Yes it is all about business, strategy and investment of fashion. Nothing much about haute couture or pret-a-porter. Not even a single clue about garment or material. One needs to understand the areas of fashion design and the market segmentation of fashion first so hence you could deductively indulge in more details about investment in fashion.
Often we treat the business of fashion as closely related to retailing and supply chain. But the truth is, retailing or marketing comes later after the production or manufacturing stage. Fashion or style is merely the value proposition to the customers about the acceptable appearance given that period of time. You would notice the segmentation is divided to women, men, kids, girls, boys, sportswear, jeans, knitwear, bridal and accessories. Then, to serve specific market segmentation, you would have a line of evening dresses, lingerie, shoes, bags and perfume.
In general, across socio-economic spectrum, fashion is very influential in defining status. Unconsciously, fashion is adopted for various purposes including seasonal and special occasions as well segregating social groups. The social elite and the upper classes are more in favor to adopt new fashion trend in attempt to be the trendsetters and increased the distinction of disposable income. Hence, you would notice the mass market is also disintegrate to several classes such as fast fashion, no frill, luxury or even bundle. More importantly, the fashion trend is being observed by general consumers via the ways of wealthy, certain group of public figures like celebrities and elite people present themselves. Fashion and lifestyle magazines like +Vogue, +Cosmopolitan Magazine , +ELLE, +Harper's BAZAAR , +Marie Claire and +NYLON Mag have cemented the correlation of fashion and status.
Coping with the fast changing trend in fashion is not a straight forward proposition. That's why in most cases investors or private equity firms prefer to put their money in more established fashion label that have a substantial growth potential. Risk is intolerably subjective. Investors are more likely to target successful companies that own fashion labels such as Inditex's Zara, +Rocket Internet's Zalora, Stefan Persson's +H&M, +Louis Vuitton and PVH's +Calvin Klein and +Tommy Hilfiger.
Back then, private equity firms are used to unearth fashion lines that are not very good in term of distribution and market reach. Building up start ups were such a noble cause. However, as the industry is getting tougher and globally competitive, they tend to focus on managing the growth, acquisition and the exit or re-structuring strategies. The hot topic now is the merger of PVH Corp and Warnaco Group. Well, it is quite normal to see the selling of brands nowadays like back in 2008 I had a chance to witness the acquisition +Yves Saint Laurent Beaute by +L'Oreal.
In the same time, I could not agree more on the notion that the old business model of fashion is under threat. Typically, too much focus on designing dresses without additional complementary accessories hurt the cash line. The cycle of selling a dress, for instance, is very long and potentially may take than a year to realization. The prices for design-rich dresses are also hindering the quicker turnover on the line. Brands like Republic, Jaeger, +Christian Lacroix, Charming Shoppes, British's Viyella and Adams Kids as well as Escada had a tough time to stay alive.
Nevertheless, fashion is still a business and investors treat fashion as another investment in their portfolio. The business cycle is also applicable and certainly fashion does have its own fashion cycle since the trend changing is a lot quicker than before. The legal and intellectual property issues have been accelerated as the demand, style and trend are becoming global. So, what's next?
Since I received so many interesting questions from friends and readers about my recent post 'Why you should invest in film', I think it would be fair if I get on with the second version. It is not a comprehensive one but it is a good enough for everybody to gauge the idea behind investment in film and possibly to supply answers based on my experience and knowledge.
Beforehand, yes I am in the final stage to set up a private equity or venture capital firm. The firm would venture in growing market of media and entertainment in the region. At present, we would work closely with sophisticated investors around the South East Asia region only. I would enclose more once it is up and running.
Anyway, yes one may say that film projects are in a 'loose' or inefficient market. It is almost impossible to produce a solid valuation model as well as arbitraging the margin but only if you are suggesting for an active management perspective. Meaning, you would be actively involved in script selection, casting, film directing etc. Usually you don't need to go that far. It is better off to leave that part to the studios or production houses though.
In reference to film financing, in the industry, we are indirectly referring to passive investment arrangements. The arrangement structures are varied depending on the preference and negotiations between the investors and studios, production houses and distributors. The investors may have controlling and non-controlling interests, equity securities or even a simple contractual arrangements. More deliberation in the future post.
And another reasons why you should invest in film.
6. Flexibility
Investment in film offers a great flexibility. In the UK, the team works closely with the producers to meet the expected ROI target of 100 - 200% on core equity. With a good casting, effective PR and marketing and low production costs within a short period of times, the cycle of producing one film is compensated. In fact, investors could enter and exit at any given point of the production cycle and at any given level of investment. Investors may want to invest in licensing or rights acquisition of the films or perhaps invest in the film distribution companies.
For instance, the existence of Beverley Hills' based film equity players like Lakeshore, +Relativity Media , Endgame Entertainment and +Participant Media offer venues for high net worth investors the flexibility in investment and of course the tax. In majority, they don't have a direct background from entertainment or media. Lakeshore's Tom Rosenberg is coming from real estate background. But his ability to treat film as another investment, has convinced JP Morgan Chase to provide the financing facility.
7. Numerous exit strategies
Similarly, investors may like the flexibility they have especially with numerous exit strategies. The common exits that I had known are including fixed ROI on capital supplied, sale of equity in the movie, complete sale of the rights and minimum ROI and dividends until the contract expired. Having said that, I figure that the arrangement could be more complex with the several parties involved in one single project.
For cautious and conservative investors, they prefer a fixed ROI on capital after repayment. The investors normally would agree with the fixed percentage on the equity capital. After meeting the target revenue, for example, the original capital plus the percentage will be paid immediately. If the investors prefer a steady income or dividend, they might want to consider a minimum ROI arrangement. They would receive a series of repayment like shareholder dividends over a film's life cycle. For how long? Usually until it becomes commercially not viable anymore.
8. Film insurance policies
Yes! Insuring film does exist. But probably a foreign concept in South East Asia region. Big studios insure their films from the start until completion. In the UK, film insurance is a compulsory. The basic should cover accidents on the production sets, death, physical loss and damage of equipment. Insurance policies will cover from the injury of an actor or stuntman to the lose of ability of filming due to the force majeure or weather, to say the least.
The insurance or the completion bond is also 'risk minimization' tool that the big studios need to ensure the director or the main star to complete the film within the said budget and schedule. If they failed to meet the requirement, the studio could replace the director or the main actor. Normally, this process is rigidly carried out before the start rolling. The commitment of director and actors are the 'insurance' policies. Most of the time, we heard about the original role was offered to somebody but was replaced right before the shooting started. Before +Viggo Mortensen settled as 'Aragorn', the role was offered to Nicolas Cage, Vin Diesel and Russell Crowe. Imagine that.
In light of TV shows, the insurance policies might contribute to the departure of Charlie Sheen from Two and a Half Men. Just maybe.
Insurance policies, nevertheless, do help investors to minimise risk should unfavourable circumstances took place. However, it is not something that insurance companies in the Asian region would have in their product lines. Perhaps I should start one.
This is an uneasy post for me to objectively justify something is so subjective and yet could offer a good alternative investment. Largely in the States and Europe, investors treat films like other investment. Of course, calculating Return-On-Investment (ROI) is possible. But does it guarantee a hit? Well, you need to go further down the road to finally say it is a hit.
Normally, investment in entertainment could offer a great personal satisfaction. With considerably high risk and high returns, investors need to be more diligent and precise in identifying the level of investment that they could tolerate.
1. Possible High Return-on-Investment
For a record, there are not particular factors that could determine whether the film would hit the box office. However, in the past, many would consider genre, the credibility of the director, budget, the lead actors and the type of contract may influence the success rate. Insofar, I could not say whether there is a set of valuation model that could help in finding the potential winner.
The truth is, usually, those factors are applicable to films produced by major studios. Independent films are rather more difficult to single out or even to establish the potential success rate. For example, a low-budget film like ' My Big Fat Greek Wedding' was produced for $5 million has gross return worldwide of $369 million. Of course, exceptionally, the film wrecks the valuation model. Similarly, 'The Blair Witch Project' and ' +Paranormal Activity ' which cost $300,000 and $15,000 respectively, gave a phenomenal $141 million and $191 million. Do the math.
2. Risk Minimisation is possible
Investing through dedicated mutual funds offer a good medium to minimise risk participating in the film project. Mutual funds draw the investment from various sources and professionally managed in which normally would spread across a range of companies at different level of investment. Essentially, diversification in segmenting investment minimise the potential downside risk as well as the upside of returns.
Major studios historically financed their own films through licensing deals. But until recently, they are also raising funds via investment banks as well as private equity firms. Some investment banks even have a dedicated team to cover investment portfolio in entertainment and media. You can refer to some well-known private equity firms such as Hal Vogel Capital Management, Noci Pictures Entertainment in Los Angeles, Ingenious Media in London.
3. Diversified Investment Levels
It is not practical for a single investor to place significant cash in one film project. Then, majority tend to believe that only large investors and established studios or production houses have a cut to participate in the entertainment industry. The reality is, mutual funds offer the opportunity to invest at various level. With a larger pool of capital, you might be able to be a part of major studios film making. In a more mature market like in the States or Europe, investors may be presented to own the distribution, syndication and licensing deals in which could offer a steady income on annual basis.
4. Long term play
Investment in film offers a reasonable long term play. The licensing deals, royalty on rights, syndication to television and merchandising usually may proceed more than 15 years or longer. On paper, the forecast favours to generate about 200% from theatrical revenues plus television syndication that widely available 3 years after release. Sometimes, they prefer to use 'Auxiliary Streams' in which royalty fees and rights are earned through media spin-offs, advertising, technology spin-off, film and TV library, product placement and merchandise.
In reference to merchandising, films like Spiderman, Batman and Teenage Mutant Ninja Turtles are bagging more than $135 million domestically for the past decade. Think about 'Transformers'. Marvel Comic and DC Comic's superheroes. Haim Saban's +Mighty Morphin Power Rangers. Ultraman and many more. Don't forget about movie franchises like +James Bond 007, +Mission Impossible, Indiana Jones, Terminator, The Bourne Identity. Many investors are sitting on the distribution deals, nevertheless.
5. Tax incentives
Undoubtedly, tax incentives for films industry are quite appealing. In the States, investors can utilise the tax credits provided at the state, federal and international level. Definitely, it is an efficient tool to upset risk, nevertheless. The tax relief, for instance, of British films with a total core expenditure of £20 million or less, the film production company can claim payable cash rebate of up to 25% of UK qualifying film production expenditure. Check UK Film Council for more details.
In Malaysia, government provide incentives for film industry in term of pioneer status and investment tax allowance. The latter provide allowance up to 60% on the additional qualifying capital expenditure. The allowance can be offset against 70% of the statutory income. What is more, government introduced a production incentive that will cover up to 30% of TV program and feature film budgets.
In conclusion, investment in films could also offer a considerable return to investor. Perhaps, investors especially in South East Asia should realise and start treating films as another venue of investment. The bottom line is the key reasons to invest in films like diversification, long term play and tax incentives are almost similar to other types of investment. Thus, never underestimate the potential of investment in films. A sound financial structuring, tax efficiencies and industry streams optimisation can make a significant difference.
