Wanna finance a Jean-Claude Van Damme movie?

In the twilight zone of alternatives, there are investors who go boldly to the outer limits.
Remember Jean-Claude Van Damme, star of such all-time classic films as Timecop, Universal Soldier and Forever Monaco, in which he played a gay karate fighter?

Well, did you know that there are alternative investors who finance his films, and, what's more, have made money from doing so?

Until now, investing in films made as much sense as setting yourself on fire. "Something for mad uncles and crazy aunts," says David Molner, the founder and managing director of Screen Capital International, speaking at this week's GAIM conference. öI don't care about the quality of the scripts. I would finance a Jean-Claude movie for $8 million if it has pre-sold to distributors for $11 million. I wouldn't necessarily go to the premier though."

There's the clue. Profitable movie investing is all about structuring the deal so that the pay-off is guaranteed. It is structured finance.

Before founding Screen Capital in 2001, David Molner came up through the studio system, not as an actor, but as senior vice president of corporate business development at Paramount Pictures. Screen Capital is also one of the partners behind the Aramid Entertainment Fund, a Cayman-domiciled fund managed from London by CEO Simon Fawcett, who used to work for Pathe.

The fund is exactly like a hedge fund/private equity fund. It charges a management fee of 2% and a performance fee of 20%. Last year it returned 22% and financed 25 films. It focuses on films with a $10 million to $30 million budget, but is about to fund a subsidiary to undertake smaller-scale pictures. The fund has $260 million in assets under management, sourced from institutional investors, and is expecting to get to $300 million in the next month.

Putting that into perspective, the average budget to make a film in the USA is $100 million, with the big productions, the ones starring Sly, Brad and Angelina, costing $250 million. The films of other artists and renowned thespians like Steven Seagal and 'the muscles from Brussels', come in at more modest levels.

How glamorous! Well, not really, because underlying this is a whole panoply of structure and protection that makes the deals watertight and took years to get right. Presumably when showing off to the starlets in Tinseltown nightlife, he just sticks to "I'm in the movie business", without mentioning his fascinating taxation speciality.

However it paid off. Once an afterthought, investors now look at anything that impacts returns, and tax is at the forefront. Capital allowances can be taken on assets, effectively expensing the whole movie. So it is a bit like ship or aircraft leasing. Tax incentives are offered by nearly all countries in the English-speaking world to encourage moviemakers to come and shoot their movies in their country. What it boils down to is getting a quarter of your upfront investment back in the form of a tax incentive.

The Aramid fund does single-picture mezzanine lending, accompanied with upside warrants. It looks for deals with a sales agent attached for foreign rights (which are priced at a standard percentage of budget), It wants pre-sales and distribution and DVD arrangements. In so doing it passes on the performance and creative risk.

The fund also does bridge financing, pre-sale discounting arbitrage, production lending, studio co-financing facilities and producer-driven slate opportunities.

Recently, Aramid helped fund the film Choke, which sold at Sundance Film Festival for $10 million and repaid everyone in one fell swoop.

The author of this article played a 16th century Portuguese soldier in the Thai-filmed movie Kingmaker and was passed over for Oscar recognition. Mindful then that you're only as good as your next production û so what's next for Aramid?

Next, says Molner, might be the movie called Bush. It's about û hold on to your hats û President George W. Bush, as a young man. He will be played by Josh Brolin of No Country For Old Men fame. You just know it's going to be a respectful depiction, as it's being directed by Oliver Stone.
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