Slate's Hollywood Economist: Hedge Funds for Films?
ALEX CHADWICK, host:
The movie business now. It's always on the lookout for new investors to help finance the growing cost of big-budget films and now there's a new idea floating through the studios getting Wall Street hedge funds to finance an entire year's worth of movies. Hedge funds are private, unregulated and often risky investment schemes, but they can bring in loads of cash. Edward J. Epstein writes about the business of Hollywood for our partner at the online magazine, Slate.
Welcome back, Edward. And these movie studios have long used outside investors--everyone from William Randolph Hearst to Microsoft co-founder Paul Allen. What's different now about hedge funds?
EDWARD J. EPSTEIN reporting:
Before, the civilians, as they call the outside investors, all wanted to have some role in the movie, the famous casting cats. They wanted to put their girlfriend in or they wanted to read the story or have some access to the plot. What's different now is the hedge funds. And hedge funds, I should say, have, according to The Wall Street Journal, $1 trillion under management. The hedge funds would buy the entire year's portfolio, or a percentage of the films, and have no control whatsoever. It wouldn't show up on the books of the movie studios, and it would basically simply be capital they could use and don't have to show that they're using the capital.
CHADWICK: Is it like a line of credit, are you saying? They can...
EPSTEIN: No, no, it's the opposite.
EPSTEIN: It's the opposite. It's an equity investment. They put in an investment. Say, they buy 20 percent--they put up 20 percent to production budget, and they get back 20 percent of the profits or the earnings on everything--not just the movies; on the DVDs, on the television--on everything that comes out of it.
CHADWICK: And why go to hedge funds?
EPSTEIN: 'Cause they have a trillion dollars, for one reason. Secondly...
CHADWICK: That's enough right there.
EPSTEIN: We don't have to stop there. But secondly, hedge funds like to show high performance. They compete for money--which hedge fund gets the money. And junk bonds basically pay 10, 11, 12 percent. Movie studios claim that they have a minimum of a 15 percent internal return on investment. So if you can buy 15 percent--and by the way, if you have a movie like "Spider-Man," it can go to 25 or 30 percent, you have a better deal if you're a hedge fund than investing in junk bonds.
CHADWICK: You're writing in Slate about a young executive in Paramount who came up with a clever idea. What was that?
EPSTEIN: Well, this was Isaac Palmer, and this was the brilliant idea that it's all based on, and that is--you could call it portfolio theory. Rather than selling one movie or a part of one movie, you sell everything you do--26 movies, in this case. Good movies, like "War of the Worlds," and the lemons all together and it's a portfolio. And then you basically show how your portfolio performed in former years, and if you can show that even in bad years, you had a 15 percent return, the hedge funds feel that they're taking the risk out of the deal.
CHADWICK: So this buy in/buy the batch idea--this comes from Paramount. Are the other studios following?
EPSTEIN: Well, Fox considered doing it, but they haven't yet come to terms--that deal they were working on fell through. Warner Bros. has a different deal with a company called Legendary, in which it's five films a year, but that isn't the same thing 'cause basically they're five cherry-picked movies, so the investors are basically going to get the worst movies. And so, you know, we're talking about things that are happening in the last few months.
CHADWICK: Are you and I going to be able to get in on this?
EPSTEIN: Only if you invest in a hedge fund, which usually requires a million dollars, but...
CHADWICK: Opinion and analysis from Edward J. Epstein, author of "The Big Picture." He writes the Hollywood Economist column for our partners at the online magazine Slate. Edward, thank you again.
EPSTEIN: Thank you, Alex.
CHADWICK: DAY TO DAY is a production of NPR News and slate.com. I'm Alex Chadwick.