Last Updated on February 18, 2022 by Lil Ginge
Private equity has recently become a major new source of funding in Hollywood. But what is private equity and why has it become involved in the movie industry?
What Is Private Equity?
Private equity is an alternative investment class of equity investment funds. It is composed of capital not listed on a public exchange like the stock market or an options market. It is made up of investors and funds that directly invest in private companies, buying, and restructuring companies. They also may buy out a public company and have the firm delisted from the public markets.
Both institutional and retail investors can provide capital for private equity. When the money is invested in a firm, it can be put to a variety of different operational uses or simply to enhance the strength of a firm’s balance sheet.
The owners of a private equity company are limited partners (LP) and general partners (GP). Private equity funds are typical 99% owned by limited partners with limited liability exposure, while 1% is made up of general partners who own the rest and have full liability. General partners also execute and operate the fund.
Types of private equity firms also include venture capitalist firms and angel investors. While each of these three types of funds – private equity, venture capital, and angel investment – have different goals, preferences, and investment strategies – all three of them provide operational money to their target firms with private, non-listed funds.
In the end, the goal of private equity firms is to take an ownership stake in a company – be it private or public – increase the value of that business through investing in its operations – and sell it for a significant profit margin. That’s how private equity funds make money and benefit their partner investors.
How Did Private Equity Begin To Invest In Hollywood?
Private equity in Hollywood began with investments in talent agencies. But they soon moved on to take positions in production companies and other similar investments. The boom in investment seems to be driven by the sheer amount of broadcast television, cable, and streaming content being produced for consumption, especially in the wake of COVID-19.
In the past, private equity companies have been focused on industries like infrastructure and real estate as well as industrial investments. By purchasing film production companies, private equity firms like Blackstone are directly competing with entertainment heavyweights like WarnerMedia, Amazon, Netflix, and Apple.
The streaming platforms are especially responsible for the Hollywood private equity boon because they need so much content to boost new subscribers and keep viewers engaged. Investors are guessing that supply will continue to be needed to fulfill the high demand from the media platforms.
In addition to stakes in talent agencies and production companies, private equity companies are also buying positions in soundstages and physical studios. For example, Hackman Capital bought Kaufman-Astoria Studios and Silvercup Studios in New York City. They also purchased the CBS Studio City lot in Los Angeles, the very heart of Hollywood.
The advantage of buying stakes in production companies is the ability to generate stable cash flows through content creation. The studio lot angle involves thinking that the actual real estate of the physical studios will appreciate over time (and can then be flipped if so desired).
Major Private Equity Investments in Hollywood
Private Equity started its Hollywood play with talent agencies, not production companies or studio real estate. For example, TPG Capital bought a 53% stake in Creative Artists Agency (CAA) with a $340 million dollar investment. Similarly, Silver Lake Partners invested $750 million in William Morris Endeavor (WME). Investcorp took a stake in United Talent Agency (UTA).
Meanwhile, Hollywood film streaming companies in the United States have been investing about $115 billion annually into television and film. This huge investment has helped to cause the private equity boom in financing content for these platforms.
In 2021, the famous private equity firm Blackstone bought two film production companies including Reese Witherspoon’s Hello Sunshine and children’s television creator Moonbug Entertainment. The combined purchase was worth approximately $4 billion.
The private equity firm Apollo recently purchased a $760 million stake in Legendary Pictures, a Chinese-owned studio that has produced films including Dune, Godzilla, and the legendary Dark Knight trilogy.
There are other film studios still seeking to cash in on the Hollywood private equity craze. For example, the much-adored-by-Kinos A24, which has produced hits like Hereditary and Midsommar, has been having discussions about a sale to private equity. Similarly, Village Roadshow, the company behind 2019’s stunning film Joker for DC Films among others, is also looking for a buyer.
Why Is Private Equity Investing In Hollywood?
Streaming content platforms like Netflix and Hulu fund and produce plenty of their own content. But a private equity company has one content advantage over these other film behemoths. Whereas content produced by Netflix is going to have to stream on the Netflix platform to fill its own content demand, a private equity company like Blackstone can essentially auction off content to the highest bidding distributor.
Another advantage private equity film production has over some of the more established Hollywood firms is the ability to be more agile and flexible in their content creation. The smaller and more nimble firms can quickly adapt to the public’s changing tastes, available platforms, and tech developments.
Part of the business model of private equity is to have an exit plan for its investments. This means at some point the fund will have to convert their film assets back into cash. They can do this by selling their ownership stakes to larger media conglomerates, for example, or by taking the companies public on the stock market.
List of Private Equity Companies Investing In Hollywood
- Apollo Global Management
- Atwater Capital
- Crestview Partners
- Guggenheim Partners
- Hackman Capital
- Providence Equity
- RedBird Capital Partners
- Shamrock Capital
- Silver Lake Partners
- Yucaipa Companies
- Zelnick Media Capital
Will Investing in Hollywood Pay Off?
There is a lot of money to be made in the entertainment industry, movies, and film. But will the investments of these private equity funds pay off? And are there any warning signs or red flags regarding these investments? One possible difficulty with the new financing arrangement is the possibility of certain conflicts of interest.
For example, before private equity swooped in, talent agencies were generally agent-owned partnerships. The change in structure to private equity ownership has shifted the focus and the pressure on these firms to generate profits for their investors. Some argue that there is a conflict of interest between private equity stakeholders demanding profits and agents who are supposed to be acting in the best interests of the talent they represent.
Despite the potential cons of investing in Hollywood-focused assets like talent agencies, production companies, and sound stages, there is a lot of money to be made in the movie industry. And a lot of capital is needed to finance those operations. So, if anything, it seems the role of private equity in Hollywood financing will grow over time.
If you found this article helpful or interesting, check out my other recent articles on film production companies.