Investor Update - 1Q17

As our Fund II is just launching, we wanted to provide a quick primer on the traditional distribution waterfall of Broadway and Tour income as well as outline the uniqueness of our Fund II model.

In a Broadway budget, there are two major figures that are critical: the CAPITALIZATION (the cost to mount the show and make it to opening night) and THE WEEKLY (the cost per week to pay all your fixed running costs). A Broadway play’s CAPITALIZATION is typically between $3m-$3.5m (as a side note, this is nearly double the cost of mounting the same show on London's West End), and a play’s WEEKLY is typically between $350,000-$500,000. From one week to the next, the weekly may fluctuate slightly based on a new ad placed, or an unforeseen expense, and if a show opens with a healthy enough advance, the capitalizationmay be reduced if a portion of the contingency reserve (a “war chest” of cash on hand in case the weekly gross box office receipts do not cover the weekly) is deemed unnecessary to hold, and is returned as a distribution.

In the traditional model, with every dollar of revenue, there are a few cents off the top for ROYALTIES (in our play analogy, for example, these are weekly pre-negotiated fees paid to the playwright, the director, the designers), typically no more than a combined 10%, and then the remaining 90 cents pays the weekly. Any surplus after paying the weekly is money that pays back the capitalization.

An Example: If a play’s weekly is $400,000, but nets $300,000 in box office receipts, then $100,000 of the contingency reserve must be used to cover the weekly. If the contingency reserves runs out, then most likely, the show closes early and investors may see some, or none, of the capitalization returned. If a play’s weekly is $400,000 and nets $600,000 in box office receipts, then $200,000 is available to be distributed to the investors who financed the $3m capitalization. After the $3m is returned to the investors, the show has RECOUPED (paid back its $3m capitalization to mount the show) and is now in PROFITS.

After covering the weekly, when a play is in profits, 50% of every dollar is due to the General Partners (their “carry”) and 50% is due to the Limited Partners (investors). A show that returns a 10% profit to investors, therefore, has actually returned a 20% profit in total. By way of example, if you invested $300,000 in a $3m play, you own 10% of the 50% share of profits to which the investors are entitled. If there is $1m of profit from this play, $500,000 is due to the General Partners, and $500,000 to the Limited Partners. You own 10% of that $500,000, so you receive $50,000 of profit off a $300,000 investment. This 16.66% profit is not bad for a 12-week run, but, in our view, it doesn’t fully marry risk and reward. This is where our Fund II model differs, for we are aiming to provide our Fund II investors the available profits not only from the investor side, but also from the General Partner side of the waterfall.

In our model, if we were to be the sole General Partner of the play, that $500,000 owed to the General Partners would go back to our Special Purpose Vehicle created by the Fund, and then flow back to the Fund. The Fund has now received an $850,000 return ($300,000 LP capital returned, $50,000 LP Profit, + $500,000 GP profit) for the same $300,000 investment. That’s a 183% profit. Tours employ a similar model to that of Broadway with capitalization and weekly being critical, but with the added benefit that tours typically have a lower capitalization (sets are less extravagant, there is less reliance on star casting, fewer union restrictions, etc), along with a Minimum Guarantee (or “MG”), which is a negotiated amount of money the touring venue commits to the producers for the rights to book the show. Typically, a First National Tour (previously termed a “Bus and Truck Tour” referring to the mode of transportation from city to city) is a production that crisscrosses the country playing short stints (typically one or two 8-show weeks per city) at pre-scheduled markets (Los Angeles, Chicago, Denver, Seattle, etc) that most frequently are supported by patrons through Seasonal Subscriptions. A Subscription Series, in the case of the Hollywood Pantages Theater in Los Angeles, for example, is a Season Package with different pricing tiers where one can select from the Season Lineup of seven shows and see some or all of the offerings. In addition, separate from these Season Packages, the box office sells individual tickets to the public at large, however subscribers have the advantage of a reserved seat to a potentially hot show well in advance and therefore make up the majority of ticket sales. This subscription model is extremely attractive to the production because, as discussed above, the National Touring production is given a Minimum Guarantee when they arrive at the venue (unlike on Broadway, where a production is essentially renting the space – called “four-walling” – with no guarantee of sales). After that minimum, there is still a profit share between the production, the venue, and a local presenter (if applicable). So, as you probably guessed, the General Management model is to “back into” the weekly around this Minimum Weekly Guarantee. If nothing goes wrong, and there are no unexpected expenditures, a production spending wisely should not ever touch a contingency reserve, and in fact, recoup its capital if it simply grosses higher than its Minimum Weekly Guarantee.

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