Alternative Investment To Hedge Fund & Private Equity Is CPPI Job Creations Film Finance Deal
Submitted by: 72equity.com
2008-12-01 00:00:44
(OPENPRESS) December 1, 2008 -- With world's nations flirting with an economic crises, Wall Street panic at an all time high, and hedge funds and financial institutions disintegrating, New York based Elliott Associates has recently parked an additional $1 billion into Ryan Kavanaugh's Relativity Media which will finance a large slate of Universal Pictures' films over the next few years.
And the question remains "why?" in today's economic crisis as well as the recent pull out of billions of dollars in institutional capital from the studios.
Well, Noci Pictures Entertainment (www.noci.com) a Chicago and Los Angeles film production and structured finance company thinks it may have the answer and its own opportunity with its $300 million dollar international tax advantaged structured film deal that has an option to be principally protected as well using CPPI, including a stand alone 100% principal protected Prints and Advertising Fund which will insure the Company's U.S. theatrical distribution.
"No matter how bad things are in the world, people need to be entertained", states Yuri Rutman, Noci's CEO. "And while the crowd mentality of panic in the U.S. financial markets exists, overseas, properly structured commercial films generate more revenues which add to bigger distributor buys with the value of the Euro vs. USD."
Apart from Elliott Associates, other investors including billionaires, family offices from Wall Street to Silicon Valley to the Middle East to Russia have been parking their money into Hollywood.
Anil Ambani, Larry Ellison Of Oracle, Paul Allen Of Microsoft, Steven Rales, Fred Smith of Federal Express, Norman Waitt, the Co-Founder of Gateway Computers, Jeff Skoll Of Ebay, Marc Turtletaub of The Money Store, Roger Marino Of EMC Corp, Sidney Kimmel Of Jones Apparel Group, Minnesota Twins owner Bill Pohlad; Real Estate Developers Tom Rosenberg and Bob Yari, and, financiers Sheikh Waleed Al Ibrahim, Michel Litvak, and Philip Anschutz are all behind the finance of a lot of films that range from box office hits to Academy Award winners.
While the glamour of the movie business may be appealing to most, at the end of the day, it is still an unknown business that many try to gamble on, and only a handful come out as winners. The real key is to minimize risk, maximize profits, and offer a steadier stream of revenues than what other alternative investments may offer such as real estate, oil & gas, commodities, hedge funds, or practically any other investment in today's market.
Traditionally a lot of media and film funds have sunk because the equity parlayed into these deals was junior. Most of these funds have, and continue to, finance large budget studio films in the $40-$100 million dollar range with senior and mezzanine debt being first and second in position while the junior equity is usually never recouped.
Instead of dazzling investors with smoke and mirror Monte Carlo simulation models that offer various IRR's and scenarios based on unpredictable film revenues streams and junior equity to trigger senior and mezz debt, the key is to offer an absolute return on investment utilizing international and U.S. public tax incentives that in certain instances can guarantee 100% or more of invested capital prior to revenues by leveraging equity positions with non-recourse debt vs. recourse debt.
The Company is putting together a slate of films using an innovative hybrid public-private finance strategy aimed at investors who either want to take a 100% Federal deduction under Section 181 or "The American Jobs Creations Act" against their ordinary income, get an additional 20-40% in tradable and monetized state tax credits or cash rebates, have a hedge of revenues from 20-30 films, a possible exit IPO on the London AIM., as well as stimulating local economic development, and creating jobs, including for women and minorities. Plus the Company is offering an alternative 100% principal protection of capital using Constant Proportion Portfolio Insurance.
"In practical terms, on a $10 million dollar film shooting in Illinois, $5 million would be equity (with CPPI principal protection), $5 million would be non-recourse debt through international pre-sales of a film" adds Rutman. "Assuming a discounted rate of about 28% (from 30%) tax credit from Illinois, that equals approximately $2.8 million dollars back into a film fund before revenues. Now assuming a Section 181 deduction is applied at a federal tax rate of 35%, an additional $1.75 million dollar reduction in Federal income taxes may be achieved so in effect investors are getting back almost $4.6 million dollars on a $5-10 million dollar investment before revenues, additional pre-sales, licensing, etc."
Internationally, the same formulas can be applied leveraging about 50% in non-recourse government incentives, 20% equity, and 30% non-recourse debt on a film by film basis.
Further, if the entire deal is structured using static or dynamic hedging (CPPI), then equity risk is virtually eliminated while the upside on 20-30 movies becomes a high yield investment with an absolute return prior to a hedge of revenues.
A complimentary deal can be structured with dynamic hedging to facilitate a prints and advertising fund to guarantee U.S. theatrical distribution.
Sound too good to be true?
"I don't know of any other alternative investment that can offer tax incentives, multiple exit strategies, an opportunity to guarantee 100% of capital, as well as giving back to the American economy and labor, while being involved with the moviemaking process", states Yuri Rutman,. "That would also add to the long line of recent film funds that have been structured with numerous hedge funds, private equity investors, corporate tax credit buyers, and institutions. Heck I don't even know of any business that someone can start where they know they will receive an exact ROI before they see any profits".
For smaller individual accredited investors and family offices who are not aligned with large capitalized hedge funds and have under $1 million to allocate to a film, Rutman can accommodate such situations using single picture financing strategies incorporating the above risk minimization techniques.
"I am surprised how many accredited investors, family offices, asset managers, hedge funds, fund of funds, Venture Capitalists, tax planners, CPA's, tax attorneys, public and private companies have no clue about these benefits", Rutman adds. "Federal Preservation, New Markets Tax Credits, etc was the usual route for tax credit planning or alternative investments, but film production incentives offer a more liquid premium, equity, as well as a little Hollywood adventure and schmoozing with movie stars."
Rutman adds "Plus, I am reinventing 'conscious' film finance. A lot of competitor deals have proven that they didn't do their homework and won't be around in a few years or even a few months because they didn't do their homework. I want to be making movies when I am 100 and be able to sleep well every night until then."
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