our margins were significantly impacted by the fact that our production slate had to bear roughly twice as much in amortized operating costs as we had planned. In the end, what sank Largo was not its performance history, which showed a meaningful, but not huge, overall loss on a fully amortized basis. What sank Largo was management’s failure to live up to its business plan, and JVC’s unwillingness to overlook that in the context of unexciting results. Ironically, the final nail in the coffin was Largo’s proposal to greenlight two big action films, which was Introduction 9 precisely what JVC expected from the joint venture. I was not surprised that JVC passed on Waterworld —Larry told me that no one knows what Waterworld would cost given the difficulties of shooting on water—but I was surprised that JVC also passed on Die Hard With a Vengeance since that seemed like a no-brainer. But I guess that the confidence factor, which is a necessary element in the successful functioning of a joint venture, was irretrievably damaged. I learned a valuable lesson from that experience: Your business plan must be carefully constructed, and, once constructed, it must be scrupulously adhered to, subject to the ability to make needed changes in response to changing market conditions. When I joined Largo, I merged my financial consultancy company, Inter- Media, with another consulting company, Film Equities, which was owned by a prominent boutique entertainment law firm, Sinclair Tenenbaum. When Largo dissolved (it actually was absorbed by JVC, which transformed it into a foreign sales company that promptly managed in the short span of 2–3 years to lose much more money than the production company ever did), I returned to InterMedia as co-chairman of InterMedia/Film Equities, which, among other things, advised the major music company Polygram on the creation of a motion picture subsidiary and the well-known directors Ridley and Tony Scott on a leveraged buyout of Shepperton Studios in the UK (a deal that turned out very profitable for the principals of InterMedia, since we had a small shareholding that was later monetized when Shepperton was merged with Pinewood). In 1996, Co-Chairman Nigel Sinclair informed me that he no longer wished to provide financial advisory services but wanted to segue into being a producer in his own right. Accordingly, I sold my interest in InterMedia to Nigel’s old friend and highly regarded foreign sales agent, Guy East, for a nominal amount, and estab- lished my current advisory firm, American Entertainment Investors. I mention this only because Nigel and Guy merged InterMedia with a major German tax shelter firm and, taking advantage of the huge inflows of German private capital into the movie business in the early 1990s, they and their German partners took the company public. For 1 millisecond, my shares in InterMedia, which I had sold for a pittance, were worth $100 million on the German Neuemarkt (the entire company had a market capitalization exceeding $1 billion!). But that was only for 1 millisecond since the German Tax Authorities killed the golden goose, and the principals did not have time to liquefy much of their holdings. I understand they did manage to sell some shares at a considerably lower valua- tion, and we are still talking about significant sums here. Yes, the film industry can generate enormous killings from time to time—but I am not promising any secret formulas for success. Over the last dozen years, Wall Street firms—primarily hedge funds—have plowed many billions of dollars into Hollywood, primarily in the form of equity and mezzanine investments in slates of studio and major independent companies’ films. Not surprisingly, this market dried up as a result of disappointing returns and the seizing up of the credit markets in 2008–09. Even during the 5-year 10 Introduction love affair between the hedge fund community and Hollywood, you would have thought that Wall Street would also have attempted to create investment vehicles for the individual investor. It did not. Ironically, Wall Street did attempt to attract retail investors in the 1980s by marketing a series of motion picture limited partnerships that permitted smaller investors to participate in a slate of studio films with a minimum investment of only $5,000. 5 Men (or women as the case may be) could now impress their dates when the lights dimmed in the cinema by casually informing them that this was their film. The only problem with these structures was that they generated unattractive returns for investors. Needless to say, Wall Street was more attentive to the investment considerations of the large studios sponsoring these funds. At that time, I was hired by a major Wall Street retail firm to educate it on the economics of these structures with a view to its possibly marketing similar partnerships. You have to realize that the executives I lectured to were predisposed to come up with structures they could sell to their clients. After all, that is how they make their money. But to the credit of the Wall Street firm in question, it could not justify getting into this business given the likely rates of return these partnerships offered. So I never succeeded in becoming a general partner on a public motion picture limited partnership. Fashions on Wall Street tend to be cyclical. Fads fade out and come back into favor. So as I write this book, the older generation of hedge fund and private equity managers who pioneered the slate deals of the early 2000s are now enjoy- ing their retirement on Nantucket or Naples, Florida and a new generation of money managers think they have figured out how to make money in the movie business—so a new series of slate deals have been launched over the past several years—embodying some improvements on the previous generations but with less leverage. Arguably, the kinds of returns required for this level of risk will be equally difficult to achieve this time around. My core consultancy is to advise wealthy individuals who wish to invest in the film and television industries, primarily by forming their own production companies. I am an incubator of such production vehicles. That is, I formulate the business plan, help organize the company, negotiate distribution relationships, assist in evaluating individual projects, negotiate deals with talent, organize the banking and other financing arrangements, and source subsidies, tax benefits and other “soft money” opportunities. When I am asked what I do for a living, I typically reply, “Do you remember Robert Duvall in The Godfather ?” I am the consigliere . Most of my clients are on the Forbes 400 list, or in the case of some non-U.S. clients, would qualify for that list if they were domiciled here. By definition, there are only so many prospective investors who can be culled from the Forbes roster. There is a much larger universe of investors in the $10–$100 million net worth range, who theoretically might be interested in exploring diversification into film and television investment. I have been seriously considering how to structure investment vehicles that could appeal to this group of investors, and I Introduction 11 hope that this book will serve as a valuable guide to assessing such opportunities if and when they can be made available. If Wall Street has found ways to provide diversification through hedge funds, LBO funds, “vulture” funds, etc., the time is ripe to forego the poorly structured partnerships of the 1980s and come up with pooled investment strategies that can offer reasonably attractive projected rates of return. In fact, I have recently set up just such an investment vehicle with several entrepreneurial investors who have made a fortune in real estate investment. We are concentrating on the mezzanine space, as opposed to higher- risk equity investment. But more about that later. For those readers whose net worth is less than eight figures, I cannot promise to come up with viable investment opportunities, but if I can give you rea- sons for not participating in the funding of a film project with virtually no commercial potential, I will regard this book as having performed a valuable fiduciary function. Hopefully, the insights and anecdotes contained herein will prove entertaining, if not financially rewarding, for any reader, whatever his or her economic circumstances. In that regard, I kibitzed a few years ago at a cocktail party with a wealthy Russian pharmaceutical mogul who, when he heard I was an “expert” on film finance, told me about a proposal he had received to finance a relatively low- budget action film. I told him the concept was passé, the stars even more so, and the producers were not to be trusted. I advised him not to do the deal and then forgot about it. He invited me for drinks on his yacht several months later and thanked me for keeping him out of trouble. Not only did he thank me, but he brought out a gift box containing a beautiful Vacheron Constantin watch— Russians tend to be very generous in showing their gratitude. It was probably the best fee I have ever received for giving some gratuitous advice. Please do not be too disappointed, however, if this book does not contain multiple proprietary financial models that I have developed over the years, and that I am constantly updating to reflect changing economic conditions (I will refer to my models though throughout the book). That intellectual property is very valuable and is part of the reason my firm can command significant consulting fees to advise investors in the movie business. You cannot honestly expect to get the benefit of those models for the cost of this book. As I like to point out to prospective clients, I have CERT to sell—contacts, expertise, reputation and time—and probably the most valuable commodity is expertise. Recent changes in the securities laws, which will enable producers to reach out to a much broader range of “non-accredited” investors will likely lead to much greater activity in the crowdfunding arena, but I am extremely concerned that accompanying laxness in disclosure requirements and lack of discipline in enforcing anti-fraud provisions of the statutes will permit scam artists and naïve producers to raise money for projects that should never be funded. Unfortunately, I have little faith in the ability and willingness of government bureaucrats to protect the interests of “mom and pop” investors. Caveat emptor! 12 Introduction

Notes 1. “They Live (1988) Box Office/Business,” Internet Movie Database , www.imdb.com/ title/tt0096256/business?ref_=tt_dt_bus; “Shocker (1989) Box Office/Business,” Internet Movie Database , www.imdb.com/title/tt0098320/business?ref_=tt_dt_bus; “The People Under the Stairs (1991) Box Office/Business,” Internet Movie Database, www.imdb.com/title/tt0105121/business?ref_=tt_ql_dt_4. 2. “The Blind Side (2009) Box Office/Business,” Internet Movie Database , www.imdb. com/title/tt0878804/business?ref_=tt_dt_bus. 3. Anita Busch, “Alcon Entertainment, Warner Bros. Extend Deal to 2019, Arranges $200M in New Financing,” Deadline Hollywood , 5 Nov. 2015, http://deadline.com/ 2015/11/alcon-entertainment-warner-bros-extend-deal-200-million-financing- 1201609157/; Dorothoy Pomerantz, “Risk Managers,” Forbes , 22 Feb. 2012, www.forbes. com/forbes/2012/0312/strategies-kosove-broderick-johnson-film-alcon-risk- managers.html. 4. “Blade Runner (1982) Box Office/Business,” Internet Movie Database , www.imdb. com/title/tt0083658/business?ref_=tt_dt_bus. 5. L. M. Farrell, “Financial Guidelines for Investing in Motion Picture Limited Partner- ships,” 12 Loy. L.A. Ent. L. Rev. 127 (1992).