Excess all areas

The film industry was one of the last Chinese industries to be reformed, and consequently has become one of the last to experience the kind of massive growth that excites investors. In recent years, the film business has attracted a tide of investment from entrepreneurs in other industries where growth has slowed, such as mining, real estate, the high-tech industries and advertising. A few years ago, the video streaming and online games companies attracted all the attention. And now the spotlight is firmly on film.

“A lot of excess capital has come to join the party,” observes Kelvin Wu, CEO of recently launched US-China joint venture Legendary East.

“There are not too many avenues of investment in China so some of the property developers or mining entrepreneurs, when they’re slowed down by regulations, have to find a new industry to invest in. Perhaps they also like this industry because they think it’s cool.”

‘Many companies are driven by a single individual’s vision’

Peter Loehr, CAA, China

The result is Chinese film-makers are in the enviable position of having financiers lining up to invest in their projects. But the money sometimes comes with strings attached. Stories abound of financiers who insist on leading roles for their girlfriends and of films left on the shelf because the girlfriend didn’t outlast the marketing spend.

There are also hundreds of investors willing to put up a few million dollars in a Chinese movie without really getting involved in the production process. This may sound tempting, but at the end of the day, every film needs to be developed, packaged and marketed properly.

For local film-makers and outsiders who look to China for finance, the key is to find the smart money that has marketing and distribution attached.
Hong Kong-based producer Nansun Shi quickly reached this conclusion while financing films such as Tsui Hark’s upcoming $35m 3D epic, The Flying Swords Of Dragon Gate, which is backed by a group of Chinese investors headed by Bona Film Group.

“Money is not an issue in China, so we can choose third parties that can bring in something other than money,” she explains. “We work a lot with people like Hunan Satellite TV, Jiangsu TV and China Film Group, for strategic reasons. Sometimes they will have a film that we will also take a piece of — so we can co-ordinate the release dates so the films don’t clash.”

Peter Loehr, managing director of CAA’s Beijing office, also stresses the importance of finding the right money. He explains around eight to 10 strategic players have emerged in China who have shown a serious commitment to the film business, and have the ability to distribute locally, as well as finance.

“We’re seeing a lot of exciting new companies coming into this space,” Loehr says. “They come into it more as companies than individuals. Many are driven by a single individual’s vision, but Chinese businessmen usually try to hire teams very quickly, so there’s a lot of poaching going on. That’s one of the big problems here — the private movie business only started in earnest in 2002, so there are not that many experienced movie executives for them to hire.”

Private companies diversify

In addition to the state-owned companies such as China Film and Shanghai Media Group, private players include Bona, Huayi Brothers and Stellar Megamedia, already considered veterans in this young business, and newer entrants such as Enlight Pictures, Beijing Galloping Horse, Le Vision Pictures, Wanda, Perfect World and SkyLand Entertainment.

Many of these companies are moving into film financing from related businesses: Wanda is a major exhibitor, while Galloping Horse started out in the advertising business; Le Vision Pictures is owned by online video company LeTV, which poached Enlight Pictures’ CEO Zhang Zhao to build a local production business and acquire international content for its platforms.

Most of their investment is flowing into Chinese-language productions for the local market, but the number of Chinese co-productions, particularly with US players, is increasing. CAA is working with its talent clients in both the US and China to package projects that combine financing from West and East.

Upcoming co-productions include two with Galloping Horse: a period action film about Two-Gun Cohen, the UK bodyguard to Sun Yet-sen, to be directed by Doug Liman and produced by Rob Reiner and Alan Greisman, and Bill Guttentag’s romantic comedy French Concession.

‘Money is not an issue in China, so we can choose third parties that can bring in something other than money’

Nansun Shi, producer

CAA is also steering Wanda, Le Vision Pictures and Bruno Wu’s Locus Global Entertainment towards co-production deals, while Hong Kong producer Bill Kong and Beijing-based DMG Entertainment are also active in this area. The norm in co-production deals is for the Chinese partner to take Chinese rights — there are few deals where the Chinese investor takes equity in the international revenue.

When Sony set up The Karate Kid as a co-production three years ago, the Chinese partner Huayi Brothers put up $5m for Chinese rights. Loehr says deals are now being negotiated where the Chinese share is double or triple that figure. The other advantage of co-productions is that they can be released in China as homegrown films outside the state-imposed distribution quota.

“Whether you are a studio strategically trying to move into this market with co-productions and local product, or an independent producer trying to finance your movie, there is significant capital coming out of China,” Loehr says.

Meanwhile, China, Hong Kong and Taiwan are sitting on billions of dollars of so-called ‘dry powder’ or uninvested private equity funds that have been raised but have yet to find the right deals. The film business may attract some of this money — the China deals struck recently by Legendary and Relativity Media are both backed by private equity — but again this kind of finance usually only makes sense if you have a Chinese distribution partner attached. Legendary is partnered with Huayi Brothers, in addition to private equity player AID Partners, while Relativity has hooked up with SkyLand and state-owned distributor Huaxia, in addition to private equity firms SAIF and IDG China Media. Both deals are for an on-going production pipeline rather than single-project finance.

There have also been cases of people coming to China and finding investment for single projects that have not been set up as co-productions — China’s Dreams Of The Dragon Pictures is one of three Asian investors to take an equity stake in Cloud Atlas, which the Wachowskis and Tom Tykwer are now shooting with Tom Hanks and Halle Berry.

However Loehr believes these deals will be rare. “The concept of putting up money and taking a back seat and having a bunch of other people recoup in front of you is different and foreign for Chinese businessmen,” he explains.