Movie production is a capital-intensive endeavor, but when a film is successful, the project could pay itself off in dividends. Institutional investors and local governments sometimes become involved in the upfront film financing, extending equity or debt in order to fund the project. Investors are repaid with the revenues that a film generates or through predistribution sales, and if the movie is a failure, nobody wins.
Film financing can be provided by investment banks, hedge funds, and insurance companies, among other investors. According to FIN Alternatives, the financing of film projects goes through cycles where one type of investor tends to be the most active. For instance, in the 1990s, insurance companies had an active hand in film financing. Banks provided the loans to the filmmakers, and insurance companies would provide insurance on that debt. If a movie did not generate the anticipated sales revenues, however, insurers became responsible for the outstanding debt, and it triggered a wave of lawsuits.
Investment banks already finance much of the deal activity that occurs in the financial markets, and these firms have a hand in film financing as well. Given that the cost to produce movies can be so high, banks have partnered with movie producers and turned to other institutional investors, including hedge funds and private equity firms, to provide the money for the financing. Debt financing typically takes priority over equity, and as a result, the former tends to be the primary way that institutional investors are willing to fund film projects. Equity may still be used in film financing, but it is more likely to derive from wealthy people or venture capital firms.
Public pension funds have been known to provide film financing in some cases. The public fund uses assets in the investment portfolio to extend equity or debt financing to a particular director who makes films in the state of the retirement plan, such as New Mexico in the U.S., for example. Financing is provided to support the local economy, and revenues are earned from movie sales. A prerequisite is often that the lion's share of the movie be filmed in a given geographic region.
Investors who extend film financing may prefer to work with a studio that is well known or at least has a history of successful movies. Lenders may offer incentives such as low interest payments to filmmakers with these qualifications. Benefits for the filmmakers include quick access to money, which in turn can accelerate the production of a film.