Ryan Kavanaugh made his name and fortune financing Hollywood movies. And while his latest investment looks a lot less exciting, it could allow him to make the kind of splash on Wall Street that he has on the red carpet.
Kavanaugh’s family office, Knight Global, in April bought Santa Monica’s Bay Mutual Financial, a registered investment adviser and independent broker-dealer that specializes in advising corporate pensions and manages $22 billion in assets.
It’s a deal that not only beefs up Knight Global’s investment capabilities but that could also provide a new source of capital for Kavanaugh’s Relativity Media, which has lately been dogged by rumors it’s short on cash.
Representatives for Kavanaugh and Knight Global declined to comment, but a source close to the deal said Kavanaugh isn’t interested in simply sitting back and collecting fee income from Bay Mutual.
Rather, the investment is a chance to bolt new capabilities onto Knight Global – namely Bay Mutual’s brokerage arm, which provides the firm with an in-house platform to make big investments in public equities. It also gives Knight Global access to a new base of investors who might want to get in on some of the firm’s deal flow, including early investment opportunities in startups and, yes, film financing.
Bay Mutual, founded by former Morgan Stanley managing director Bud Pernoll, manages money for sophisticated investors who want alternatives other financial advisers don’t have. Knight Global can provide access to those investments, and Kavanaugh’s imprimatur could give them some extra legitimacy, the source said.
Relativity theory
Kavanaugh, 40, who has an estimated net worth of $1.6 billion and ranked No. 36 on the Business Journal’s most recent list of Wealthiest Angelenos, boomed and busted as a hedge fund manager – all before the age of 25 – and then turned his attention toward film finance.
Relativity uses a data-driven modeling approach to project how films will perform at the box office and then decides whether to invest in them. It tends to eschew expensive action films in favor of niche genres, which cost much less to make and often benefit from a core following of dedicated fans. The company is widely reported to be planning an initial public offering sometime in 2016.
Kavanaugh has said that most of Relativity’s investments are profitable, although the company has backed a few high-profile duds in recent years, such as “The November Man.”
Some of those misses have fueled rumors that Relativity is in a bit of a cash crunch. On May 22, Relativity released a statement accusing New York’s Colbeck Capital, which had previously provided financing to the firm, of trying to seize control of Relativity by spreading falsehoods about the company’s financial condition.
Relativity recently refinanced its debt and raised $250 million in equity from VII Peaks Capital in San Francisco, according to an April report in Variety.
A Relativity source told the magazine that the infusion was to strengthen the company’s balance sheet in advance of the IPO, rejecting rumors that the company is short on cash.
Regardless of Relativity’s financial health, the firm had evidently felt the need to upsize its available capital. By buying Bay Mutual, Kavanaugh might be hoping to tap into a new source of potential investment for the company’s films.
Indeed, Pernoll, who will become president of public markets at Knight Global in addition to running Bay Mutual, hinted at that possibility in a statement announcing the deal, saying that “the alliance with Knight Global will allow Bay Mutual Financial to bring a new array of unique, diversified and generally only available to a select few, investments to its clients.”
David Acosta, a senior vice president at downtown L.A.’s City National Bank who leads the film finance division, said there’s definitely interest in show biz from the types of institutional investors and wealthy individuals who might keep money at Bay Mutual, especially in today’s yield-starved environment.
“Wealthy investors know the importance of diversification and are always looking for alternative investments with the potential for higher returns than you can get from other types of investments right now,” he said in an email. “There is also a certain cachet to investing in Hollywood you won’t find anywhere else.”
Bay Mutual is Knight Global’s first investment in the money management industry. Knight Global’s portfolio includes an aviation company, biotech and consumer product firms, and several smaller private companies. The firm now has about $150 million in stock in Seattle’s Juno Therapeutics, the result of a seed investment in ZetaRX, a firm acquired by Juno and founded by Kavanaugh’s father, Jack.
The deal source said Knight Global is preparing to ratchet up its investments in public equities, and picking up Bay Mutual’s brokerage platform was a big step in that direction.
In acquiring Bay Mutual, Knight Global also retained Pernoll, who has a 20-year working relationship with Kavanaugh, giving the firm an experienced Wall Street hand who can help spearhead Knight Global’s move into bigger public equity investments.
