Why did film investors back Kavanaugh?
business essentially worthless.
Kavanaugh soon resurfaced in Hollywood. His pitch to hedge fund operators had several elements. One was that by investing in “slates” of a dozen movies or so, they could dilute the risk that a single bomb would torpedo the whole portfolio. The deals would be structured so the investors could collect years of revenues from ancillary sales of TV and DVD rights. Finally, there was the magic dust — an algorithm that could gauge the prospects of a film project based on such inputs as its cast, writers, director, genre and what Kavanaugh told a Vanity Fair writer was data from “every single film that’s come out in the last 10 years.”
Hedge funds had started jumping into slate deals in 2006, enticed by projections of annual returns of 18% or better. The studios happily hoovered up the proffered cash; Kavanaugh’s Relativity announced a deal with Deutsche Bank to pump $620 million into productions at Sony Pictures and Universal Studios.
Reality soon intruded. A few box-office bombs proved to be sufficient to sink even a slate with a few hits. One Relativity slate examined by The Times in 2008 was headed for a loss despite the inclusion of the Will Ferrell blockbuster “Talladega Nights.” Three bombs on the list, including the Ferrell stinker “Stranger Than Fiction,” were on course to lose $84 million among them. Kavanaugh’s formula didn’t seem to be an infallible gauge of audience taste after all.
Investors began to see that the slate deals heavily favored the studios, which were able to load down the investors’ portfolios with uncertain projects while keeping the surest blockbusters, and their profits, to themselves. Meanwhile, DVD sales were flatlining, cutting the overall profitability of the Hollywood product. Hedge funds, including some that invested with Relativity, quietly began looking for the exits.
But Kavanaugh’s business footprint kept expanding.
Glossy magazines and trade publications bought into his projected image as a wunderkind. They slavered over the delicious incongruity of this young thruster mixing it up with gimleteyed corporate lawyers, and winning. The short-lived Portfolio Magazine depicted him as a “red-haired and impish” 32-year-old conducting a 22-hour negotiation in a New York law firm’s conference room. Three years later, Vanity Fair noted: “Most promising of all,” Kavanaugh has just sewn up distribution rights with Universal for “James Cameron’s ‘Sanctum,’ his 3-D follow-up to ‘Avatar.’ ” (That 2011 underwater thriller sank beneath the waves.)
In his lifestyle, Kavanaugh seemed to follow the advice of Max Bialystock in Mel Brooks’ “The Producers”: “Baby, when you got it, flaunt it!” There was a collection of vintage cars, beautiful women on his arm, parties with movie stars. He flew his own helicopter from his home in Malibu to his Beverly Hills office (irritating West Hollywood neighbors with the noise). He gave keynote speeches around the world, collected industry plaudits and even an award for philanthropy. He talked about arranging an initial public offering for Relativity.
Financial backers came and went. In 2012 one longtime backer, the hedge fund Elliott Management, started to bail out by selling some of its stake to supermarket magnate Ron Burkle’s Yucaipa Cos.
Yucaipa eventually invested as much as $300 million, but has gotten all its money back along with a healthy return, according to a source close to the deal. Burkle remains on Relativity’s board, according to the bankruptcy filing. But Elliott, through its affiliate Manchester Securities, still is owed $137 million by Relativity.
Bankruptcy documents and a lawsuit by a major lender, RKA Film Finance, indicate that Relativity was heavily leveraged and “cashstrapped.” More than $330 million in loans were maturing June 1, with much more coming due if Relativity failed to make the payment — this for a firm whose film business had brought in revenue of only $346.3 million in all of 2014. The films tended to be heavily mortgaged to lenders, leaving little wiggle room.
In its lawsuit filed in New York state court, RKA, which made loans to cover postproduction spending on specific films, portrays Kavanaugh trying desperately to raise new financing during the spring while fending off questions about what had happened to some $70 million of its money.
RKA, which labels Kavanaugh a “con man,” says it eventually concluded that Kavanaugh and his fellow executives used its loans as “their own personal piggy bank,” covering Kavanaugh’s “personal indulgences, such as the five personal helicopters purchased by Kavanaugh for his daily commute,” among other things. Relativity denies the money was diverted, but acknowledges the loan proceeds went into its general corporate accounts until it was needed, a system it says RKA understood.
What happens next? The fate of several Relativity films, with stars such as Halle Berry, Kristin Wiig and Colin Farrell, is unclear. Someone presumably close to Kavanaugh has floated the idea that he might try to buy the firm out of bankruptcy himself. That may sound dubious, but it’s a safe bet that even if we’ve seen the last of Ryan Kavanaugh, we haven’t seen the end of his type. The next brash wunderkind undoubtedly is already polishing his pitch, ready to watch money and glory come cascading his way.