Private equity goes to Hollywood: when investing in media content production became hype

Private equity goes to Hollywood

Even in a downturn, private equity money picks Hollywood as a smart bet. Investment firms now view star-driven production banners (and major soundstages) as a long-term play in a crowded content marketplace. How did this happen? Why the sudden change of heart, since finance people had previously always viewed investing in media content production a very risky bet, at best? Is this ‟all in” investment strategy in media content production, implemented by private equity funds, financially sound?

1. Private equity buys stakes in media content production entities

Private equity (‟PE”) is doubling down on Hollywood.

After dipping their toes in the water through the talent agencies (TPG owns a majority stake in CAA, while Silver Lake is the largest external shareholder in Endeavor), investment firms are on a spending spree, snapping up stakes in production entities, or financing new vehicles like former Disney execs Kevin Mayer’s and Tom Stagg’s Candle Media to do the buying for them. Candle Media, which is backed by billions of dollars from Blackstone, has already purchased stakes in Reese Witherspoon’s Hello Sunshine (for a reported USD900 million) and Will and Jada Pinkett-Smith’s Westbrook Media, and has bought outright ‟Cocomelon” owner Moonbug and ‟Fauda” producer Faraway Road.

In June 2022, Shamrock Capital invested USD50 million into Religion of Sports, the studio co-founded by Gotham Chopra, Tom Brady and Michael Strahan.

On 13 December 2022, The Hollywood Reporter reported that Redbird Capital Partners formed a joint-venture with Abu Dhabi-based private investment fund, International Media Investments, pouring an initial committed capital of USD1 billion into the new venture, called RedBird IMI, which will see former CNN and NBCUniversal CEO Jeff Zucker acquiring and building companies in the sports, media and entertainment sectors. Both companies are already heavily invested in the media content production sector, with RedBird owning stakes in entertainment ventures like diversified content-production studio Skydance Media, LeBron James’ SpringHill as well as Ben Affleck’s and Matt Damon’s Artists Equity. IMI, meanwhile, owns a stake in Euronews and Sky News Arabia (a joint venture with Sky News).

Village Roadshow and Chernin Entertainment, sensing opportunity, have also begun to explore their options. The North Road Co., Peter Chernin’s production roll-up, is being financed by USD500 million from Providence Equity Partners and USD300 million in debt from Apollo through its managed affiliates. Chernin said, in July 2022, that he is now in the market for further acquisitions, leveraging the private equity cash to buy ‟pure-play” companies that focus solely on creating content.

What is causing the gold rush? Look no further than the annual ‟Peak TV” data released by FX Networks in January 2022. The data showed that in 2021, broadcast and cable channels, as well as streaming services, presented 559 English-language scripted series, a new record, and a 13 percent jump from pandemic-impacted 2020.

There is a high demand for supply of unique high-quality content to drive new eyeballs and subscriptions, and, at the same time, a lot of companies still need to program linear TV channels.

Therefore, the bet from private equity is that original programming, especially programming from blue-chip talent or independent studios, will not abate anytime soon, and may even continue to increase as streaming services seek to stand out, and compete with each other, in this era of streaming consolidation. In other words, ‟Peak TV” has not peaked yet.

2. Infrastructure purchases: soundstages and physical studios are feeling the love too!

The thesis that demand for content will continue to surge has also led to investment firms buying up soundstages and physical studios. Los Angeles-based real estate investment and operating company Hackman Capital has purchased Kaufman-Astoria Studios and Silvercup Studios in New York, as well as Los Angeles’ CBS Studio City lot, and has purchased, or is developing, studio space in Scotland and Toronto, among other places.

Meanwhile, TPG purchased Studio Babelsberg in Germany and Domain Capital Group is developing a new studio in Georgia.

The private equity firms’ logic, with the studio and soundstage buys, is that the real estate will appreciate in value, while the non-stop demand in film and TV productions provide steady and stable cashflows.

3. Private equity on the Croisette: investors are bullish on indie films, particularly in Europe

Within this broader trend of so-called ‟smart money” placing its bets on content, the 2022 Cannes film market was the stage set for some of the biggest players packaging projects and inking deals, backed by private equity groups, last May.

Indeed, very prominent on the Croisette were European mini-majors Leonine and Mediawan – both bankrolled by KKR – and Anton, the Anglo-French producer/financier/sales outfit run by Sebastien Raybaud, which has tapped private equity to fund productions such as Gerard Butler’s actioner ‟Greenland” and Cannes market projects ‟Canary Black” (a spy thriller from ‟Taken” director Pierre Morel starring Kate Beckinsale) and ‟Femme” (a LGBTQ+ revenge thriller featuring George MacKay and Nathan Stewart-Jarrett).

Meanwhile, the teams from Vine Alternative Investments portfolio companies Village Roadshow, EuropaCorp and Lakeshore Entertainment were all sharing a tent in Cannes, last May 2022.

Private equity investments are coming to Europe, riding the wave of European content consumption growth, driven by the explosion in streaming services and platforms offered to European customers, as well as the mandatory European Union (‟EU”) content quotas for SVOD platforms (imposing that 30 percent of all content on streaming services must be European-made) which guarantee demand for original, home-grown films and series which most streamers will be unable to fill on their own.

So the opportunities for independent studios, based in Europe, with access to original intellectual property and private equity capital, have never been greater.

Instead of inking an exclusive output deal with a single streamer – as Steven Spielberg’s Amblin Partners, Spike Lee’s 40 Acres and a Mule Filmworks, and Vanessa Kirby’s Aluna Entertainment have all done with Netflix – many creatives are now using private equity’s backing to stay independent and sell their wares to the highest bidder, in particular at film markets like Cannes.

It is telling that the new Cannes Film Festival president, from 2023 onwards, will be Iris Knobloch, the head of I2PO, a private equity-backed Special Purpose Acquisition Company (‟SPAC”) set up in 2021 by François Pinault (of Kering fame), Iris Knobloch and Matthieu Pigasse (who owns many media outlets in France, such as Le Monde, Les Inrockuptibles, Radio Nova and Mediawan) for the purpose of acquiring entertainment companies across Europe.

4. The distribution and downturn risks: heavy reliance on streamers and low valuations

However, even flush with all their new PE cash, the indies – and other media content producers – remain dependent on the global streamers for distribution.

Also, it is a known fact, in the movie business, that it is never been possible to scale a content business if you do not own your distribution. If streamers move away from licensing films and shows from third parties, in favor of producing the bulk of their content in-house, or if the influx of new private equity capital inflates the cost of production beyond profitability (due to fast-rising interest rates and heavy reliance on debt financing), the current growth market for indies and other media content producers, and their appeal as PE investments, may vanish.

Talent like Witherspoon, Smith and James are on board with the private equity cash, knowing that their financial backers have deep pockets and are willing to sell to the TV channel or streaming service willing to cut the best deal.

By contrast, every entertainment conglomerate is increasingly creating films and TV shows first and foremost for their owned services. Not only that but, with fears of a recession mounting, companies like Netflix, Warner Bros. Discovery and Disney have indicated that they will be more prudent with their content investments.

However, their desire to work with name-brand talent or producers remains, ensuring that firms like SpringHill and Hello Sunshine stay in demand.

Meanwhile, a potential economic downturn could force media firms to take a close look at their valuations. For companies that do not necessarily need the capital and are selling minority stakes, the lower valuations justified by the current market may not meet expectations, leading some founders to wait things out until conditions improve.

But a downturn also could bring opportunities of its own: even if private entertainment and production companies get spooked by low valuations, the public markets could provide them with new opportunities. Could, for example, Lionsgate be in play once it completes its spinoff of Starz?

This is the first time in at least five years where there are real opportunities in the public markets. For firms spending big to gobble up content and production companies, it could lead to bargains that are hard to pass up.

Crefovi’s live webinar: Private equity goes to Hollywood – 4 January 2023

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