5 facts that debunk the myth that assumes “Films are made with 100% equity funding”

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5 facts that debunk the myth that assumes “Films are made with 100% equity funding”

(1) Banking on a negative pickups or discounting (factoring) of pre-sale contracts are non-equity forms of finance.

(2) Even when equity is used in films it almost always is packaged in conjunction with debt capital.  Usually 70% debt and 30% equity.  One notable exception was the movie ‘Avatar’ which received 60% equity and 40% debt capital. This film still had to mitigate risk by syndicating the equity with more than 1 P/E firm.

(3) After a decline since 2008; film finance is on the rise in the last 2 years.  The largest increase from as few as 10 film studios approved for $5.5B in film finance was primarily 100% non-equity and was syndicated by upwards of 12 institutional investors each time to mitigate risk.

(4) One of the biggest equity investors of films used to be the film studios themselves. This is no longer the case. Many recent films were co-financed by 15 firms other than the film studios. http://SinCityFinancier.wordpress.com/2012/12/13/irglobalcrossroadscapitalcom-has-shared-why-s

(5) Many people ask for equity matching funds (J/V) which require borrowers have proof of 50% of budgets’ funds on hand.  Few have any such proof.  And it would be more logical to just leverage 35% LTV through entertainment bank hard money funding or loan gap financing.  This approach is a 15% cost savings already.

Here are the rest of the facts on “matching funds”;

/>Date: Sat, May 12, 2012 at 8:31 PM
Subject: RE: Anyone have a consensus on the % of those who claim to have 50% funds and just need matching funds and have POF’s? Wouldn’t hard money…
To: Jeffrey Allen
LinkedIn

Victor Gallo has sent you a message.

Date: 5/13/2012

Subject: RE: Anyone have a consensus on the % of those who claim to have 50% funds and just need matching funds and have POF’s? Wouldn’t hard money…

Hi Jeffrey – your hunch is going to be correct 90% of the time. Any producer worth their salt that has 50% of their funds in place – as equity – has everything they need to make their film. The rest can be done through debt/pre-sales, etc.

Generally, someone who is making such a request doesn’t really have the money.

View/reply to this message<

So if what Victor is saying is an accurate percentage of those who lie…why bother wasting everyone’s time and getting caught being a liar? This reputation eventually permeates throughout the financial community and you just get blacklisted. Then you wonder why you can’t ‘find’ any funding.

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7 thoughts on “5 facts that debunk the myth that assumes “Films are made with 100% equity funding”

  1. I agree with SinCity, to a point. When you bundle presales (which is cash revenue), product placement and all the other ancillary things, the equity investment does seem to be a low percentage… on paper. We all hope just one single investor will provide the film’s budget, but that’s not always the case. That’s where Limited Partnership deals (a grown up’s version of crowdfunding) comes in. You have a minimum of 15 investors investing in the film’s budget and their ROI comes from all forms of cash revenue (box office sales and presales, etc). What makes an independent production company* an independent production company is the equity/investment is not coming from the Studios. In the case of Negative Pickup, it is the Studios investing in the project and providing facilities (which is at the filmmaker’s cost) and distribution — the filmmaker must provide evidence they can provide everything else and get the job done. It’s a good way for a new producer to get a name in the industry.

    The investor(s) are investing in a single project, not the company, though the filmmaker is backing the investment with a percentage of the company’s listed/unlisted shares. The filmmaker’s focus should be on equity until they can self-fund their projects. The relationship they create with investors can now allow those investors to invest directly in the company. If an investor in the company decides to also invest in a project, they get ROI X2: their ROI from the project and the ROI resulting from the film’s distributable profit to the company. So investing in a project first is the safest for the investor because it gives them up to a 125% tax deduction from investing in the film and getting the film incentives. Didn’t know your investment is 100% tax deductible, did you? BUT, it is only available to accredited investors, not banks and finance companies, etc.

    * “Indies” are not Independent production companies but are amateur filmmakers that are *independent* from the film industry.

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    • The prevailing percentage of equity in a film (if it exists at all) is 35% the majority of the time for the film industry. DPO’s which is 1 of 24 different kinds of equity does not require anyone to be an “accredited” investor. The truth is most film producers have no tradeable securities which is the legal basis for having equity to offer. PPM’s are not tradeable and are akin to TP. And bulk stock investors know this. Never mind the labor and time consuming issue of telemarketing for PPM’s. Those who gravitate solely to PPM’s as the only means to fund a film are either clueless about finance or ignoring the other 30+ options that are often quicker and cheaper.

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