In a low-growth, illiquid market, growth and liquidity are priceless.
The recently ended concurrent strikes in Hollywood seemed to threaten the overall film and TV production ecosystem, but they actually wound up strengthening an emergent source of finance for the industry: private credit.
So, what is private credit, and why the interest in media production?
As the SAG-AFTRA and Writers Guild strikes wore on, studios and streamers were no longer a viable source of funding for producers seeking capital. Instead, they turned to private-credit financiers such as the one I operate at FilmHedge, which has given me a unique perspective in watching this trend play out.
Dozens of film and television productions that were underway when the strikes started, or that went into production as they took hold, were given approval to shoot — exemptions called interim agreements — by SAG-AFTRA on a case-by-case basis. For example, independent films starring talents such as Matthew McConaughey and Anne Hathaway were among those announced as having been granted interim agreements; private-credit lenders were involved in “Bob Trevino Likes It,” with John Leguizamo; and the films “Off the Grid” and “Not Without Hope,” both starring Josh Duhamel, also received agreements with backing by private-credit financiers.
This rise of private credit in media comes at a time when other areas of investment haven’t been as strong as they were in recent years. The growing need among media producers met a growing need for financiers to deliver returns to their own investors, and these emerging asset managers and private equity groups turned to financing media as an alternative asset class — specifically an area I like to call media production lending.
MPL is a type of specialty finance strategy that offers opportunities for high-yield, short-term, risk-managed transactions against well-collateralized productions, usually with prenegotiated takeout agreements as a form of collateral. Essentially, it allows investors to lend against corporate paper (from the likes of streamers Netflix and Amazon or distributors such as Lionsgate) or sovereign paper (state or country tax incentives).
Private credit has proven to be uncorrelated with markets and resilient during slowdowns while offering producers more control and ownership (from giving up less equity) over their productions versus studio financing. With the strikes in the rearview, the opportunity for private-credit financing has never been greater.
For producers, media lenders act as consistent, reliable, evergreen sources of capital, as opposed to equity investors, who can be more seasonal and selective. As a much-needed lifeline during the 2023 strikes (and the 2020 COVID lockdown), producers are now well aware that studio financing is not their only avenue to production financing.
For investors, MPL offers a short-term, low-risk, high-yield lending opportunity with high internal rates of return (IRRs) that rival, or exceed, other asset classes (such as venture capital, real estate, public markets and private equity).
In a typical MPL deal, the borrower (a TV or film producer) must deliver a completed production to a buyer (a streamer like Netflix or distributor like Sony) who completes the transaction, effectively paying the lender on behalf of the borrower. The receivables offered by the buyer are then held as collateral. This three-way relationship between borrower, buyer, and lender means MPL transactions most closely resemble transactions in another area of private credit, trade finance.
The fact that these private credit financiers have taken a liking to the media lending asset class means more capital is becoming available to independent producers at a time when original content is increasingly in demand but scarce in supply.
With media lending as the lesser known, and least understood, opportunity, I wanted to contrast the risks associated with each asset class, particularly venture capital — the industry I know.
“Venture capital has consistently outperformed public markets over 5-, 15- and 25-year periods, according to longitudinal data,” was a statement made by researchers at Alumni Ventures earlier this year.
As a former venture capitalist myself, I was curious about how MPL performed against my old world of VC and against asset classes such as real estate and public markets.
I focused on venture for three reasons:
To my knowledge, there were no industry-specific datasets or studies on media lending available, so I analyzed the pre-release financials of over 300 productions collected from media financiers and production companies in my network.
The budgets of the majority of these productions were between $3 million and $50 million, with a handful of larger budgeted outliers. These largely independently financed productions are the ideal market for private credit financiers. The dataset accounts for between 10 and 15 percent of all films (2,500-3,000, according to the MPA) released each year theatrically, on streaming platforms, networks or cable. Such a sample size is a decent proxy for what’s happening across the industry.
I then compared the analysis against annual findings from sources such as Pitchbook, Crunchbase, Axios, and Cambridge Associates to benchmark them against one another.
The chart above compares MPL to other attractive asset classes. I included two years related to venture capital because the current projects for 2023 have been impacted by factors including rising interest rates, economic uncertainty and a decline in the number of tech exits.
Additionally, the sector has been shocked by the controversies around the collapse of Silicon Valley Bank, the FTX scandal and WeWork’s recent bankruptcy.
This table benchmarks media lending against other areas of debt financing, a more apples-to-apples comparison. And media lending still rises to the top. Additionally, the IRR standard deviation suggests that outlier returns can be substantially higher than the norm.
Statements from 2021 showed the IRR in VC investments between 2007 and 2020 ranged from 6 to 36 percent a year. The average up to 2020, was 15 percent, and as of 2023, it’s -19 percent. In comparison, the average MPL deal yielded an average of 22.5 percent on debt and 28.6 percent when including mezzanine and equity strategies.
Historically, VC had been one of the most resilient and profitable forms of investing. However, based on current downward trends, the outlook isn’t great. For me, media lending became the much more attractive alternative.
My goal in this study isn’t to suggest venture capital, private equity or real estate should become less attractive areas to investors but rather to make the case for media lending to become a new consideration as an alternative for a high-yielding asset class that can help diversify their portfolios.
Note: This article references data pulled from the FilmHedge report “Film + TV, Private Credit Insights 2023.”
Jon Gosier is the founder and CEO of FilmHedge, a financial data company that facilitates lending and credit rating film/TV transactions. The company has underwritten dozens of media transactions and is one of the fastest-growing lenders to Hollywood.
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