The Select Film Fund to invest $1 billion in films

Warning: full of financial jargon.

here's a view from a future finance major:

this will not work in the long run. the keyword in this article was "private equity". right now, private equity funds are a enjoying a boon due to the low cost of borrowing and massive amount of global liquidity. if there's a sign that credit is too accessible, this fund is it.

now, the article didn't necessarily say the fund would borrow money to finance these films, but rather from investors. but in today's financial situation, institutional investors would be inclined to borrow cheaply to finance "projects with low risk and high profit margins."

having said all that, this why i think this fund will not perform well in the long run:

credit will not be cheap forever. sure, most analysts believe vast liquidity will be around for the next three years. but when that dries up, there's going to be hell to pay (many analysts believe this as well).

sources of investment for these films will dry up, and investors locked into these projects will lose money as the cost of borrowing increases while their expected return stays the same. if a mix of derivatives, junk bonds, and "hedging" instruments are used to finance these films, the downfall could be even worse.

so for a while, the select film fund could do well. but that would just lure more investors into the inevitable crash.

The thing I don't understand is that it is 'up to' 10 films, at a cost of $10 million dollars each.

Although that's low for Hollywood (although fine for indies), that still comes out at a total of $100 million invested.

That's an order of magnitude from the $1 billion quoted .. even though there is a generic disclaimer about a couple of films may be higher ...

Mac
(Edited to add: Thanks XL - I misread it. That is 10 films each for 10 producers x $10 million.)

since the film business is so volatile, i could understand a large cash position. but 90% seems excessive. even in bear markets, most firms never go above a 25% position.

under the traditional model of private equity firms, managers charge 2% of assets and 20% profits. so, applying this to SFF, they would take 2% of your total investment as an annual fee. but they only manage 10% of the funds you give them. here's the hypothetical situation:

I give SFF $20 million. They tell me they expect a 20% return on their next project. (on the high end in the film industry, I'm assuming).

but they only use 10% of my funds. 1/10 of 20 mil= $ 2 million.

with the 20% return, that's $400,000 profit. now they take their 20% profit fee, leaving me with $320,000. based on my orginal investment, that's a 1.6%gain.

then, they take their annual management fee of 2% of assets, ending up with a net loss.

the actual fee structure of the Select Film Fund must be radically different from any other fund on wall street in order for investors to make a dime.

10 movies each from 10 producers = 100 movies @ 10m a piece.

Reynolds is another fool seduced by Hollywood. I'll bet $100 against anyone else's $25 that SFF will be out of business within 10 years OR they will not have made five movies in the next five years.

They're competing with 2929's HDNet, but it is MUCh harder to make money off a $10-million movie than it is a $2-million movie. Wait. let's calculate that a little differently. You make ten movies at $5-million each, you hope two hit. Two "Sideways." You make oodles of money even if the other eight go in the tank 100% and do not bring in a dime. Compared with, you make ten movies at $10-million each, and two are hits like "Sideways." You make money, still. But . . .

What happens if only one of the ten is a hit? Reynolds' research will have told him that of 200 movies made for between $2-million and $10-million last year, a dozen made 300% or greater returns in the USA and overseas. So he thinks he can do better? How? Who does he recruit?

2929's high-def group is way in the red, but they have a long-term plan. Probably to sell out before anyone realises what a loss the process is. Still, they are determined to keep their movies way under $2-million. How many were they going to make? Ten movies a year? How many have they brought to market? The Enron movie. And they are everywhere; any jackass with a vid camera has been interviewed by them for ideas or plots or approaches. (They don't like screenplays too much, either.)

Reynolds thinks he can do better. That's like saying you think you can out-gamble the house or your lover or your neighbor. You can't! That's why it's called gambling. We're all wannabes here; so is Reynolds.