The Future of Independent Film Finance

When the movie factory needed cash in the 1980s, it tapped individual investors through brokerage firms. That strategy ran its course, and in the 1990s German tax credits became the next sales pitch: Funnel money to our movies via a legislative loophole and you can take immediate tax deductions.

More recently, the likes of Goldman Sachs, along with giant hedge funds, poured billions of dollars into groups of movies called slates. The idea was that investing in a dozen or more movies at once, with the return calculated in aggregate after all had been released, was a sure-fire way to invest wisely. In many cases, though, it wasn’t.

Now that the economic crisis has washed away much of that money, a new pickup line is starting to waft through the air in deal-making hot spots like the Sundance Film Festival. The new line is this: Wall Street, real estate, the art market — all of those other supposedly stable investment areas — are now such a mess that Hollywood is one of the safer places you can park money. Although the movie business has been hurt along with nearly every other industry, it’s proving far more resilient to recession than most.

For example, iDeal operates out of New York, with financing to make about eight movies. It manages risk to investors through a variety of routes: preselling its films to foreign distributors, casting commercially tested actors, taking advantage of state tax incentives for filming. With that approach, iDeal was able to promise investors a risk floor of 70 percent on the chance that none of iDeal’s films succeeded.

But as iDeal rounds the home stretch on its first batch of movies, the production company is projecting at least a 15 percent return for investors and — if something big happens with “Motherhood” or “Arlen Faber” — as much as 40 percent.

The Exodus Film Group, a Venice Beach, Calif., production and financing company, focuses on animated films and has had a slow start, with its recent “Igor” selling a sluggish $19.5 million in tickets.

Coming Exodus entries like the animated “Bunyan & Babe,” featuring John Goodman as the voice of Paul Bunyan, are more promising.

“We have witnessed a surge of existing investors interested in upping their commitment as other opportunities have become less compelling. INvestors are telling us that they no longer consider well-made movies as high-risk.”

Anybody making the Hollywood-is-safer argument just six months ago would have been laughed out of town. Complex accounting methods, tremendous competition, soaring costs — it wasn’t exactly a safe part of the woods for even the most sophisticated investor.

All of that terrain is still intact, of course, but compare it with imploding investment banks, plunging real estate prices, a whipsawing stock market, Warhols sitting unsold and Bernard L. Madoff. At least in the worst instance of Hollywood investing, you’ll probably catch a glimpse of Angelina and eat some really good shrimp.

“Is investing in movies more attractive now because of what is happening elsewhere in the economy? Yes,” said Daniel H. Black, a partner at Greenberg Traurig, the large entertainment law firm. “Does that mean all the risk is gone? Absolutely not.”

The big studios probably won’t be able to rely much on this pitch. Their upfront needs are too big — Universal’s last round of private financing, which closed in September, totaled about $3 billion — and Wall Street and the real estate market may sort themselves out before their current slate deals expire.

The biggest players in the investment world have also soured on entertainment because they have been burned badly before, said Amir Malin, a partner at Qualia Capital, a media-focused investment firm.

But for independent producers the strategy could offer a lifeline. They are in a particularly tough spot because they have almost no hope of tapping the debt markets, there is a dwindling number of buyers — with outfits like New Line folding — and costs are soaring.