Private Equity Money picks Hollywood as a smart bet even in recession –

Hollywood executives may be worried about declining content spending, but smart money doesn’t seem to be. Although companies like Netflix, Warner Bros. Discovery and Disney have said they will be more cautious with their content investments, and private equity firms continue to invest in entertainment assets at a dizzying pace. And while some in space are warning that macroeconomic factors could cause things to cool, at least for now, the deal is in place.

Consider that The North Road Co., Peter Chernin’s commodity conglomerate, is financed with $500 million from Providence Equity Partners and $300 million in debt from Apollo through its managed subsidiaries. Chernin tells him the hollywood reporter Which is now in the market for new acquisitions, using private equity to raise money to acquire “pure game” companies focused solely on content creation.

North Road is just one of many ventures private equity firms are playing in the media and entertainment sector, upping the ante in the long run. Candle Media, another content conglomerate run by former Disney executives Tom Staggs and Kevin Mayer, has a multimillion-dollar Blackstone war fund. Candle, like North Road, continues to scour the market for acquisition opportunities. SpringHill, the content company of LeBron James and Maverick Carter, raised money in late 2021 from an investor arm that includes RedBird Capital. And in June, Shamrock Capital invested $50 million in Religion of Sports, a studio co-founded by Gotham Chopra, Tom Brady and Michael Strahan.

“Unlike TV and cable, today’s streaming platforms don’t have time slots or limits on the amount of content they can store,” says Andy Howard, partner at Shamrock. “So content is king and especially premium content. That’s why we, in particular, are invested in the religion of sport, and you see other PE companies trying to do the same thing. Iconic talent and brands with a built-in following are already top notch because they won’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 disappearing (in the case of Fox’s entertainment assets, which are now owned by Disney) or increasingly producing only for its own platforms.

“As the world of content consumption grows, the big traditional providers are leaving,” says Chernin. “I think this creates more opportunities for us because there is more and more demand for these things and the number of suppliers is decreasing.”

In particular, it highlights two needs in the content space: international, non-scripted programming, an international need for any service seeking a global, non-scripted presence because of its lower cost compared to scripted fare. And while some in Hollywood have raised concerns that there’s already too much content, companies investing in the space clearly disagree. “Obviously, both Apollos and Providence believed in us; otherwise, they wouldn’t have invested in our support,” adds Chernin.

In addition to investing in content, many private equity firms are also buying infrastructure used in the production of movies and TV shows, betting that as more and more projects are developed, the demand for studio space will only increase. Thus, private capital investments in the acquisition, construction and expansion of sound studios are increasing.

“Historically, you’ve had more episodic productions, which has led to more hiatus,” says Peter Rumbold, head of Shadowbox Studios and head of real estate for the Commonwealth Group. “Now, due to the incredibly strong secular nature of the demand for new content, this 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 world. . world”. production center”. .”

A year later, with investments in commercial facilities hit by the cold of remote work, private equity drew even more attention to Hollywood. In June, private equity firm Silver Lake invested $500 million in the Atlanta facility at Shadowbox Studios (formerly Blackhall Studios). The expansion, part of a $1.5 billion capital investment plan, will add 1.2 million square feet and 22 new soundstages to Atlanta, making it one of the largest production facilities in Georgia and the South. . Private equity firm Commonwealth acquired Shadowbox, one of Georgia’s largest manufacturing companies, in April 2021 for $120 million.

Additionally, Blackstone and Hudson Pacific Properties revealed in July 2021 plans to invest up to $190 million to build a 240,000 square foot production studio, which will be the first new large-scale production studio to be built in the area. of Los Angeles in more than 20 countries. years old. Hackman Capital, one of the largest independent owners of production space, has acquired 19 studio properties since 2014, including the January 2021 acquisition of the Sony Pictures Animation campus for $160 million. The company, which has built a $3.8 billion studio investment portfolio in the past three years alone, also has about 90 phases under construction.

“We are seeing such high demand and such low infrastructure supply that we are looking at studio acquisitions, development and expansion,” said Jason Harriton, director of real estate at MBS Group, a division of Hackman Capital. .

But there are challenges that threaten to delay the business, even if the rainmakers themselves are interested in the sector. Sources in the financial space point to two troubling variables: rapidly rising interest rates and a possible economic slowdown, each of which could derail investment plans. The Federal Reserve has been aggressively raising interest rates this year (it raised rates by 75 basis points in June, and there are signs that another big hike is on the way this month), and that steady rise could lower borrowing rates. which has recently become a staple of venture capital and private equity investments.

Meanwhile, the recession could force companies to carefully scrutinize their valuations. For companies that don’t necessarily need capital and are selling minority stakes, the low valuations warranted by the current market may not meet expectations, causing some founders to wait until conditions improve.

“It takes some time for sellers or potential sellers to figure out the new environment,” Liberty Media CEO Greg Maffei told CNBC July 8 at Allen & Co.’s Sun Valley conference. “Potential buyers are much quicker to say, ‘Look, things are broken.’ “

Of course, a recession can also bring its own opportunities. Even if private entertainment and production companies are alarmed by low ratings, public markets can offer opportunities of their own. Could Lionsgate, for example, be in the game after completing the Starz spin-off?

“This is the first time in a long time, at least five years, that there is a real opportunity in public markets,” IAC CEO Joey Levine told CNBC July 7 from Sun Valley. “The math didn’t work for us for a while to buy a growing business that had a lot of upside because all the prices were positive, but the execution wasn’t there yet.”

For companies that spend a lot to acquire content and production companies, this can lead to deals that are hard to refuse.

This story appeared in the July 15 issue of The Gossipify. Click here to subscribe.