MovieArb Private Equity Fund To Invest In 10 Film Slates

Jul 21 2011 | 6:08pm ET

Rich Furlin of MovieArb, a film industry consultancy, says when he mentions Hollywood to potential investors, their first reaction is, inevitably, “Oh, no, no, no.”

“Then,” he laughs, they “dig into the details” and the idea of investing in Hollywood films starts to make more sense.

Furlin, a managing director at the Chatsworth Group, is also the CFO of the U.S. Sports Film Festival. While finance has been his career (the bulk of which was spent at Standard & Poor’s), film has always been his hobby, and with his latest venture—the ARA-MovieArb Equity Strategy—“the two have sort of melded together.”

The ARA-MovieArb Equity Strategy is a private equity vehicle targeting Hollywood films. The goal is to raise $275 million which will be invested in 10-film slates, with an equity limit of $7.5 million per movie.

In choosing films in which to invest, MovieArb will be aided by its sister company, Epagogix, which specializes in analyzing the box-office potential of movie scripts (and takes its name from Aristotle's discussion of epagogic, or inductive learning).

Epagogix, Furlin told FINalternatives during a recent phone interview, was founded in London in 2006 by “a bunch of brilliant mathematicians who decided they wanted to set out to forecast box office revenue.”

“Now, any mathematician that has ever tried that in the past has come up with a multi-factor model where they consider genre, and stars and things like that. That doesn’t work. That’s not what Epagogix does. What Epagogix does is they actually get down to the script level and they analyze the scripts and they look at every page and see the factors there—the tensions, the characters, the number of characters, things like that— and they’ve got that ‘neural network’ model that takes in these factors that are in the script, and then they can crank out an estimate of the box office… They say, ‘It’s going to do this much in box-office revenue and if you make these changes to the script, it could potentially do this much.’”

Furlin says Epagogix counts one “major, major” Hollywood studio among its customers and has been “uncannily accurate,” not so much in predicting winners but in “spotting losers.”

In addition to what Furlin calls “the Epagogix filter,” he says his fund has a few other things going for it:

“One is the alternative investment space. Hedge funds and private equity funds are not as uncorrelated with the equity markets as was originally advertised. People are finding a high degree of correlation between the private equity funds and equity markets because you need a strong equity market to have a good exit.”

Hollywood, he argues, is non-correlated, “It even did well during the Great Depression.”

Furlin also points to Tinsel Town’s “insatiable” demand for content—“You see all these alternative platforms now,” says Furlin, “you have Netflix, Amazon, they’re all competing to distribute, however, there’s still the same number of content providers,”—as well as its need for financing.

“They’re in kind of dire straits for financing,” he says, pointing out that one of the bigger sources of film financing, Relativity, is getting out of the financing business to start its own studio. Wall Street money has dried up, the credit markets are generally in rough shape and as a result, “Hollywood has never, never been so open to investors’ demands as they are now.”

Like many a Hollywood screenplay, Furlin’s investment approach is based on a formula: guarantee release on 2,000 screens, control the print and advertising budget, use no senior or mezzanine debt.

“With that formula, on 2,000 screens, you have a pretty good shot at making money,” he says.

Fundraising has begun and although Furlin wouldn’t share actual figures he says there’s been “surprisingly good interest.” The fund carries fees of zero and 33%, but also has a 15% hurdle rate.

“We get nothing until we make money and nobody else gets any money—not the actors, not the producers—the investors are sitting in first position which is very unusual because normally it’s your debt providers that are getting all the money. That’s why we’ve eliminated all the debt,” he says.

The group behind the fund—which, in addition to MovieArb includes Connecticut-based Archetype Risk Advisors, the portfolio manager—is already contemplating its second vehicle.

“Our second fund is a bigger strategy where we can deploy a lot more capital and our partners there actually used to run one of the major studios,” says Furlin. It will be a $350 million vehicle that is “going to invest more in the big tent poles.”

“The difference is kind of interesting, the first fund is more of a development fund—you put your money in, they develop the film, and then it’s released and you get your money back. The second fund is actually more interesting, because the studios don’t even need your money for these big things, they just want to offset some risk. So you come in and invest a couple of weeks before the film is released. And then within five weeks after the release, you know pretty much how you’re going to do and when you’re going to get your money.”

Furlin says their target investor for the smaller fund is high net worth individuals, while the second fund will be for institutional clients; investors, he says, seeking an “alternative alternative.”

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