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0910 THR Indie Financing

0910 THR Indie Financing

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Published by Stu Pollard

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Published by: Stu Pollard on Aug 10, 2012
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08/10/2012

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How to beat the indie financing system
Producers turn to overseas investors, wealthy backers
By Eriq Gardner Sept 23, 2010, 08:08 PM ET Anthony Millan knows how hard it is to make money in the independent film sector these days.But after spending more than a decade as a financing consultant for Lionsgate, Relativity Media, VoltagePictures and others, Millan recently took a major plunge anyway, raising nearly $10 million from associatesand hedge funds to form Catch 22 Entertainment, his new full-service indie production, distribution andmarketing outfit."It's the Wild West right now in terms of financing a film," says Millan, who hopes to invest in dozens of films with budgets ranging from $25,000-$25 million. "You have to look hard, but there are still great waysto find a nice reward, including making investments in small-budget films and gaining a profit from your ownmarketing and distribution."Indeed, despite the stalled economy, fewer distribution slots and an exodus of bank and hedge fund moneythat has caused the number of movies released this year to plummet from only a few years ago, there areplenty of film financiers who believe that hard times beget great opportunity.The new class of indie moneymen are realistic enough to acknowledge the risks, yet eager to pounce upona dispirited marketplace.Despite the sales activity at this month's Toronto International Film Festival, Millan knows that producerscan no longer count on the largess of presales from foreign distributors, traditionally the life blood of indiefilms. In fact, he considers it barely worth his time to show up at AFM, hunting for a buyer.Instead, as studios have cut their own indie prestige divisions, Millan has been "cherry-picking" talent,including execs at Paramount Vantage and other studios. For Catch 22's first film, the wrestling drama"Beyond the Mat," Millan is putting up about $15 million in P&A from his own side fund to prop up a film thatcost only $250,000 to make.In addition, he plans offset his risks by providing bridge loans to indie productions and advances againsttax credits and finishing funds. Catch 22 will lend money to producers at virtually any stage of a production,depending on the opportunity.Millan is an optimist in a time of overwhelming pessimism. Arguably, finding money for indie films hasnever been harder. From locating equity to securing gap loans to finally reaching distributors, producersare struggling. But money is still out there.Rather than a bank or hedge fund, the first stop for indie producers now is often a high net-worth equityinvestor. Traditionally, people who made their money in other industries were willing to get into film based
 
on a sheer love of art. But these days, as even the richest individuals struggle to maintain their wealth, thebargains are getting harder.Consider Bill Perkins, a successful oil and gas venture capitalist, who for the past decade has been puttingmoney into indie films. Perkins recently became a lot more conservative in his choice of film investments.He understands that fewer indie films get distributed domestically, and he isn't convinced that digitalrevenue streams represent real profits just yet."The problem I see, frankly, is that I don't have to take production risk," says Perkins, who is still investingin projects here and there. "I can go to Toronto and they'll have 10 horror movies, all looking for a buyer. Ican buy a movie for zero and distribute it myself. And if I want to invest, going microbudget seems theplace to be. I can have just as much fun making a $450,000 movie as I can making an $8 million movie.Much less risk there."The lucky producers are the ones who find a guy like Gary Gilbert, co-owner of the Cleveland Cavaliers,who found success this summer with "The Kids Are All Right."Gilbert is an industry optimist. He grew up loving movies like "Butch Cassidy & the Sundance Kid" and sayshe'll invest in scripts he loves and projects in which he can play a meaningful role in the developmentphase. This attitude has made him a popular man of late."I've certainly been seeing three or four times as many script submissions in the last six months as I was afew years ago," he says. "That's a good thing."Gilbert only takes on about two projects a year, though. And even with a big-ticket moneyman on board,producers are asking talent and crew to work for less and attempting to get financial commitments fromstates like Michigan, which offer tremendous tax incentives."We're starting to see adjustments on the cost side but a lot more needs to be done to attract financiers,"says David Molner at Aramid Capital, which has participated in 40 film projects during the past three yearsand is the largest debt provider to Summit. "I think a lot of the complaining about the current environmentfor film financing is driven by people whose projects aren't financeable. It really comes down to theproduct."Lately, some producers have been trying to attract foreign companies, sovereign wealth funds, and evengovernments who might put up some equity."Overseas sources have certainly been stepping up of late," says attorney Lindsay Conner at Mannatt."China is becoming much more active in entertainment finance, and we're starting to see more activity fromIndia and the Middle East."Lauren Versel, a producer on the upcoming indie "Vamps," found equity investors from Brazil, England andPoland. "We got really fortunate," she says. "It's getting tougher and tougher to raise money."Even if producers can cobble together an international consortium of equity investors, it still is often notenough.That's because fewer financiers are willing to float bridge loans.
 
  A few years ago, there were more than 40 banks doing gap lending in entertainment. These days, it's downto about 10. Many institutional hedge funds also have pulled out.Jean-Luc De Fanti at Winchester Capital Partners, one of indie film's leading creditors, believes this is thebiggest problem haunting the indie space."Those in the gap business were lending against the promise of territorial sales," De Fanti says. "In 2007,investors starting seeing sharply declining sales at AFM, Cannes and Toronto. Some of the big funds likeJPMorgan doing gap financing had poor results and were terminated. A lot of the money dried up, addingfuel to the fire."Part of what has happened is cyclical, De Fanti notes, but most bridge lenders won't be back until foreigndistributors show renewed interest in picking up indies for foreign distribution. That might only happenwhen domestic distribution of indies heats up.Gary Gilbert’s production outfit Gilbert Films backed “The Kids Are All Right.”"One can hardly expect the world to finance American movies that Americans don't want to seethemselves," he says.That assessment is as gloomy as it comes. But on the flip side is Peter Graham at 120dB Films, who, likemany of today's finance optimists, believes this is a very ripe time to invest.His company is sinking millions of gap financing dollars into dozens of films. He'll only get involved with a"perfect" combination of elements -- name-brand stars, a strong sales company and some equity backing.But thanks to a lack of banks in the space, he says he's getting the "benefit of the last man standing.""When I started there was a ton of money from hedge funds and those without experience," Graham says."Now that they've withdrawn, our main competitors are subprime lending outfits. We're now doing bigger projects."Producers like those behind "Vamps" are going to Graham because he's a little more flexible andresponsive than a typical bank, willing to provide quicker access to capital in return for a slightly higher interest fee. A few years ago, when the indie film world was flush with cash, producers were getting better deals fromtheir lenders, but these days, they'll largely take what they can get.Of course, even if indie producers manage to line up equity financing and bridge loans, they're still not quiteto the finishing line.In the past, money from domestic distributors often provided finishing funds (not to mention marketingmight). These days, producers are going to festivals with only the tiniest hope that one of the dwindlingnumber of domestic distributors will bite. As a result, some producers are raising P&A money themselvesby offering financiers the opportunity to be the first investors to recoup money after the theatrical release.Here too there are new investors seeing a chance to profit.

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