The Essential of Investment and Entertainment 2.0

Subsequent to investment and entertainment article, I think I should describe a little bit on entertainment.

Investment in entertainment or 'showbiz' focuses on the mass media, music and lately electronic entertainment (games). Exhibition and live entertainment like theme parks, wax museums, circus, comedy clubs, theatre and performance arts are usually at the bottom of the list.In entertainment, investors would look at film, commercial broadcasting, music, new media, fashion and video games (online or offline).

Take-over or merger and acquisitions between film studios in the States is particularly fierce and normal to certain extent. For example +Miramax. It was a leading independent film motion picture before it was acquired by Walt Disney in 1993 for $60 million. 17 years later, Miramax was sold for $663 million to +FilmYard Holdings, a joint-venture between Colony Capital (an international investment firm based in Santa Monica, Los Angeles), Tutor-Saliba Corporation and Qatar Investment Authority. They have 700 film titles including +Reservoir Dogs, +Pulp Fiction, Good Will Hunting, Shakespeare in Love and The Talented Mr. Ripley. Almost tenfold return within 17 years? Awesome!

In commercial broadcasting, the focus is more on television and radio. Based on the business models like free-to-air or Pay TV, the pulling power is the content. The royalties, licensing and franchising streams like Simon Fuller's 'American Idol', 'America Got Talent' or 'So You Think You Can Dance' have been providing a steady flow of income to investors or television network operators for more than 10 years. Imagine the advertising rate for the prime-time series of 'American Idol' was sold more than $700,000 for a 30-seconds slot. The estimated revenue for Season 6 was $870 million and the series was the TV's biggest moneymakers according to Forbes Magazine.

With hindsight, investment in commercial radio, unfortunately, is still relevant. The infrastructure and initial investment setup are relatively cheaper than television and it still spews money like +SiriusXM does. SiriusXM, listed on NASDAQ, broadcasts 135 channels in the United States. Their contents are impressive with the leading figures like Howard Stern, Martha Stewart, Oprah Winfrey and Jamie Foxx.

In fashion, big names such as +Ralph Lauren, Tiffany & Co, Coach and +Michael Kors  are the favourites to the investors. Top performing fashion retails like JCPenny and +Nordstrom Rack nevertheless are also offering a good return for investors. Investors like PPR, home to Gucci, YSL, Stella McCartney and +Balenciaga, look for companies that have significant growth potential with a dynamic and focused business strategy.

Online and offline game developer companies are enjoying a phenomenal growth across the globe. You could expect many private equity firms to support the start-up or growth companies. +Zynga games, +Gameloft, Foldit, +Tapjoy, Warner Bros Interactive and +Electronic Arts (EA) have an impressive run in the industry. Needless to say, the successful Twitter, Facebook, Tumblr, Foursquare and LinkedIn would offer investors more venue to put their money in.

In reality, the scope of entertainment industry is quite huge. From film to gaming, the industry offer a handful of investment venues to the savvy investors. Each sub-industry have a different level of risk that you might need to take into considerations. And the return of investment (R-O-I) or payback period is a bit longer compared to other industry though.

So, do you think investment and entertainment relevant?

The Essential : How to invest in entertainment industry?

By now, you should know that investment in entertainment and media is viable. But how?

Normally high net worth individual won't face much problems getting access to private equity firms or funds provided by their bankers. Private equity firms often seek at minimum USD one million for their portfolio. Well it is also depending on the type of transaction they are in.

It could be just a minority or majority transaction. It may only involve in growth capital, mezzanine, divesting, management buyout or recapitalization. Therefore, you need to find the private equity firms that suit your investment target and style.

Screening the private equity firms is not similar to normal stock screening. You might need to rely on the information provided by the firms, word of mouth, the management team information or perhaps your personal assessment on their previous and current investment performance. I guess you could apply your fundamental analysis on the firms and technical analysis on their portfolio, if available.

Other criteria that I think you should look at as well, are including:
i. Earnings before interest, taxes, depreciation and amortization (EBITDA) as it would reflect the cash flow of the funds,

ii. the firm's portfolio as it would align with your expectations and needs,

iii. revenue criteria would describe the revenue range targeted by the firms,

iv. average investment size would indicate the average amount invested by the firm in a single company,

v. geographic location

Many private equity firms that invest in entertainment are based in the States and Europe such as 21 Partners  (Italy), Abry Partners (Boston), CVC Capital Partners (London), Sandler Capital Management (New York) and TPG Capital (Fort Worth). Firms like CVC Capital Partners, Carlyle Group and India Value Fund have a strong presence in Asia and Australia. They invest in broadcasting, publishing, online media, broadband, radio and film studios.

Alternatively, you could just buy media and entertainment stocks like Viacom, Time Warner, Disney and CBS on NASDAQ. On Bursa Malaysia, they don't have a Media sector. Thus, you need to find media companies under Trade/Services sector like Media Prima on the Main Board. Asia Media and Catcha Media Berhad on ACE Market are media companies, in my opinion.

If you are not confident with your stock screening and selection, you might want to subscribe to sector funds dedicated to media and entertainment sectors. The good news is they save you a lot of time in picking the media stocks, diversification and direct access to media stocks. However, the bad news is your choices are limited.

I came across with Fidelity Select Multimedia (FBMPX) that have about 60 media stocks and PowerShare Dynamic Media Portfolio (PBS) consists of almost identical list of media stocks. And if you want to tap into Bollywood market, you might want to have a look at India's Reliance Media & Entertainment Fund and Sundaram Entertainment Opportunities Fund. These two funds have a quite impressive run this year.

In short, there are a few ways to invest in entertainment such as via private equity firms, media stocks and funds. However, with limited choices, you might want to weight out the best option reflecting your investment style and target. You should have, at least, a screening criteria in place though. Choose wisely.

The Secret: Investment and Entertainment

Little that 'we' know that investment and entertainment can co-exist.

I could not recall how many private equity firms, venture capitals, investment funds or banks that already and would continue to put their money in entertainment and media either in Europe or in the States. Must be in thousands like Goldman Sachs, KKR, Carlyle Group, Haim Saban, Ingenious Media, Media Right Capital and Citigroup.

Did you know that Goldman Sachs owns 50% of the 'CSI' franchise? In 2007, Goldman acquired the interest in the shows through its purchase of "CSI" co-producer Alliance Atlantis. Goldman retained the rights to the "CSI" until today.

Before I left London, Citigroup was busy with Terra Firma Capital Partners LP bidding for British's EMI. The music industry is not very kind to their £4 billion investment though. KKR and +Bertelsmann via their BMG Rights BMG Rights Management was eyeing to get EMI's +Parlophone Records that houses artists like +Coldplay and David Bowie. However, Universal Music Group stepped in to complete the acquisition.  

The primary reason to see participation of investment banks or private equity firms in entertainment is similar to any industries. They are looking for a good return for investors. They structure and arrange financing for acquisitions or growth. They also assist in capital raising exercise in venture capital, private equity and debt commitments for investments from start-up phase to the recapitalization. 

Investment in entertainment is quite straight forward, once you understand and identify the niche market. Some private equity firms invest in media technology, production houses, distributions, big established studios and last but not least, intellectual property. 

Generally, banks financed the medium sized media company in the senior debt bank market i.e. with collateral. The collateral is the intellectual property and they do finance it like a real estate, with minimal amortization and long repayment periods.

Intellectual properties are ideal for long term investment since they have long stable and predictable cash flow. The royalties on the ongoing use of intellectual property, licensing and interests are nevertheless offer a steady return for the investors. What is more, some countries have a near to zero and banks are pretty good in their transfer pricing department. I am not sure whether the Dutch's zero rated royalty income is going to change soon though.

Investment in entertainment is possible. The established markets like in the States and Europe offer considerable opportunities to private equity firms and investors to put their money in entertainment and media industry. I reckon Malaysia's entertainment and media industry is still at the infancy stage since the circulation of capital is almost insignificant.

The Mystery: Investing in entertainment

A couple of month ago, I made a 6-page slide presentation about investment in entertainment in front of enthusiastic and optimistic indie music practitioners. I hope by now they should know about the inevitably the no 1 requirements in order for them to advance in the industry. Capital. 

Investing in entertainment or creative industry is not really significant in Malaysia. Even though the government is providing several funding initiatives, I would not consider that as an investment in entertainment. It is more like a social service and the industry is in the growing process, if any. 

In my opinion, to consider an investment in any given industry, there should be more participants other than government agencies. You should have investors like banks and private equity firms. And that would only take place when the industry is considerably significant and the return of investment (ROI) is not something like a Russian roulette. Hit and miss. 

Investors like Morgan Stanley Global Private Equity invests in Creative Circle LLC, one of North America’s largest professional staffing firms specialising in advertising, creative and marketing talent. Investors like Ingenious Media that invests in media and entertainment including in Rise of the Planet of the Apes, X-Men: First Class, Avatar and Music Festival. 

Investors like Media Rights Capital, an independent film and studio backed by Goldman Sachs, AT&T and WPP Group PLC. They invest heavily in films including Ted, Babel, Bruno and The Adjustment Bureau. In television, they have House of Cards with Kevin Spacey and The Ricky Gervais Show.

Unfortunately, in Malaysia, so far I just don't see the same investment scenario taking place. The synergy of production houses, filmmakers, Bank Simpanan Nasional, Creative Industry Loan, FINAS an other form of financial incentives is not there. Giving away and investing are different. Investments may require returns. Giving away may produce outcomes. 

I do hope one day local investment banks in Malaysia would have dedicated team focusing on investment in creative works. Private equity funds and firms should consider and create a landscape within creative industry whereby the funding considerations may produce a double digit return, to say the least. 

Anyhow, creative industry is not limited to films and music. It also involves animation, creative content, fashion and textiles, performing arts (theatre), visual arts, crafts and publishing. Advertising is also consider a component in the creative industry though. 

Yes, investing in entertainment in Malaysia is a myth...

Creative Industry : Inner Thoughts

As stated on the title, collectively, I would share thoughts based on my direct experience in the creative industry locally or internationally. It could be related to film, drama, animations, television, broadcasting, channel and new media. Not another gossip blog, unfortunately.  

Primarily, I would share the perspectives from the other side of the fence i.e. investment and commercialization. You would be expecting some discussions on corporate strategy, branding strategy and investment strategy in the creative industry.  

I would try to refrain myself using figures, statistics etc as much as I can. I pledge to have a little focus on the specific talents or players in the industry. I tend to agree with the notion of "Don't blame the player, blame the game". 

I believe not too many people familiar or aware of on how to treat creative as a part of their investment portfolio. In fact, there are not too many investors or private equity firms that really invest in media or creative industry commercially. 

Normally, government assistance through industrial grants and loans would be the best bet. Thus, from time to time, I would share other alternative avenues available in the industry. 

In general, I would focus on the local scenario of the industry which is more domestically concentrated. Malaysia and Indonesia perhaps would be the best case study countries for the time being.  

I hope this blog, at least, would stir some great ideas for the industry, practitioners and followers, wherever you are. I am not a total expert but my experience and knowledge are somehow relevant and sensible, I think. 

So stay tuned!