A few weeks ago, Chris Daniels burst onto the Altea scene with an opportunity our members couldn’t pass up.
It was a collateralized debt position in an upcoming Clive Owen film, yielding 15% over sixteen weeks (that’s 57% annualized).
He gets lots of these deals.
The only problem is each deal is fiddly and requires investors to move quickly.
Chris solved that by putting together a five-year investment vehicle that reinvests capital across dozens of projects.
And we’re helping him out.
Our Altea members have already committed more than $500k to the fund, but we have a bit more space for the rest of our community.
(Accredited investors only, I’m afraid)
If you want to learn more — and potentially invest — read on.
Table of Contents
Launch Film Bridge Fund
Launch Film Bridge Fund allows investors to participate in short-term, high-interest loans for film production financing. These loans have robust legal protections and the potential for high returns.
Deal Basics
- Total Fund Size: $5,000,000
- Minimum Investment: $20,000
- Potential IRR: 20% to 40% (depending on performance and share class)
- Deal Type: Debt (Bridge Loans)
- Deal Duration: 5 years
- Recent Performance: View
- Join us for a Q&A session: RSVP (you’ll need to create a free account)
Deal Overview
The Launch Film Bridge Fund presents a unique investment opportunity in the film financing sector. The fund provides short-term bridge loans to carefully vetted film projects, typically for 8-14 weeks, to cover critical early-stage production costs. With a focus on senior-secured positions, rapid turnaround times, and comprehensive legal protection, including completion guarantees, the fund aims to generate attractive returns while mitigating risks inherent in film production financing.
What’s the opportunity
The Launch Film Bridge Fund capitalizes on a specific niche in the film financing landscape, addressing a critical gap between project initiation and the release of primary financing.
Several key factors drive this opportunity:
Industry Dynamics: The film industry often faces timing mismatches between when funds are needed and when long-term financing becomes available. This creates a persistent demand for short-term bridge loans.
Risk-Adjusted Returns: The fund aims to offer attractive returns while significantly mitigating risks by focusing on projects that have already secured primary financing and obtaining comprehensive security interests, including completion guarantees.
Rapid Turnover: The short-term nature of the loans (typically 8-14 weeks) allows for quick capital recycling, potentially amplifying returns. The fund projects an impressive 39.59% IRR over its 5-year lifespan.
Market Inefficiency: Traditional lenders often shy away from film financing due to perceived risks and industry complexities, creating an opportunity for specialized lenders with industry expertise.
Content Demand: The proliferation of streaming platforms has led to an unprecedented demand for original content, driving production volumes and increasing the need for flexible, short-term financing solutions.
Legal Protections: The fund’s use of completion guarantees, comprehensive security agreements, and other legal safeguards provides a robust risk mitigation framework.
The fund’s management team, with film production and finance backgrounds, possesses the necessary expertise to evaluate projects and navigate the industry’s intricacies. Their industry connections and understanding of the production process are crucial for deal sourcing and execution in this specialized market.
Historical parallels can be drawn to the rise of specialized financing in other industries, such as the emergence of venture debt in the tech startup ecosystem. Like venture debt, film bridge financing fills a specific capital need that traditional banks are often unwilling to address, creating an opportunity for specialized lenders to generate attractive returns.
Deal Economics
The Launch Film Bridge Fund aims to raise $5,000,000 from investors, including an allocation from our community. This capital will be used to provide short-term bridge loans to film productions, with loan amounts scaling up as the fund grows.
The fund targets a 16% return on each deal, with loan durations typically lasting 8-16 weeks. This rapid turnover allows the fund to reinvest capital multiple times yearly, amplifying returns.
Based on the existing track record, the fund’s first year might look like this.
The forecast pipeline is already in place, with several projects already in the hopper. I’ve seen the list, and there are loads of household names in there.
Projecting out the timelines and model above and reinvesting profits would lead to this investment profile:
- Year 1: $12,325,000 invested across 8 deals, generating $1,972,000 in returns
- Year 2: $17,185,660 invested, generating $2,749,705 in returns
- Year 3: $23,963,355 invested, generating $3,834,137 in returns
- Year 4: $33,417,990 invested, generating $5,346,879 in returns
- Year 5: $46,594,700 invested, generating $7,455,152 in returns
The fund’s duration is five years, allowing for multiple cycles of lending and repayment. At the end of the five-year period, investors will receive their principal investment back and any accrued returns not previously distributed.
Assuming reinvestment, gross (not including fees) AUM growth looks like this.
The fund’s value is projected to grow from the initial $5,000,000 to $26,357,873 by the end of Year 5, representing a total return of about 427% or an annualized IRR of 39.59% (assuming reinvestment).
The kicker, which we’ve not modeled, is points on the back end. Some loans run a week or two longer than usual, and the film can give up points on the back end (a share of total profits) as compensation.
This only materializes on a fraction of deals, but when it does pay out, it might add an extra 10-15% to returns on a specific deal.
The fund charges a 2% annual management fee and a 20% performance fee (carried interest) on profits above an 8% hurdle rate.
We’re working to put together a dual share class system that allows LPs to either reinvest earnings or pull them out annually.
Market Size
The global film and video market, which encompasses the fund’s target sector, was valued at $234.9 billion in 2020 and is expected to reach $318.2 billion by 2025, growing at a CAGR of 6.3%. This growth is primarily driven by increasing demand for content from streaming platforms and traditional media outlets.
Focusing specifically on film production, the global movie production and distribution market size was valued at $38.6 billion in 2021 and is projected to reach $46.3 billion by 2027, growing at a CAGR of 3.1%.
The market for film financing, a subset of these broader markets, is more challenging to quantify precisely due to the private nature of many transactions. However, industry estimates suggest that the global film financing market ranges from $15 billion to $20 billion annually.
Bridge financing, the specific niche targeted by the Launch Film Bridge Fund, represents a smaller portion of the overall film financing market. While exact figures are not readily available, industry experts estimate that bridge financing could account for 5-10% of total film financing, suggesting a potential market size of $750 million to $2 billion annually.
It’s worth noting that the U.S. remains the largest single market for film production and financing, but there’s significant growth in other regions, particularly in China and India. The film industry’s global nature provides opportunities for geographic diversification within the fund’s portfolio.
Growth potential
The growth potential in the film bridge financing sector is significant and is driven by several factors:
Streaming Wars: The intense competition among streaming platforms (Netflix, Amazon Prime, Disney+, etc.) drives unprecedented demand for original content. This trend will likely continue, increasing the number of productions requiring financing.
Global Content Demand: There’s a growing appetite for diverse, international content, opening up opportunities for financing productions from various global markets.
Independent Film Renaissance: As digital distribution channels proliferate, independent films have more avenues for reaching audiences, potentially increasing the number of projects seeking bridge financing.
Technological Advancements: New technologies (e.g., virtual production) are changing how films are made, potentially creating new financing needs and opportunities.
Post-Pandemic Production Surge: As COVID-19 restrictions ease, there’s a backlog of productions looking to move forward, potentially creating a surge in demand for bridge financing.
Emerging Markets: Growing film industries in countries like India, Nigeria, and China present opportunities for expansion into new geographic markets.
Cross-Media Integration: The increasing integration of film with other media (video games, VR experiences) could create new financing needs that bridge loans could address.
These growth opportunities could potentially be realized through strategic expansion of the fund’s operations, such as:
– Expanding its geographic focus to include emerging film markets
– Developing expertise in financing for new production technologies
– Creating specialized products for different types of productions (e.g., streaming series vs. feature films)
– Partnering with larger financial institutions to increase lending capacity
– Investing in technology to streamline the lending process and handle a higher volume of deals
Maintaining rigorous risk management practices while scaling operations to meet increasing demand will be key to realizing this growth potential.
Risks
Porter’s Five Forces Analysis:
1. Threat of New Entrants (Moderate to High):
- Low capital requirements for small-scale operations
- Specialized knowledge acts as a barrier
- Potential entrants: Traditional banks, private equity firms, fintech companies
- Example: Bank of America or Goldman Sachs could leverage their capital and networks to enter this space
2. Bargaining Power of Suppliers (Low to Moderate):
- Suppliers are film productions seeking financing
- Many projects competing for funding
- However, high-quality projects have more options
3. Bargaining Power of Buyers (Moderate):
- Buyers are investors in the fund
- Alternatives exist (e.g., other alternative investment funds)
- However, specialized nature of the fund may reduce alternatives
4. Threat of Substitute Products (High):
- Other forms of film financing (equity investments, traditional loans)
- Crowdfunding platforms (e.g., Kickstarter, Indiegogo)
- Studio self-financing
- Example: A platform like Slated.com offers a marketplace for film financing, potentially competing with the fund
5. Rivalry Among Existing Competitors (Moderate):
- The specialized nature of the market limits the number of direct competitors
- However, competition for high-quality projects can be intense
- Competitors might include other film finance funds or specialized lenders
- Example: The Forest Road Company offers similar short-term lending for film and TV productions
Macroeconomic Risks:
1. Interest Rate Fluctuations: Rising interest rates could make the fund’s loans less attractive compared to traditional financing options.
2. Economic Downturns: Recessions may reduce overall investment in film production and impact the ability of borrowers to repay loans.
3. Changes in Tax Incentives: Many film productions rely on tax incentives, which could be reduced or eliminated, affecting projects’ financial viability.
4. Currency Fluctuations: Exchange rate volatility could impact returns for international projects.
5. Regulatory Changes: Stricter regulations on alternative lending or the film industry could impact the fund’s operations.
6. Pandemic Resurgence: Another wave of COVID-19 or a new pandemic could disrupt film production schedules and impact loan repayments.
Potential Black Swans:
1. Major Streaming Collapse: A sudden bankruptcy or market exit of major streaming platforms could dramatically reduce demand for content and disrupt the film financing ecosystem.
2. Technological Disruption: A revolutionary technology (e.g., AI-generated content) could fundamentally change how films are produced and financed.
3. Intellectual Property Law Changes: Drastic changes to copyright laws could impact the value of film assets used as collateral.
4. Geopolitical Events: Major conflicts or trade disputes could disrupt international film productions and financing.
5. Systemic Fraud: Discovery of widespread fraud in the film industry could erode confidence in film investments.
6. Catastrophic Cyber Attack: A major cyber attack targeting the entertainment industry could compromise sensitive information and disrupt production.
Legal Recourse
The fund has implemented robust legal protections to mitigate risks:
1. Completion Guarantees: Each project must obtain a completion bond from an insurance company, ensuring either the film’s completion or immediate loan repayment.
2. Security Agreements: The fund secures comprehensive rights to the films, including IP, distribution rights, and future revenues.
3. Copyright Mortgage and Assignment: Provides additional security interest in the film’s copyright.
4. Personal Guarantees: May be required from key individuals involved in the production.
5. Power of Attorney: Grants the fund step-in rights to take over production if necessary.
In case of default, the fund can:
– Claim against the completion bond for immediate repayment
– Foreclose on the collateral
– Enforce personal guarantees
– Exercise step-in rights to complete and exploit the film
Conclusions
What I like
1. Attractive potential returns (39.59% projected IRR)
2. Strong legal protections and risk mitigation strategies
3. Short-term nature of loans allows for quick capital recycling
4. Growing demand for content driven by streaming platforms
5. Experienced team with industry knowledge
What to Consider
1. High-risk nature of the film industry
2. Potential for increased competition in the space
3. Macroeconomic risks, particularly interest rate sensitivity
4. Illiquidity of the investment (5-year commitment)
5. Dependency on the continued growth of content demand
While the fund’s strategy appears sound and the market opportunity is compelling, investors should be aware of the speculative nature of film investments and the potential for volatility in returns. The robust legal protections and risk mitigation strategies the fund employs significantly enhance its appeal, but the overall risk profile remains relatively high.
FAQs
Q1: How does the fund mitigate the risk of project failures or delays?
The fund employs several strategies to mitigate risks:
1. Careful project selection: The team thoroughly vets projects, focusing on those already secured primary financing.
2. Completion Guarantees: Each project must obtain a completion bond from an insurance company, ensuring either the film’s completion or immediate loan repayment.
3. Comprehensive Collateral: The fund takes security interests in the films, including intellectual property rights and future revenues.
4. Short loan terms: By focusing on short-term loans (typically 8-14 weeks), the fund reduces exposure to long-term project risks.
5. Diversification: By investing in multiple projects, the fund spreads risk across its portfolio.
Q2: How does the fund’s return compare to other alternative investments?
The fund’s projected 39.59% annual return is exceptionally competitive within the alternative investment space. For comparison:
1. Private Equity: According to PitchBook, U.S. private equity funds had a median IRR of 14.2% over a 10-year period ending in 2020.
2. Venture Capital: Cambridge Associates reports that U.S. venture capital funds had a 10-year pooled return of 15.3% as of Q3 2021.
3. Hedge Funds: According to HFR, hedge funds returned an average of 11.8% in 2020.
The significantly higher projected return of the Launch Film Bridge Fund reflects the specialized nature of the investment and its associated risks. It’s important to note that past performance and projections don’t guarantee future results, and due to the nature of the film industry, the fund’s returns may be more volatile than some other alternative investments.
Q3: What happens if a film project defaults on its loan?
In the event of a default, the fund has several recourse options:
1. Completion Bond Claim: The fund can claim against the completion guarantee for immediate repayment.
2. Collateral Seizure: The fund can exercise its rights over the collateral, including comprehensive film project rights.
3. Legal Action: The fund could pursue legal remedies to recover the loan amount, including enforcing personal guarantees if applicable.
4. Step-In Rights: The fund could exercise its power of attorney to take over the production and complete the film.
Q4: How does the fund source its deals?
Right now, deal sourcing is on a trusted network basis. Holding a first-position lien over a multi-million dollar film production is a powerful position. So, some level of trust must be built with the producers and IP holders. On our side, of course, we only consider top-tier projects right now. Projects with undeniable collateral, star power, teams with strong reputations, etc. I have about 10 Executive Producer partners in my network who bring me these deals actively, who trust me with the IP leverage, and whom I trust only to show me real deals. In time, this trusted network will naturally expand, increasing our compelling deal flow to scale along with us.
Q5: How might changes in the streaming industry affect the fund’s performance?
The streaming industry significantly impacts the fund’s performance in several ways:
1. Content demand: Streaming platforms’ content needs drive production, increasing demand for bridge financing. Netflix alone spent $17 billion on content in 2020.
2. Valuation of IP: Streaming rights can significantly impact a film’s value, affecting the strength of the fund’s collateral.
3. Distribution landscape: Changes in how content is distributed could affect the financial structures of film projects.
4. Market saturation: If the streaming market becomes saturated, it could lead to reduced content budgets and impact loan repayment capabilities.
5. Consolidation: Mergers and acquisitions in the streaming industry could alter content strategies and financing needs.
Like what you see?
That’s all for now. Any questions, smash the reply button.
Cheers,
Wyatt
