Evergreen Investing in the Live Performing Arts and Ancillary Rights
Evergreen Investing in the Live Performing Arts and Ancillary Rights
By Lance Paddock and Chris Tayeh
Traditionally investing in Plays, Musicals and other forms of live entertainment has been done on an individual project by project basis, or as part of Closed End Partnerships with a call structure and a defined wind down. While still viable models, today we want to discuss the opportunities and advantages in allocating to this dynamic, exciting and evolving opportunity set by investing through, or creating, a highly diversified evergreen structure.
The Opportunity
Of course, the first question one might ask is why invest in Live Performing Arts at all? We suggest the benefits to an investment portfolio listed below of a long-term allocation are worth considering. Furthermore, for many investors each of these advantages are augmented and enhanced in an evergreen structure:
High risk adjusted Returns
A well-constructed and diversified global portfolio of productions across the categories that show the most attractive average returns and can take full advantage of scaling up ancillary opportunities should produce high-teens to mid-twenties returns over time with limited downside and significant upside optionality. The opposite of what we find most investors would assume.
A Short J Curve
Live Performing Arts returns are rapid with losers closing quickly and winners returning capital fast.
Diversification and Low Correlation
Not only are the assets unrelated to most of the assets in most investor portfolios, but their return drivers are also idiosyncratic and not correlated to the stock market.
Tax Efficiency
While various types of shows and international assets have various treatments, a large proportion of the global opportunity set benefits from advantageous tax treatment that for the next decade at least should result in tax losses each year until the portfolio is redeemed. Thus, compounding capital at a rapid rate.
Industry Overview
Post Pandemic the industry is experiencing a reboot as the backlog of productions that were interrupted finish their runs and new capital invested is starting to be activated in their place. The data shows the industry is back on track for meeting historic returns, and possibly exceeding them. Furthermore, new opportunities have arisen as both the industry and consumers have changed. Not only has the opportunity set grown, but the diversification benefit of the industry has grown as well as more return drivers have been added.
The industry, most critically the unions, are now more willing to begin exploiting the opportunities for monetizing the industry IP through various media, but most prominently through Live Capture after the runaway success of Hamilton. A fund with a large catalogue of Live Capture Rights has a huge opportunity to provide economical content to the various streaming services which are starved for high quality content that can be delivered cheaply relative to traditional film or TV productions.
Experiential and/or Immersive entertainment, also known as Location Based Entertainment (LBE) has exploded. The category currently has a total addressable market of $3 Billion but is projected to grow to $23 Billion a decade from now. Interactive experiences such as Twenty Sided Tavern based on Dungeons and Dragons, Monopoly and Clue Lifesized (soon to come to 11 Times Square in New York, with Monopoly already producing strong returns in London and Riyadh), The Paddington Bear Experience and more are already starting to expand and proliferate across the globe producing eyepopping IRR’s with long lasting tails, possibly for decades. Projects based on brands such as Magic the Gathering, Pokémon, Nerf, Alice in Wonderland, Peppa Pig, the horror franchise Saw, Star Trek, Dr. Who and more are on deck.
What do we mean by Location Based Experiences? Monopoly is a good example. Your Team enters the building which has various “boards” you can play. You choose your token (I will pick the horse) and we play the game with large dice, escape rooms for jail, solve puzzles, build apartments and houses, you can flood our opponents property if you own Waterworks, etc. The experience includes popular Restaurants, Bars and Merchandise shopping. https://www.monopolylifesized.com/
Clue Lifesized allows your team to travel from Room to Room to solve the murder…assuming of course you are not the murderer…
We will soon see large scale multi-sensory touring drone shows in outdoor venues with technology that is about to change dramatically enabling animation in the sky to be more “movie” like than we have seen so far.
Meanwhile traditional Broadway style musical and theatrical franchises have started proliferating around the globe expanding the opportunity set to billions more people. First, they became commonplace in the UK, and then started touring Australia and Continental Europe. Now Asia, The Middle East and South America have become attractive markets for global franchises such as Moulin Rouge and Hadestown.
So Why Evergreen Investing?
Diversification
Small partnerships can do well, but larger fund structures that can recycle the capital can accommodate a far more diverse portfolio. The industry on average is very profitable, but individual projects can be quite risky, especially early in their investment cycle and on Broadway or the West End. This is further exacerbated by the fact that such partnerships are often raised to fund specific projects as opposed to structuring a more diverse portfolio to reduce the chance of loss and allow for large winners to be extended and turned into franchises that give you multiple bites at the juiciest apples.
Higher risk adjusted returns
We advocate a data driven approach that is less about funding what an investor or capital raiser may want to fund, and instead spreads funds across many productions in the areas of the market that are making the most money (thus avoiding most of the biggest losers.) Right now, that means Large Musicals, Star Driven Plays and Location Based Experiences. By doing that when capital is most at risk, once winners are identified you can then place more of your capital to work when the risk is radically reduced. Non-Evergreen funds have difficulty funding those ancillary opportunities and follow-ons that are not only the most profitable, but also far less risky and often come with substantial guarantees prior to capital being deployed. As they are intended to end after a defined period, closed end funds may have to hand those later in the investment cycle opportunities to other investors and have difficulty capturing the full value of those future opportunities upon exit.
In addition to funding initial winners, Evergreen funds are well positioned to pick up opportunities that others miss. Believe it or not, many investors into successful productions on Broadway or London do not take advantage of their right to participate in follow on tours even though in the US they come with guarantees from the venues against loss? There are many reasons, including partnerships that are closed-end and unable to extend the life of their fund. This allows Evergreen Funds to take their allocations and put far more capital to work when risk is low and returns typically higher. Even more exciting is that many productions that fail on Broadway still tour and do fabulous. Meanwhile even fewer people agree to participate in the tour even though the venues are still guaranteeing a profit. A great example is Pretty Woman which was a flop on Broadway, but venues in other cities were very willing to pony up guarantees for a title they knew they could find an audience to attend. And they were right, Pretty Woman was a very successful tour.
Nor does it stop there, tours can be extended, new tours formed, non-equity tours (more profitable still) international tours and other rights (movies, books, etc.) through licensing of the IP. With ongoing capital needed to take advantage of such low-risk options shorter term investment vehicles may miss these opportunities, whereas an Evergreen Fund has the possibility of funding them in the future. That ability can be capitalized and accounted for should you wish to redeem after any lockup has passed. Over time an Evergreen fund could have more and more of its capital invested in low risk, high return Ancillaries and Franchises.
Tax Efficiency
Most production expenses in the US are expensed immediately after a play opens or are on very short depreciation schedules. Meanwhile a properly structured Evergreen Fund does not tax you on the gains in your portfolio until you redeem or after your tax basis goes to zero. Obviously other nations have other tax laws, but if an Evergreen Fund is growing and continually reinvesting most capital the fund should generate tax losses or minimal gains until redemption. Meanwhile closed end funds force an exit with no built-in way to reinvest the proceeds and avoid or minimize current year taxation.
Current Observations on a Changing Performing Arts Market
Stay Away: At this point plays that do not have a Major Star or significant licensing opportunities are not economically viable for a fund looking to deliver strong returns. Make sure your manager is looking at data in making investment decisions, not focused as much on their opinion of the project’s artistic merits.
Where to Pinch Pennies: Cost is obviously a major consideration for any operation, but when deciding what shows to provide initial funding for, consider how expensive the show or experience is to pack up and tour? Especially with current technology some shows can easily be structured for tours and thus may warrant more attention than those which may play well on Broadway and receive critical acclaim but have poor touring economics. In such cases you are taking risk with little opportunity to scale up your investment when risk is low.
This is also true for Location Based Experiences, which can tour! Twenty-Sided Tavern (A Dungeons and Dragons Production) is a great example as the stage is mostly projections which can easily be transported and adapted to numerous versions of the game in addition to being very inexpensive to start. The extensibility of it to different campaigns, different role-playing games, transforming it to a Pokémon or Magic the Gathering experience, etc., gives the investment a potentially very long and inexpensive tail. The RPG Gaming world is massive and a huge opportunity. Their fans are not only rabid, but also willing to travel and spend for experiences. They go to conventions and themed restaurants, listen to themed music and wear themed dress.
Live It: Which comes to another theme. Throughout entertainment the consumer is becoming more and more experience based in their spending. They want interactive entertainment on a larger scale than in previous decades and the industry mix should reflect that. Interestingly, the actual experiences themselves are not necessarily more expensive than large musicals.
I Wanna Go To London! More and more productions originate in London and are then moving to Broadway once proving themselves. Simply put, the costs are lower and more predictable in London. In addition, there are significant Tax Credits which include 40% and 45% of eligible production costs for West End productions and UK touring productions respectively. We expect this trend of UK origination to continue and expand.
The Theater Audience is Changing: The average age of theater goers has dropped to 40 years old and is buying tickets 2 weeks closer to the performance than pre-pandemic. Women now make up 65% of attendees with BIPOC and nonbinary attendance on the rise. We see that reflected in what is doing well at the box office.
Larger, “Smarter” Pools of Capital are getting preferred access and terms: Funds with deep expertise on the business side as well as being reliable providers of capital are getting larger allocations and the ability to structure terms in ways that are more advantageous to their investors. People who showed up with money and business expertise during the pandemic garnered lots of goodwill. They not only are able to be lead producers, but other producers want them on the team.
The Two Key Strategies We Identified Have Not Changed: Put relatively small amounts of seed capital across a variety of titles that are in categories most likely to succeed. This gives you the right to allocate into later rounds of capitalization and into ancillary rights proportionately. When low risk, high return options appear such as US Tours with guarantees, dramatically scale up your exposure as others do not exercise their options. Once you have a successful franchise (Moulin Rouge, Hadestown, Back to The Future, Monopoly Lifesized, etc.) fund proliferating it through new markets, repeat tours and non-equity tours, new products such as live capture, book rights, movie rights, cast albums, etc.
In Summary
Live Performing Arts properly structured has a unique risk adjusted profile (High Sortino Ratio) that can bring not just high returns, but a return profile with essentially no correlation to equity markets. Evergreen funds are best positioned to allow most investors to fully participate in the highest returning and lowest risk parts of the industry and simultaneously participate in a more diverse and tax efficient portfolio of those assets.
Lance Paddock
CEO
Thompson Creek Wealth Advisors
Chris Tayeh
Partner and Advisor
Thompson Creek Wealth Advisors
Thompson Creek Wealth Advisors is a fee-only Registered Investment Advisory (RIA) firm started in 2009 and based in Louisiana
Investment Management
Thompson Creek Wealth Advisors focuses on value investing in both public and private markets and specializes in alternative investments.
Thompson Creek Wealth Advisors works with clients to offer both bespoke investment portfolios to meet their objectives in addition to standalone investments in alternative investment funds.
