A new sphere

In this age of scarce capital and a struggling independent film business, the industry is always looking for innovative financing solutions. The founders of Winchester Capital Management, Jean-Luc De Fanti and Jeff Sagansky, appear to have found one — at least for studio-level pictures.

Their new venture, Hemisphere Media Capital, is a $250m fund backed by institutional investors and a group of strategic partners, including Japanese distributors Toho-Towa and Kadokawa Pictures and Singapore-based executive producer and talent manager RGM Media. The fund’s first investment is a venture called Hemisphere Motion Picture Partners, which aims to co-finance US studio pictures with strong international appeal.

Speaking at November’s American Film Market (AFM), where the venture was announced, De Fanti explained that Hemisphere will tip in 20%-50% of each film’s budget, and that most films are expected to be in the $40m-$80m range.

Hybrid model

Some projects are already under negotiation and will be announced in the coming months. In each case, the US studio will handle worldwide distribution, with the exception of Japan where Toho-Towa will handle theatrical and Kadokawa will handle the video release.

De Fanti describes the venture as a hybrid model as it contains elements of both studio and independent financing. “On the one hand, international distributors continue to be hungry for mainstream Hollywood fare. What they typically want are big movies with a worldwide theatrical release, which a lot of independent films don’t have,” says De Fanti. “Then, of course, the studios are constantly looking for capital. All of them are part of large media conglomerates and the parent companies don’t always give the studio divisions as much capital as they’d like.”

The inclusion of Japanese partners — at a time when Japan is regarded as a depressed market by international sales agents — raised eyebrows at the AFM. But as De Fanti explains, it is the capricious nature of the Japanese market that makes it such an ideal partner for Hemisphere. He starts by arguing that Japanese distributors still have an appetite for big-budget studio fare – it is just the trickier independent films from which they are currently shying away. He then makes the point that the studios are eager to raise capital and bring in co-financing partners, but as international box office has grown over the past decade, they have been less keen to give away international rights.

“We knew the studios would not let us have distribution in a broad swathe of territories. But Japan is a unique territory in that it’s culturally very different to the US and the studios have historically found it a bit hit and miss. So being able to partner with the number one exhibitor there was seen as an asset for us.”

However, De Fanti also stresses the studios with which he co-finances are not really giving up Japan. “All Japanese revenues will be pooled and put back into the worldwide pool,” he explains. “Say we invested 50:50, the studio will keep 50% of worldwide revenues and we keep the other 50%. It’s just that the Japanese partners are like the studio’s agent or sub-distributor in Japan.”

Toho is the undisputed giant of Japan’s film market — as a distributor it had a market share of around 29% in the first half of 2010. Toho-Towa, the subsidiary of Toho which releases foreign product, has an exclusive contract to distribute films from Universal Pictures. Kadokawa is a smaller company but is strong in video distribution, owns a majority stake in Hong Kong distributor Intercontinental and also has a relationship with Korean giant CJ Entertainment. It was also a founder investor in the original DreamWorks in 1995.

RGM Media, a straight investment rather than distribution partner, is based in Singapore which De Fanti describes as “a real financing centre — like the Switzerland of Asia”.

Originally a Sydney-based talent management company, RGM expanded into both Asia and executive production and now has a close relationship with Singapore’s Media Development Authority (MDA). The company arranged mezzanine financing for US independent films, including Fragments (aka Winged Creatures) and The Girl In The Park, and is also involved in the long-gestating Point Break sequel, Point Break: Indo.

Squaring the financial circle

In some ways, Hemisphere brings the French-born De Fanti full circle to studio financing in which he started his movie career and worked for many years. After a stint in engineering in Australia and business school in the US, he started work in the finance department at Sony Pictures, under Jonathan Dolgen, and later moved into acquisitions and production at the studio. Remaining in Los Angeles, he then worked for France’s Hachette Premiere, which produced films such as Cyrano De Bergerac and The Horseman On The Roof. In the late 1990s, he tried his hand as an independent producer and segued into consulting.

Sagansky, his partner in former venture Winchester, is a veteran of both studios and networks — with senior positions at NBC, CBS, Sony Pictures and Sony Corp — who in the last decade has invested in a wide range of new media start-ups.

“Jeff, whom I knew because he was a senior executive at Sony when I was there, had a similar idea of basically looking for star-driven packages to arbitrage vis-a-vis international distributors,” says De Fanti. The two partners launched Winchester in April 2007 and got into the business of financing independent films by pre-selling international rights. The fund also lent money to German distributor Senator Entertainment and was involved in gap financing and cash-flowing tax credits.

Winchester’s film investments included The Private Lives Of Pippa Lee, starring Robin Wright Penn and Keanu Reeves, and The Men Who Stare At Goats, starring George Clooney. It also had a multi-picture financing deal with Luc Besson and Pierre-Ange Le Pogam’s EuropaCorp, and backed The Transporter series among other titles.

But while most of these films were deemed successful, De Fanti says there are a limited number of independent movies with the right elements that can be profitable and he found it difficult to scale up. So the new fund will continue to be involved in gap financing, tax credits and other financial services, but not pre-selling. “This model of financing by selling rights is broken — not because of the international distributors or the movies, but because of the US market. These movies don’t find US distribution and for how long can we ask the world to finance American movies that no-one in America wants to distribute? If you look at French movies, they’re financed 80%-90% out of France.”

Meanwhile, minimum guarantees for international rights are not growing, as the territories which offer the biggest MGs — the big five in Europe and Japan — are the ones suffering most from the impact of new technology. At the same time, the territories which are growing quickly in terms of box office — Mexico, Brazil, Russia and China — are not paying more for independent English-language product. “When I started in this business, Mexico was 0.5% of international and Spain was 5%. Now Mexico is 5.5% and Spain is 2.5%, but there aren’t many Mexican buyers paying $5m for MGs,” observes De Fanti.

He believes the worldwide market will continue grow — both geographically and in terms of new media — but he also believes the US studios are best placed to take advantage of that growth: “New media will be helpful for small producers and distributors who can’t otherwise release their films, but to really maximise revenues it’s the most popular content that sells.”

The same goes for extracting value from emerging markets. “The major studios have the equipment to do it; they have the reach and the product line-up. The independent sector will always be there, and I believe it will bounce back, but right now it’s a little challenging,” De Fanti says.

His opinion may not be popular in his native auteur-driven France, but after 25 years working in both Hollywood and in the independent financing sphere, De Fanti has seen both sides of the coin.