India film funding: Bollywood bets

Within four weeks of its release in India last September, "The Lunchbox" had already made back almost double its budget of INR100 million ($1.6 million). The movie, a romantic drama about a relationship sparked by a mistaken lunchbox delivery, is one of the biggest domestic hits of the year and is now playing to popular acclaim in the US and Europe.

"The Lunchbox" is not a stand-alone success. India's movie industry generated revenues of around INR122 billion ($2 billion), according to a report by KMPG, and this number is predicted to nearly double to INR193.3 billion in 2017.

This has been the rationale behind the launch of a number of specialist investment vehicles. While PE investment in India's movie industry is nothing new, Bollywood-focused funds are. And their emergence prompts a string of questions as to how attractive these vehicles are to investors and whether the industry is ready for them.

"The last 3-5 years have seen Indian cinema go into a different league," explains Kewal Handa, CEO of Third Eye Cinema Fund. "There has been a lot of corporatization in the industry, the governance systems have been put in place and digitization has allowed greater transparency in terms of revenue and expenditure."

To date, PE deal flow in India's movie industry has been sparse with around $328 million invested across 17 deals since 2008. These have involved business operating at various points in the value chain. The most recent saw Callista Capital and RW Media buy a 49.9% stake in Abundantia Entertainment, a studio.

The risk factor

Most of these deals have been opportunistic; investors rarely have sought to invest directly in movie production. But Third Eye is one of a number of newer players seeking to do exactly that. Others include the Cinema Capital Venture Fund and the Vistaar Religare Film fund.

Handa describes his fund - which is seeking to raise $43 million - as structured around a mini studio concept. It aims to generate returns by investing in everything from domestic and worldwide distribution rights for movies to productions and the acquisitoin of television broadcast rights. The fund will mitigate risk by taking advantage of various revenue streams.

An early movers in this space was Dar Capital Group - the investment arm of Dar World, one of the backers of "The Lunchbox" - which launched its movie fund in November 2012 with a similar premise. The INR1 billion vehicle will invest in both production and distribution, targeting movies with budgets of INR40-300 million.

"We are not a traditional PE firm, we are a hybrid," explains Arun Rangachari, chairman of Dar Capital. "We are different in the sense that we are a production company with our own line-up of existing projects, so there is an element of risk but we also raise money for our own films and make that very clear to investors."

Rangachari admits that not all investors will have the appetite for direct exposure to productions. This is because it is incredibly difficult to predict how a movie will be received. Distribution, on the other hand, is a safer game.

"The flipside is that by investing in distribution you pay a premium because you are coming in a later stage," Rangachari says.

In this respect, investing in productions is comparable to angel investing. Movie funds mitigate risk like any early-stage vehicle - by investing across a broad portfolio of movie projects with the expectation that, while a number might fall flat, one or two blockbusters will ensure the overall success of the fund.

Similarly, investment opportunities are almost always in smaller productions, which tend to carry the greatest risk. "Studio films studio do not need venture capital because they are funded by the Viacoms of this world," explains Jehil Thakkar, head of media and entertainment with KPMG India. "It is the small to medium-sized films that need of capital, if somebody has the risk appetite."

Playing it safe

Inevitably those with the greatest appetite will be those with industry experience and requisite connections and resources. Other PE investors will continue to target companies operate on the further down value chain. For example, L Capital Asia, a PE firm sponsored by luxury group LVMH, acquired a 10% stake of cinema multiplex chain PVR for around INR1.1 billion last year.

"We believe film production and film distribution in India still doesn't warrant institutional capital in," Sanjay Gujral, regional managing director with L Capital Asia. "Whereas the exhibition space it very well organized where the industry is consolidated to relatively small number of players."

This sentiment is echoed by KMPG's Thakkar, who explains that India is still massively underserved with nine screens per one million people, compared to more than 100 per million in the US. "We are dominated by single screen instead of multiplex," he says. "With more multiplexes, revenues will grow exponentially."

Thakkar adds that the growth of the movie industry will continue to create opportunities, providing there are quality pictures such as "The Luchbox" help generate demand.

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