The entertainment industry is probably too sexy for its own good, says Dave Merritt, new managing director with Gerard Klauer Mattison, the New York-based securities firm that is making a big push to establish a presence in Los Angeles.
Merritt joins longtime entertainment industry analyst Jeffrey Logsdon and industry lawyer-turned-banker Ron Silverman in GKM’s new Century City-based Entertainment Media Advisory Group. Also working with the group is Manny Gerard, former COO of Warner Bros.
In previous professional incarnations, Merritt was CFO at the Artists Management Group and headed the entertainment consulting arm of KPMG Peat Marwick in Los Angeles. Of course, it should also be noted that Logsdon has been named an “All-Star Analyst” by the Wall Street Journal no less than five times in the past five years.
But why is entertainment too sexy? Returns in the industry have been subpar for years, certainly when compared to other growth industries, explains Merritt. “Anytime you have returns that are below other industries and it persists, that’s almost a definition of an industry that has attracted too much capital,” says Merritt.
The problem isn’t Hollywood’s commercial popularity, says Merritt. The domestic and global demand for American-produced entertainment results in good revenue increases, year after year. “Revenue-wise, it is an attractive industry,” said Merritt. “But in terms of margins and returns, it is not.”
Merritt sees his role as one of brokering a few key deals each year to help create situations that will take advantage of industry growth, and yet throw more cash to the bottom line.
Like so many other investment bankers today, Merritt sees the present and future for investment bankers as largely in private equity, not the public markets. Only a few years ago, the bulk of a typical investment banker’s time was spent arranging public issues such as initial public offerings, bond offerings, or stock-swaps for merging publicly held companies.
Now, particularly at smaller securities firms, the talk is of fast-moving, private equity. For one, private money abounds today. “There has been a tremendous amount of equity raised in private markets; it is more stable, and we intend to be quite active in private equity deals,” said Merritt.
And in private investments, the exit strategy can also be private, or through a sale to a public company. In either transaction, company sale valuations tend to be more consistent, based on assessments put together by teams of accountants and lawyers.
The Great North
R.M. “Dick” Torre, chairman of Global Vantage Ltd., a financial shop with offices in Century City and Newport Beach, is a different stripe of investor. For starters, he dismisses national borders the way most investors tread over city limits, and for seconds he is not averse to taking a controlling stake, or even total ownership, of an enterprise.
Torre has to been to the Far East more times than he can count, but for the last couple of years he has sojourned to the vast and wooded north, as in Canada, to plunk down investment dollars.
One big reason is that Canada is on sale, at least when measured in greenbacks. “A year ago, Canada looked cheap when the (U.S.) dollar bought $1.40 (Canadian). Now it trades at $1.535,” said Torre.
The strength of the dollar seems to fly in the face of fundamentals, such as trade flow, noted Torre, but all the same makes for great buying power at the moment.
Moreover, Canada has been getting its financial and political house in order in the past several years, moving to lower tax rates, balancing its national budget, and in many respects consolidating regional stock exchanges with uniform rules. In addition, Quebec’s secession movement has sputtered.
With all that, Torre recently bought CDN-listed Exceed Capital Holdings Ltd., itself a financial shop that provides bridge financing to companies about to go public or otherwise receive a capital infusion. Exceed Capital especially likes to get hold of pre-IPO stock.
The Canadian IPO market has slowed, but not as much as in the U.S., said Torre, who is nothing if not a diversified investor. He also recently bought several Pacific Coast Canadian fishing operations that process their catch in mainland China for sale back in the United States. Torre’s South El Monte-based International Pacific Seafoods Inc. handles the logistics of all that.
Whether it’s due to well-regulated fishing or natural luck, fish harvests have been increasing of late, reported Torre. “I can help finance your startup or sell you dead fish. So long as the deal doesn’t smell,” he joked.
Educated Money
Beverly Hills-based ITU Ventures, co-founded by Adam Winnick (son of finance titan Gary Winnick) and which finances university-based entrepreneurs, raised $29 million in its second round of funding, the firm announced. Thus far, it has financed six companies.
Venture giant Softbank and Gary Winnick’s own Pacific Capital Group were major investors in the round. Other investors include GKM Venture Partners (an arm of the aforementioned Gerard Klauer Mattison), funds managed by downtown Los Angeles-based money manager Trust Company of the West, and principals of Apollo Management (the Beverly Hills-based LBO shop).
ITU Ventures provides early-stage capital to high-tech startups springing up from the nation’s top graduate schools. Armed with the fresh cash, ITU will expand its network to include the likes of Caltech, Carnegie Mellon, Georgia Tech, Harvard, MIT, Purdue, Stanford and the University of Michigan.
Why not UCLA and USC, two huge universities in ITU’s backyard?
“We want to get on board with UCLA and USC also,” said Brendan McDermott, ITU spokesman. “In fact, we haven’t hired the contact for Caltech yet, so maybe we will hire one person to be in contact with all three campuses. Don’t worry, we haven’t forgotten about our local schools.”
Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].
