Hollywood executives may be concerned about content spending cooling down, but the smart money doesn’t seem to be. While companies like Netflix, Warner Bros. Discovery and Disney have indicated that they will be more cautious with their investments in content, private equity firms continue to invest in entertainment assets at a breakneck pace. And while some in the space are warning that macroeconomic factors could cool things down, the deals are holding out for now.
Recall that The North Road Co., Peter Chernin’s production roll-up, is funded with $500 million from Providence Equity Partners and $300 million in debt from Apollo through its managed subsidiaries. Chernin tells The Hollywood Reporter that he is now in the market for further acquisitions, using the private equity funds to buy “pure play” companies focused solely on content creation.
North Road is just one of the many ventures private finance companies are playing for in the media and entertainment sector, betting on a long runway for growth. Candle Media, another content roll-up led by former Disney executives Tom Staggs and Kevin Mayer, has a multi-billion dollar war chest from Blackstone. Like North Road, Candle continues to explore the market for buying opportunities. SpringHill, the content company of LeBron James and Maverick Carter, raised funds from a number of investors in late 2021, including RedBird Capital. And in June, Shamrock Capital invested $50 million in Religion of Sports, the studio co-founded by Gotham Chopra, Tom Brady and Michael Strahan.
“Unlike TV or cable, today’s streaming platforms have no slots or restrictions on how much content they can hold,” said Shamrock partner Andy Howard. “That’s why content is king, and especially premium content. This is why we invested in Religion of Sports in particular and you see other PE companies trying to do the same. Iconic talent and brands that have an embedded following already have an edge because they don’t need the same marketing dollars to get noticed in a very crowded market.
Chernin says consolidation has made third-party content providers even more valuable, with Disney, Warner Bros. and Fox either disappear (in the case of Fox’s entertainment assets, now owned by Disney) or increasingly produce just for their own platforms.
“As the world of content spend expands, the traditional larger vendors are disappearing,” Chernin says. “I think it creates more opportunities for us because the need is growing and the number of suppliers is shrinking.”
In particular, he cites two content needs: international programming and unscripted, with an international need for any service seeking a global presence, and unscripted because of its lower cost compared to scripted rates. And while some in Hollywood have expressed concern that there’s already too much content out there, the companies investing in the space clearly disagree. “Obviously, both Apollo and Providence believed in us too, otherwise they wouldn’t have invested behind us,” Chernin added.
In addition to investing in content, many private equity firms are also buying the infrastructure used for the production of movies and TV shows, with the expectation that as more and more projects are developed, the demand for studio space will only increase. And so investments in the acquisition, construction and expansion of soundstages through private equity are booming.
“Historically you had more episodic production, which led to more calm in the occupation,” said Peter Rumbold, director of Shadowbox Studios and head of real estate at Commonwealth Group. “Now, with the kind of incredibly strong secular nature of the demand for new content, that has led to a significant increase in the production of that content, which has led to a significant imbalance in the demand and supply of soundstages in the global market. production hub.”
After a year in which commercial real estate investments were tarnished by the chill of remote work, private equity turned its attention even more to Hollywood. In June, private equity firm Silver Lake led a $500 million investment for more than double the size of Shadowbox Studios (formerly Blackhall Studios) facility in Atlanta. The expansion, part of a $1.5 billion investment plan, will add 1.2 million square feet and 22 new soundstages to the Atlanta location, making it one of the largest production facilities in Georgia and the South. Private equity firm Commonwealth bought Shadowbox, one of Georgia’s largest manufacturing companies, in April 2021 for $120 million.
In addition, in July 2021, Blackstone and Hudson Pacific Properties unveiled plans to invest up to $190 million to develop a 240,000-square-foot production studio that would be the first new large-scale production studio facility to be built in the Los Angeles area in more than 20 years. year. Hackman Capital, one of the largest independent owners of production space, has acquired 19 studio facilities since 2014, including the January 2021 purchase of the Sony Pictures Animation campus for $160 million. The company, which has built a $3.8 billion portfolio of studio investments over the past three years, also has about 90 stages under construction.
“We see demand so high and infrastructure supply so low in comparison that attention is being paid to the acquisition, development and expansion of studios,” said Jason Hariton, chief real estate officer for the MBS Group, a division of Hackman Capital.
But there are challenges that threaten to slow deal closing, even if the rainmakers themselves remain interested in the industry. Sources in the financial space point to two worrisome variables: rapidly rising interest rates and a potential economic downturn, each of which could throw a wrench into investment plans. The Federal Reserve has been aggressively raising rates this year (it raised rates by 75 basis points in June, and there are indications that another major rate hike is coming this month), and that steady rise could lower the interest rate in debt financing, which has become a staple of VC and PE investments in recent years.
Meanwhile, a downturn could force companies to rethink their valuations. For companies that don’t necessarily need the capital and sell minority stakes, the lower valuations justified by the current market may not live up to expectations, leading some founders to wait for conditions to improve.
“It takes some time for sellers or potential sellers to recognize the new environment,” Liberty Media CEO Greg Maffei told CNBC on July 8 from Allen & Co.’s Sun Valley Conference. “Potential buyers are much more likely to say, ‘Look, it’s not going well.’ ”
Of course, a downturn can also present its own opportunities. Even if private entertainment and production companies shy away from low valuations, the public markets can offer their own opportunities. For example, could Lionsgate be in the game when it completes its Starz spin-off?
“This is the first time in a very long time, at least five years, where there are real opportunities in the public markets,” IAC CEO Joey Levin told CNBC from Sun Valley on July 7. “The math didn’t work for us for a while to buy a growing business with a lot of upside because all the upside was priced in, but the execution wasn’t there yet.”
For companies that spend a lot to gobble up content and production companies, this can lead to bargains that are hard to miss.
This story appeared in the July 15 issue of The Hollywood Reporter magazine. Click here to subscribe.