Private Wealth Magazine, May 2011 issue
Reposted by permission. Original article here...
By Michael S. Fischer
Edward Sylvan says that his 17 years working in investment banking, corporate finance and public company structure prepared him well to transition into film investment. In his earlier career, working in Canada's Beco International, First Marathon Brokerage and Scotia McLeod, he raised high-risk financing for technology companies and mining companies to enable them to execute their business plans.
Today, Sylvan is focused on the niche component of film finance, called prints and advertising, through Sycamore Entertainment Group, which he co-founded in June 2010. P&A involves the making of release prints of films and advertising them through a variety of media.
According to Sylvan, some 9,000 films are produced domestically every year, but only 5% get distribution, which accounts for $4 billion of revenue—a combination of box office and ancillary sales.
Sycamore's principals created their company after they identified a phenomenon that was happening in the marketplace with the onset of the 2008 credit crisis, says Sylvan. Film studios that had set up independent divisions to make films with budgets in the $15 million to $25 million range withdrew funding after 2008, when these small film projects became unprofitable. Instead, they turned their focus to big budget projects, such as the Spider-Man franchise, with costs running to $100 million to $200 million per film. That in turn left a gaping hole in the $15 million to $25 million budget space, and Sycamore has moved in, though it will also consider marketing and distributing films with smaller budgets.
"We operate in the mid-budget arena, those movies with A-list actors and scripts," says Sylvan. Films in the $15 million to $25 million range, such as this year's Oscar-winning The King's Speech, are usually independently produced adult dramas, with few special effects and little in the way of computer graphics. The stories are driven with high-caliber actors, such as Colin Firth.
A P&A investor helps market a movie. Take a film with a budget of, say, $25 million. The risk to make that movie has been assumed by someone else. Now, it needs an additional $10 million for release prints, the physical negative and other media rented out to exhibitors, and to pay for advertising Advertising includes such things as theatrical trailers, network television, print and radio campaigns, promotions and personal appearance tours.
Most P&A capital is in the form of a short-term loan, and the P&A financer commands between 15% and 20% of the money as interest, plus 5% to 10% of post-box-office revenues into perpetuity. "And that 5% could equal two to three times the P&A money you put in," says Sylvan.
Sycamore is currently raising a P&A investment fund. By the end of the first quarter, it had received commitments of $30 million in equity, according to Sylvan, and was seeking to boost the equity portion to more than $100 million. The fund also has a $70 million revolving line of credit.
P&A funding is required only after a film gets a distribution deal. That money is needed three months prior to the film's theatrical release, and is generally returned three months after the film's release. So the window of the funding being deployed is approximately six months.
There is an extra benefit to P&A investing: The investor is senior in order of repayment. After the distributor is paid, the P&A investor receives his money. Sycamore has gone a step farther by setting itself up as a film distributor as well. "We operate as a hybrid P&A fund-distributor in an effort to control revenues and return to P&A investors," says Sylvan. "The distributor is the first person paid, and is obligated to pay back print and advertising investments immediately."
Historically, movie investors have almost always been brought in to invest on the production equity side of the equation, providing early stage financing that enables a script to be turned into a film, according to Sylvan. But that investment represents the highest risk and longest waiting period for repayment. He says this is not normally articulated to film investors. "They go in on the promise of a great script, stars and promise of lots of box office without understanding how the money is returned," he says.
In fact, a film may never find distribution (recall the 5% rate), and as a result it may never have an opportunity to realize revenue. Moreover, even if the movie does get a distribution deal, the equity investor falls at the very bottom of the recoupment schedule, and so may never get his money back—or may wait a very long time to do so.
Ahead of equity investors in the repayment queue are providers of senior debt, another major source of film financing. Traditional providers of debt such as banks require some form of collateral—perhaps the value of contracts for the sale of distribution rights in different countries—against the money they're advancing and repayment ahead of equity investors. The equity investor has no collateral, and so falls junior to all the collateral holders.
In contrast to the equity investor, the person who enters on the print and advertising side stands at the very top of what Sylvan calls the "recoupment waterfall." That funding is the last money to come into a film production, but it's the first money to be repaid, thus significantly mitigating the risk to that investment.
Other forms of film financing involve tax credits for shooting a movie in a certain domestic or foreign locale and so-called slate financing, whereby investors provide various kinds of financing for a group, or slate, of films in an effort to diversify their risk.
Sylvan says that each film's marketing and P&A requirements are analyzed project by project. Based on that analysis, Sycamore will tap the expertise of various partners. The two largest monetary outlays go to film print and duplication firms—the "print" portion of P&A activities—and to media buyers—the "advertising" portion of those activities.
Film print and duplication firms duplicate the physical print of the film to be distributed to exhibitors. A feature film scheduled to be released in 500 theaters, for example, would need 500 physical prints of that film. For their part, media buyers purchase advertising time from TV, print and all other media outlets within the scope of the marketing objectives of the specific film project.
Sycamore may also work with other partners in some combination, depending on the exigencies of the particular film project:
The P&A Fund's target investors are institutions and accredited investors, which include high-net-worth investors. The lockup period for investors is one year. After that, the fund will proceed to payout.
But what if the film is a critical or box office bomb? Sylvan says the fact that the P&A investor has put up $10 million (in the example) to market the movie indicates the project has a certain level of awareness in the marketplace. That ensures the film is going to be shown in various venues. Seventy-five percent of a film's revenues, he notes, comes from all of the market that follows the box office.
This includes DVD sales; video on demand such as Netflix, iTunes or Redbox; pay-per-view, cable TV and free TV (networks); airlines, hotels, cruise ships, military installations, prisons and offshore oil rigs; production rebates; and foreign sales.
As to the investor's risk of not being made whole, Sylvan says, "Your risk will be not if, but when. Because the film has a distributor, you're at the top of the recoupment with the actual film itself as collateral. You own all revenues to that picture until you're paid in full. If everything goes right, that will take six months, but it could take longer."
He says any discussion about P&A is one about revenue. The risk is that if the movie does poorly, the recoupment period might be longer than six months, resulting in an opportunity cost with capital not being able to be deployed elsewhere.
Against that is the fact that spending money on P&A drives market interest, he says. And because new players keep entering the market, more revenue streams continue to open up. This happened with the advent of Amazon and Netflix, and the possible entry by Microsoft would create still more demand for content and result in yet more new revenue streams.
Furthermore, Sycamore's P&A fund offers an opportunity for recurring revenue that performs extremely well in down markets. Films historically benefit from increased movie theater attendance during economic downturns. In this sense, the fund is an alternative investment, says Sylvan.
At launch in June 2010, Sylvan and his team took over a publicly traded company called ImaRx Therapeutics Inc. in order to become a reporting issuer to the SEC and FINRA. "As a publicly traded company," he says, "we are able to craft investment products that are tailored and suited to the economy, which private companies are not able to do. If the stock market is up, we can create equity products; if interest rates are hot, create debt products."
In November, the principals changed the company's name to Sycamore Entertainment Group to reflect its business plan. ImaRx no longer exists, says Sylvan.
Sycamore's management team has long experience in marketing and distributing domestic and foreign feature films. Joseph Takats, who serves as senior vice president for marketing, previously worked at After Dark Films and Miramax Films, where he was involved in marketing campaigns for such high profile projects as Sex, Lies, and Videotape, Cinema Paradiso and The English Patient. Chief operations officer Mike Doban was a co-founder of Freestyle Releasing, which distributed The Illusionist and An American Haunting among other films. And Terry Sylvan, Edward Sylvan's brother and the company's co-founder, who serves as executive vice president of corporate communications, formerly held senior executive positions with the advertising companies BBDO and DDB Canada.
The Sycamore team identifies film projects through their extensive relationships with producers and agents and by attending film festivals around the world. Sylvan says Sycamore chooses films based on the story. "It must have a powerful story with international appeal," that is, universal themes such as overcoming adversity (The King's Speech, My Left Foot). Economics are also a factor in deciding which films to work with. He says Sycamore must be able to position a film in the marketplace, and sometimes that may be impossible given budget constraints, for movies with difficult or hard-to-articulate themes.
Sycamore hasn't yet deployed any money. For 2011, it has made one commitment and is in negotiations for two others. "We're expecting to make three deployments of capital by October and are leaving room for two other projects," he says.
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