He is hardly your average movie investor. He cultivates his privacy, and he heads a $13 billion hedge fund that, unlike those run by Carl Icahn and others, rarely mounts a proxy fight. But while most Hollywood bankers have turned off the money spigot, billionaire Paul Singer's Elliott Associates appears to be stepping up its investments. Last year the firm lent money to film investor Ryan Kavanaugh, who is providing financing for as much as 75% of Universal Studio's films through 2011. In recent days movie moguls have been buzzing that the hedge fund could be eyeing a play for the debt-hobbled MGM studio by buying up a small piece of the iconic film company's nearly $4 billion in debt.
It would be easy to pass off Singer as another well-heeled investor who has trooped into Hollywood since the days of Howard Hughes only to be sent packing after getting skinned by an industry where profits are sometimes as illusionary as the stuff they put on screen. But after only a few years in the business, Singer's outfit is impressing Hollywood's suits with its savvy deal-making. Elliott Associates isn't talking about its business or MGM other than to say in a statement that it has a "limited investment" in MGM's debt and that it has "no intention or desire to convert our MGM debt into equity." In short, they aren't going Hollywood.
Still, the hedge fund has quietly become a player without anyone noticing. That's the Elliott way, moving silently and finding opportunity where others are fleeing. It's how the firm built one of the investment community's most enviable records since Singer opened shop in 1977. Over that period, Elliott has picked remarkably few clunkers, racking up a 14% annual rate of return (roughly 50% better than the S&P 500) by investing in out-of-favor retail, biotech, and other companies. "We like situations that are complex," explains the company's marketing materials. "They may have greater discounts and fewer participants."
Elliott's man in Hollywood is 29-year-old Jesse A. Cohn, a Wharton grad and portfolio manager who had specialized mostly in technology investments and biotech companies before deciding in 2006 to invest in Hollywood, too. That was when talk of making bundles on DVD releases, online distribution, and all things digital attracted a ton of private equity investors (many of whom went bust). Cohn's first investment was a ho-hummer as well. He put some of Elliott's money into a Gun Hill Road hedge fund, which invested $600 million in Sony (SNE) and Universal (GE) to make films. Returns were modest for a firm used to 14% yields, and Elliot didn't appreciate the way studios tend to treat investors as second-class citizens. As all studios were doing at the time, Sony withheld its Spider-Man franchise from Gun Hill investors. At the same time, the studios took all manner of expenses off the top before they started to share profits.
Brilliant or About to Take a Fall?
That's when Cohn and Elliott first came into contact with Ryan Kavanaugh, the 34-year-old, onetime high-tech venture capitalist who put together Gun Hill Road and was in the midst of raising billions from hedge funds. In short order, Kavanaugh would become Elliot's guide to Hollywood. Hollywood insiders are divided on Kavanaugh. Some think he's brilliant, others a salesman poised to take a major fall. But Kavanaugh raised more than $8 billion at the height of the private equity love affair with Hollywood and, more important, has deals with most of the studios. That meant Kavanaugh saw every deal, knew everyone, and was collecting a database of how films performed and the studios' profit structures, which appealed to Elliott's detail-oriented investors.
Rather than simply investing, Elliot decided to step up its involvement and, like the studios, get a piece of the action before other investors. Hollywood insiders report that Elliot took a 20% stake in Kavanaugh's firm, Relativity Media, which not only gets fees for arranging investments but also exacts a fee for producing films and a cut from the studios that distribute its flicks.
Elliott decided to bankroll Kavanaugh's expansion into areas of the film world where Relativity could build its own assets. Kavanaugh has moved into producing his own movies and has signed a deal with Lions Gate Entertainment (LGF), which distributed his first film, the Russell Crowe Western 3:10 to Yuma. Kavanaugh is also making TV shows. And earlier this year he paid a reported $150 million to buy Universal's Rogue studio, which produces mostly horror flicks such as The Unborn and Seed of Chucky. In that deal, Kavanaugh got a library with 25 older films, four movies in development, and 30 scripts. He has since launched a clothing line, a social network based on the Rogue name, and even slapped the name on a concert hall at the Hard Rock casino in Las Vegas.
Elliott's Deal with Universal
Last year, Relativity and Elliott struck a deal with Universal in which they will provide the studio with a revolving line of credit—charging interest—to provide funds for 75% of Universal's films. Universal is required to match the money Relativity and Elliott put into each film, which reduces the lenders' risks by making them partners with the studio. Relativity and Elliott can also back out of films that carry too steep a budget.
Which brings us back to MGM and the $300 million or so of debt Elliott has purchased at the fabled home of the James Bond and Pink Panther series. The Hollywood rumor mill has Cohn and Elliott contemplating a way to link Relativity and MGM, perhaps allowing it to produce films based on some of MGM's library of classic films. More likely, though, Elliott is looking for handsome return on its investment, as it has done for years by buying up distressed debt from troubled companies.
MGM has already said it is angling to restructure that debt. Elliott has used such restructuring in the past to strike deals that eventually boosted its investment. Already, the notes Elliott holds, trading at roughly 58¢ on the dollar, have jumped an estimated 30% in value since the New York hedge fund began buying MGM shares earlier this year. Judging from Elliott's history, those are the kinds of reviews a low-key hedge fund from New York seems to enjoy.
Grover is Los Angeles bureau chief for BusinessWeek.