For Love of Famous People

Hollywood is a funny business. There's lots of money sloshing about, the big stars see huge paydays, and some movies make a tremendous amount of cash. But it always seems like an extraordinarily bad business to invest in -- tons of uncertainty without the level of reward that normally comes with accepting that level of risk. And yet, there's invariably some new wave of capital pouring in even though every previous wave has eventually walked away bitter and disappointed. The latest wave has come from hedge funds and The Los Angeles Times reports that their experience has been no better than anyone else's.

At the end of the day what none of these hard-headed businessmen -- from the heads of Japanese conglomerates to the high-flying hedge funders to whomever else -- is that the attraction of the business isn't the business, but the fact that people like movies and know that owning a piece of a production or a studio will give them a chance to hang out with movie stars. Everyone, after all, likes hanging out with movie stars. And I suppose there's no reason very rich people shouldn't plow their savings into an enterprise like that, but oftentimes the people making these decisions aren't just playing with their own money, they're also managing assets for someone else.

Comments

Breach of fiduciary what?

Posted by Trigger | February 16, 2008 12:05 PM

yes, it was certainly very strange when supposedly hard-headed hedge funds jumped into hollywood; at least when people with too much money buy sports teams (with the same motivation), by and large they have at least been able to count on capital gains.

i own a few shares of lion's gate, but somehow that hasn't given me the chance to hang out with movie stars; yet another example of how the very rich are different than you and me.

Posted by howard | February 16, 2008 12:21 PM

I think there's a pretty standard reason big time investors want to get into very big businesses with low profits or losses, or on the other hand a lot of uncertainty. Because they are big time business people and they want to take on the chronic problems of a big time industry that has multi-billion dollar cash flows and a high profile. Why do big investors get into car companies or airlines? I don't think there's anything glamorous about Delta.

Hedge funds and especially private equity firms are not old grandmas looking for the safest return on investment. In many cases they're trying to pick a winner among several losers, or they're looking to have some influence on the company and thus the opportunity to work their magic. Why do people dream of coaching, playing for, and managing the NY Knicks? It may seem strange to an ordinary person, but apparently not to Larry Brown or Phil Jackson.

Posted by Colatina | February 16, 2008 12:29 PM

While there is risk in Hollywood - there is also incentive to minimize the reward - if your studio is swimming in money, there is more incentive for actors, writers and tech people to ask for raises. Therefore, reporting less money than is earned in a creative way, and pleading poverty is less of a sign of risk in the business and more of a negotiating strategy. High earnings please shareholders in most industries, but in Hollywood, underplaying the total profits can mean the studio is being frugal.

Posted by Byrd | February 16, 2008 1:07 PM

colatina, there's an buffet-ism that goes something like "when an executive with a reputation for genius gets involved in an industry with a reputation for bad economics, it's usually the industry's reputation that remains unchanged."

i appreciate that hedge funds and private equity firms are high-flying risk-takers, but there's risk-taking and there's dumb.

Posted by howard | February 16, 2008 1:11 PM

Imagine if hedge funds could invest in football teams. They'd all think they're the next Bill Walsh, when they'd really be the next Dan Snyder.

Posted by Mike | February 16, 2008 1:38 PM

In a previous lifetime, I was paid to hang with famous people. I soon learned that most stars are as flawed and boring as the rest of us (plus being orbited by sycophants and assholes). The chief exceptions to this are aging has-beens, who may have developed perspective, even wisdom, and a sense of humor about famousness.

If you ever find yourself in a room full of famous people and want to take home an impression other than "(s)he's not as tall as I thought," look for the oldest and/or least hot.

Posted by allbetsareoff | February 16, 2008 1:45 PM

Only a tiny number of *Stars are fun to be around and I've been around gazillions for a day or night or so. The nicest by far: Anthony Hopkins. The biggest scumbag hands down: James Woods. Other real nice guys (movies and TV): Alec Baldwin, Ed Harris, Chris Noth, Dennis Franz. Nicest female star: maybe Sandra Bulloch.

Posted by Trevor | February 16, 2008 2:52 PM

Of course, for every rule there's an exception, and in this case the exception seems to be Steve Bing. He's done well investing in the movies ("Polar Express") and has not just hung out with stars, but dated some of them (such as Elizabeth Hurley). He's not walking away, and I suspect he's not bitter.

Posted by Kit Stolz | February 16, 2008 3:09 PM

The book to read on this, by the way, is: Hollywood Economics: How extreme uncertainty shapes the film industry.

Posted by ~~~~ | February 16, 2008 3:33 PM

"i appreciate that hedge funds and private equity firms are high-flying risk-takers, but there's risk-taking and there's dumb."

Yes! They all think they're high-flying genius risk takers. Most of the are dumb. So Oleg Deripaska's adventure with GM didn't make the automaker into a lean profit machine like he thought it would. But it's not jsut about hanging out with movie stars.

Posted by Colatina | February 16, 2008 4:16 PM

but oftentimes the people making these decisions aren't just playing with their own money, they're also managing assets for someone else

The people they are managing money for are also rich people. And the rich investors are plenty able to take care of themselves. If the hedge fund managers don't have sufficient alpha, the current investors pull out and new investors don't invest.

Posted by Al | February 16, 2008 4:50 PM

There's a similar dynamic at work in investing in big-budget musicals, I think, as well.

At a certain point, the psychic value of investing in these enterprises to worth enough to justify the lower returns. Hedge funds, too, seem to attract investors who obtain a psychic benefit from putting one's money in a hedge fund.

Al, of course, provides the necessary comedy relief by explaining that hedge fund investors are typically rational.

Posted by Tyro | February 16, 2008 7:32 PM

I suspect that there is a backstory here that is more interesting than the _Get Shorty_ version Matt is peddling.

You people may know about Epagogix (you can find a discussion here: http://name99.org/blog99/?p=9)
which is a company that claims, using Science(TM), to have found patterns in how to "manufacture" profitable mid-budget movies. Their claim was that if some financial types were to use these ideas, rather than getting all hung-up on old-school Hollywood ideas about how to make a movie, the results would in general be more profitable.

I'd love to know the extent to which
• these hedge fund investors were driven by this rather than by Hollywood glamor
• these hedge funds managed to control how movies were made (and Epagogix' ideas were flawed) as opposed to that they were snowed by Hollywood types and simply ignored Epagogix' ideas
• this is all actually BS, that the movies were perfectly profitable, perhaps even more profitable than usual, but the glories of Hollywood accounting ensured that the money got syphoned off to a few people in the know, rather than to the investors.

Posted by Maynard Handley | February 16, 2008 9:56 PM

With financial people, this is all vanity investment, ego fun with money you've made--same goes for restaurants and bars. They usually fair worse than others because they do it for personal emotional reasons. The idea that they are going to be able to do it better is an excuse rationalizing the actual doing of it to themselves, and the really smart ones don't do that and just admit to themselves that they are doing it only because they always thought it would be fun to play in this or that sandbox.

Posted by artappraiser | February 16, 2008 9:58 PM

p.s. to clarify that further:
The sensible ones admit to themselves that they are not trying to build a movie or restaurant business, but using such investments to express their "artistic" nature, and maybe, through tax write-offs, it won't even cost them much. They want to do it because it's cool. A few even do it in a cynical attempt to be cool, to add to a "brand."

Posted by artappraiser | February 16, 2008 10:03 PM

Arrgh, it's sad but true. Many a young entrepeneur were lured onto the rocks by the promise er a chance to mingle with hollywood cooze. In me own personal case, I invested me hard-earned booty in a little picture called, Pancakes Ain't Flapjacks. It were the story of a young lady workin as a logger who yet yerned to dance. It starred the tempestuous Sean Young. This were about 1985 and she'd just finished work on Blade Runner and she were a bit high on herself, having bested Harrison Ford and Rutger Hauer both in the game er love. Well, to make a long story short, I went through three fortunes at least trying to insinuate meself into her drawres (not that she wore them often). In the end it required none less than the gift er a puppy a day fer forty days until she finally relented and let me board her. I be too much of a gentleman to report what happened that night, but let me just say that I still bear the scars, literally. Talk about yer hard-earned booty.

Posted by ol' one eye | February 17, 2008 2:37 AM

Did Arundel Partners, the guys optioning movie seuqels (and the subject of a HSB cast study) make money?

Posted by Sock Puppet of the Great Satan | February 19, 2008 11:02 AM