Slate Financing: How Hedge Funds bet on Hollywood/Bollywood
When Parasite, the Korean movie that won the Oscar in 2020, shot into limelight how many of you knew that a tiny hedge fund in South Korea was raking in stellar returns? Seoul-based Ryukyung PSG Asset Management had invested around $500,000 into the production of the movie, that had a budget of $11m. Fuelled by the success at the Oscars, it crossed over $250m worldwide. This represents an exciting yet niche investment channel for investors, not at all correlated with financial markets.
As with any other business, production of films and television series need access to a good amount of capital. Behind every movie is a production house, a distributor and investors. While a distributor is in charge of selling the film to theaters and promoting it to the public, it is the production house that actually makes the movie. In essence production houses raise capital from investors and in turn, employ it to materialise the project. Traditionally, studios have financed their productions through a combination of their own equity as well as bank loans for specific films. However, private equity and hedge funds sought their way into film financing through an arrangement called ‘Slate Financing’.
Slate Financing Agreement (SFA) is a term that emerged in the early 2000s, referring to a financing arrangement in the film and television industry. SFA’s are distinct from the large revolving credit arrangements in use by the major studios and big independents for several decades. The key characteristics that distinguish slate financing arrangements from other forms of outside investment are: 1) Participation of the investor in a dozen or more, rather than a single film within a financing deal and 2) A degree of participation in the selection of films prior to the closing of the transaction.
Credit lines, of course, create a secured credit, and repayment obligations but do not grant lenders an equity position or a participation in revenues. This is where mezzanine and equity financing became a gateway for hedge funds and private equity firms to take bets. Mezzanine financing is a hybrid of debt and equity finance that is commonly provided quickly with minimum due diligence and collateral requirements.
Hedge funds, individual investors and some institutional investors prefer the higher-risk classes (compared to debt), mezzanine and equity, that lets them take a bet on an array of films and reap potentially higher returns. As hedge funds often seek to offset potential losses by using a variety of methods, slate financing presented an interesting opportunity, on the assumption that people would go and watch movies even in times of economic hardships.
PE and VC firms are in fact also drawn by the time factor. Their usual investments typically have a horizon of five-seven years, while films offer what investors call an “18-18 model". It takes about 18 months to identify a project and release it, and another 18 months to monetize it.
However, there is still a long way before slate financing can attract a wider investor base. Volatility in terms of unpredictability of box office performance still remains a key challenge.
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