Kevin D. Kinsey

SLATE FINANCING ARRANGEMENTS

Raising capital for production finance through State Financing Arrangements, in the next addiction of film production capital, came from the effect of other people’s money.  This thrust of new funds were peddled by a new film industry entrepreneur, dubbed by the trades as the “financing producer”, a producer who brought partial production or distribution equity financing to the studio conference table.  Much of this equity in fact was money that flowed through the German film funds, private investment, and hedge funds which raised funds for production in the new market.  The producers and companies who brought equity financing to the American studio-distributors included many established production companies and foreign sales organizations, as well as A-list producers and former studio executives who had the clout to secure an output, pre-sale or co-production deals with a  fund or distributor.  The financing producer trend ultimately did not evaporate the way that the “new market” funds did, it morphed into a very different film finance vehicle which is the subject of this article.  But some of these financing producers had another source of equity investment, wealthy American investors who had recently made fortunes in the stock market, the dot-com boom, real estate, or elsewhere.   The proliferation of the financing producers was in part precipitated by the mushrooming of private equity in the early 2000’s.

This new wave of film finance is a portfolio approach to film production and in some cases, development and distribution, in which debt and equity investments are made in a slate of films.  Having proven themselves over a five-six year period, and still increasing in number, slate financing arrangements (“SFA’s”) have a singular character that establishes them as a unique device in the realm of motion picture finance which has as much permanence as other long-standing vehicles for film finance such as dis-countable-contract finance, production-financing and distribution agreements, and single-picture private placements.  SFA’s are transforming into near-partnership like arrangements, with the studio and lead investor acting as partners in selection of product, if not development, production and distribution.  Many, if not most SFA’s, do not require disproportional participators in the slate’s upside to offset risk, a feature which distinguishes them from most low-budget investment deals and venture capital investments.  That is, a 20%-of-budget investment earns 20% of profits (after deduction of distribution fees and expenses), a 50%-of-budget investment earns a 50% split of profits.  Provisions that allow the studio to retain complete creative control, and unfettered discretion over which films go into the slate, have become anachronistic, due partly to the leveling off of DVD revenues in 2005 and 2006, partly to the well publicized failures like Poseidon, and party to the equally well publicized bearishness of some studios for their tent-pole franchises the history of the SFA development puts a number of questions for film finance professionals, producers, and distributors into the light.  What will happen to this trend as the global credit crisis and the recession (or “economic downturn”) in the U.S. continue to unfold?

What will the very successful promoters and lead investors like Relativity, Legendary and Dune transform into?  How will new content delivery systems affect their transformation?  Does the ascent of these outsiders – the  SFA studio-co-financiers – argue an expansion of membership among the elite major studios?  And lastly, what are the ramifications of this wave of portfolio-style finance for the low-budget producer, or for any producer without a distribution pipeline?   If history is any indication of the future, entrepreneurs and film finance professionals will create ways to expand the effectiveness of SFA arrangements into the low-budget independent sector.  The chief obstacle, perhaps, is that there are a limited number of studio distributors with limited theatrical distribution capacity.  Additionally, there is a limited supply of studio co-finance capital.  Perhaps there is an alternative strategy the independents will devise that offers an investor group the same assurances that a studio-distributor’s internal rate of return offers.  Their success may depend a great deal on how well some recent “non-SFA’s” perform.  Companies like Endgame, Wildflower and Spark Capital recently pooled huge sums of capital or obtained very substantial credit lines without a major studio slate-distribution commitment.  If these entities fail, private equity and Wall Street Advisors will be quick to point out that their flaw was to omit one essential ingredient: distribution.  Maybe a new distribution medium will emerge as a suitable substitute for theatrical distribution, and a studio commitment will be unnecessary.  Or maybe SFA’s will remain a finance vehicle which belongs more or less exclusively to studios and the independents will simply have to paddle into position for the next wave.

By Administer