Film investing: moneyball or casino royale?

Movies are arguably the cheapest and most popular form of entertainment. Regardless of the economy, films are made, watched and profited from the world over.

Those who earn their livelihood solely by investing in films say there are few other asset classes so rewarding. Few, also, are quite as high-risk.

“Films aren’t correlated to the economic situation,” says UK-based Lyndon Baldock, managing director, Templeheart Films, a firm that invests in movies. “The movie industry has tended to do better in economic downturns—and it certainly has done better in the last three-to-four years.”

Payoffs can be huge. The 1999 horror hit “The Blair Witch Project” cost $60,000 to make, but raked in $140 million after production costs. For investors, that’s as good as it gets.

Although the bulk of a movie’s profits are realized the first few years, they continue through royalties from DVD sales, pay-per-view, rentals and cable.

Baldock says most people choose film investment for diversification. Poor stock-market returns have investors looking further afield; still, ensure they understand the risks.

Baldock says he invests based on the production company, budget, crew, cast, and story. “It’s a thorough due diligence process,” he says. “You analyze the script, the genre [and] the target audience.”

Facts and Figures

• $32.6 billion Global box office for all films in 2011, up 3% over 2010’s total
• 35% Growth rate of the Chinese box office in 2011
• $10.2 billion Drop in 2011 U.S./Canada box office compared to 2010. Still, it’s up 6% from five years ago
• $21.2 million Americans and Canadians who went to the movies at least once in 2011
• 650 Motion-picture theatres in Canada
• $1.28 billion Total box office receipts for “Star Wars Epi. IV: A New Hope”

So, how can a private investor get that information? “Normally, if a producer is presenting to an investor, [he’ll explain] why the script is commercial; why the cast works; what’s happening with the genre,” says Baldock.

Then, find out what equipment they’re using, whether the film’s been correctly budgeted, and the producers’ track records at controlling costs.

If that sounds like too much spadework, there are other ways to play the film market: clients can buy Disney or other film studio stocks. Such picks are more attractive if companies have additional revenue generators, like theme parks and television channels.

Many private investors only want to back a specific film. The only way to do that, says Baldock, is to choose independent movies. Since they cost less to make, investing in them is a good way to test client tolerance. Budgets can run as low as $15,000.

And there are film funds: private investment pools and hedge funds that finance a basket of entertainment projects, such as Panda Screen Productions, Ingenious Media, Cinema Capital Venture Fund and The Cavalier Film Funds. “It’s similar to investing with a hedgefund manager [who’ll] put your money into different stocks,” says Baldock.

“You invest into a general pot. You don’t get to choose the movies; a lot of the time you don’t know what the movies are or how that fund is doing until the annual report comes out.”

And never invest more than you can afford to lose. While every investor hopes for a blockbuster, things can go sideways. Actors and directors walk out. The film overshoots its budget. The distributor fails to break into the multiplexes. Or it sinks at the box office.

“If it doesn’t sell; if it was badly made; if something horrible is discovered about your cast members,” then you’re sunk, says Baldock.

And yet films remain attractive, because movie industry growth hasn’t corresponded to economic cycles. “Since it’s grown every decade, it’s never a bad time to invest,” he adds.

Baldock advises investors allocate no more than 25% to such high-risk investments, “[regardless of whether] a client is worth millions or has limited funds to play with. And they should go in knowing returns can be just as hit or miss as the films they fund.

Hassle Factor

• Choosing a film to invest is a complex process
• It’s a high-risk investment akin to gambling
• Poor marketing can kill a good product
• No way to hedge or insure losses
• Final product can be poor
• Potential for spiralling costs
• Legal issues around contracts, intellectual property rights, copyright
• Negative publicity kills box office receipts