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Published by Stu Pollard

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Published by: Stu Pollard on Aug 10, 2012
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Wall Street eyes indie sector funding
The sudden windfall stands to transform the way business is done.
By Stephen GallowayJan 24, 2007
The independent film world descends on Park City for the annual industry ritual that is theSundance Film Festival, running today-Jan. 28, they'll have a major new subject of conversation:a hefty infusion of cash from Wall Street. Two to three years after East Coast-based hedge funds,private equity funds and banks began investing billions of dollars in studio slate deals, theseestablished financial institutions are turning to the indies. And most insiders predict that what hasthus far been a mere trickle of funds is likely to turn into a tsunami this year."There's a lot more coming soon," entertainment attorney Schuyler Moore of Stroock & Stroock &Lavan says. "It's going to be a tidal wave. Hedge funds and private equity funds are open toinvesting in alternatives to the studios and are willing to accept higher returns for higher risk." Already, Wall Street has made significant investments in a number of companies -- from theWeinstein Co. and First Look Studios to Regent Entertainment, as well as Radar Pictures, theindependent company led by Ted Field that last year closed a deal to co-finance 25 picturesbudgeted in the $20 million range with private equity partners.Many of these deals (with the exceptions of the Weinsteins' and Radar's) have been relativelymodest. Most have been in the millions of dollars or at best the tens of millions -- and that makesthem a financial footnote compared to the slate deals worth several hundred million that WallStreet-backed companies such as Legendary Pictures and Relativity Media have entered intowith individual studios.Now, high-profile independent producers, executives and entertainment attorneys who specializein such financial matters say they expect 2007 to mark the year in which Wall Street goes indie. If that happens, the independent business will most likely undergo yet another major transformation, much as it did in the early part of this decade, when "high-net worth" individualssuch as Jeff Skoll, James D. Stern and Bob Yari came calling with cash in hand.
  Among the most prominent new deals in the works are two involving established Hollywoodfigures Mark Gill and Michael London. Gill, until recently president of Warner Independent Pictures and before that a longtime executive with Miramax, is in talks to raise some$200 million for his new company, the Film Department, to finance about six movies per year inthe $10 million-$35 million budget range. Gill declined to be specific about his financial partnersbut said he expected a deal would close within the next two months.Similarly, London -- producer of successful specialty fare like 2004's "Sideways" -- is working withGoldman Sachs to raise tens of millions of dollars in production coin, and Robert Friedman, theformer vice chairman of Paramount Pictures, is putting together financing for a major newproduction, marketing and distribution entity. Friedman has been working with Merrill Lynch toraise close to $1 billion for what is effectively a new studio. At the same time, attorneys such as Moore and John Burke of Akin Gump Strauss Hauer & FeldLlp., a leader in the independent finance field, along with agents like WMA's Philip Alberstat, saythey are working on a handful of other such deals that would bring many hundreds of millionsmore into the indie realm.What's intriguing is why Wall Street now has decided to look to the independent arena. Insidersoffer several reasons for the change of heart. Chiefly, there's a limit to the number of deals thatEast Coast money can do with the studios, even though Wall Street generally prefers to work withthe Hollywood majors because they have established a financial business paradigm -- known asthe Monte Carlo model.Under that model, investors can spread risk over an entire slate of films rather than gamble onone or two productions that might hit big at the boxoffice but could just as easily flop."There are only so many studios you can do your deal with," Burke says. "And Wall Street, byparticipating in studio slate transactions, has gained a much deeper understanding of the way thefilm business overall operates. They have been introduced to the independent world through thiseducational process and are exploring it as a possible opportunity to deploy more capital."Of course, Wall Street's Hollywood experiment has yielded mixed results so far.Legendary failed to reap sizable returns on its investment in Warner Bros. Pictures' 2006 summer release "Poseidon," though insiders at the company say they made a $50 million profit on thatstudio's other major summer movie, "Superman Returns.""A lot of people on Wall Street have learned a great deal about studio financing in the last threeyears," Gill says. "The next thing for them to learn about is the companion piece to that, which isindependent film."
 Investors are encouraged by the robust state of the indie world right now, both domestically andaround the globe."Independent film is a very healthy business, and the business models look pretty good," saysone veteran indie producer in talks with Wall Street. "And (because of that), there is now a swingback to the independent film space, and a lot of investors are curious about investing inindependent production companies."Independent films have several advantages over studio films. For one thing, they do not involvethe high overhead of many studio pictures and the multimillion-dollar development fees their producers expect. For another, indie projects can deliver financial returns more quickly becauseinvestors don't have to worry about a studio deducting a 15%-20% distribution fee before payingout profits."The cost of making and distributing studio movies is higher than it has ever been, while the costof making quality independent films has not increased as rapidly," the indie producer says. "Andthe home video value of independent movies remains relatively high. A studio movie might cost10 times as much as an independent movie, but that does not mean its home video value is 10times as great. If you look at the (revenue of a successful specialty film) in relation to cost, it isprobably better."Producers such as London and Gill have a vested interest in touting the advantages of theindependent scene, but there are potential negatives as far as Wall Street is concerned. For onething, the indies have difficulty putting together entire slates of films, and the projects that they dotend to be less commercial -- not exactly guaranteed moneymakers as far as investors areconcerned."In my experience with venture capital money, the way that funds usually work is on slates," saysHoward Cohen, co-president of the independent distribution company Roadside Attractions andformerly a UTA agent representing independents. "They want to spread the risk over more thanone film. And I always get nervous when people talk about slates because unless you've got abunch of great scripts, how do you talk about slates? Studios can do that because they arespending an enormous amount of money to develop screenplays, but not too many entities canafford to develop slates."For another, the structuring of independent deals is enormously complicated. Even thoughattorneys who worked on the studio slate deals say those agreements are far more complex thanmost observers believe, they pale in comparison with indie pacts."With a studio deal," one insider says, "you can throw that into a computer and get all sorts of scenarios that give investors comfort, but with independent films, there are all sorts of issues:What if you don't sell (distribution rights in) Germany? What happens if you don't have a North American sale? There are a million 'ifs' in all this."Most important among those "ifs" is the problem of securing domestic distribution. All studios canpromise a substantial domestic release, and that is one of the factors that makes the Monte Carlo

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