With profits taking longer to receive than they are typically used to, hedge and private equity funds have been selling stakes in films to a new group of investors. Equity funds, which have been bulging with money, have invested $10 billion into Hollywood films in recent years.
The problem with equity funds as far as waiting for their profits goes, is the way Hollywood studios disperse money. Under the current accounting rules, the first of the profits must go to theaters, distributors, actors and directors, etc. Once that initial money is handed out, profits may have to be waited on for years until further profits are gathered.
This has created a secondary market where share owners in films are able to sell their shares to buyers looking for yields. Knowing the long-term wait for profits that many films produce, companies approach private equity funds to buy them out.
Investors in films usually buy up a slate of usually between a dozen to twenty or more movies to hedge their bets. The problem is it doesn't deal with the time frame related to waiting for profits.
Another problem is the best-performing blockbuster movies aren't put up as possiblities to invest in, so the funds usually get the secondary movies, which are at times even more risky because they rely on unforeseen hits, which happen, but in no way can be counted on. "Wild Hogs" was one such surprise this year.
In an even more amazing insight into the industry, Attorney Alan Schwartz of Greenberg Traurig in Los Angeles says with the long cycle of the movie industry, it's extremely difficult to find out if slates of films have been profitable.
"(Investors) are beginning to shows signs, in some cases, of irritation and concerns: 'The pictures all did terribly -- what the hell is going on here?"' Schwartz said.
The investment in film slates makes no sense. The secrecy, payouts, complicated deals and lack of consistency make this about the same as playing Vegas. Yet, Schartz adds that in spite of this, investors all over the world keep on wanting to get a piece of the Hollywood industry.
While I understand when someone that has money wants to do some ego investing, this is about the same as throwing your money away. Will those buying up the slates make money? Nobody knows. That's been the problem. I'd like to see the lid blown on the secrecy of the Hollywood deals and really see the financials behind them. It may be shocking for some. But as in the case of private equity and hedge funds, some never seem to learn.
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