China’s Film Investors Flex Their Financial Muscles in Hollywood

By Robert Cain for China Film Biz

February 9, 2012

The Year of the Dragon so far looks to be the year China starts investing some serious coin in Hollywood. During the past week several purportedly major Chinese investment funds have burst onto the scene with intriguing announcements about the riches they intend to spread around the cash-starved American film business.

Could this be 2005 all over again? Back then Wall Street’s hedge funds fell all over themselves to fund slates and individual film projects, convinced they were smarter than the ‘rubes’ in Hollywood who didn’t know what they were selling. As a veteran banker friend put it to me then, “The Wall Street guys think they’ve discovered beachfront property under the noses of a bunch of west coast hicks and it’s there for the taking.”

Of course it didn’t take long to see who the real rubes were. After investing hundreds of millions of dollars with such companies as Relativity Media and Capitol Film, Wall Street got a costly lesson in what it’s like to deal with Hollywood’s dark side. If the hedge fund managers did indeed find a sunny beach anywhere, they got badly burned. Even though there were other, more honorable recipients of film funding, enough damage was inflicted that few of the Wall Street financiers who were new to the biz in 2005 will ever come back.

The spate of recent fund announcements from China (CMM, Harvest Seven Stars, Yao Ming, Paul Y Engineering, SAIF Partners, etc.) must have more than a few unscrupulous individuals in the U.S. scheming about ways to strip the fresh round of film investors clean of their dollars and renminbi. But China ain’t Wall Street, and it’s unlikely that the pickings will be quite so easy this time, if there is indeed a new wave of money coming.

For one thing, the Chinese investors may not know much about the global film industry or even how business is done in the U.S., but most are smart, savvy, and conservative with their capital. Having done business with numerous Chinese funds and high net worth individuals, I’ve found them to be way ahead of all the hedge fund kids I dealt with in their sophistication about the ways of the business world. Most of them survived the tumult of China’s Cultural Revolution, and have risen to the top of a business and political environment that has no rule of law and throws a multitude of roadblocks in the way of any individual’s success. To them, Hollywood’s con artists are amateur punks.

That’s not to say, of course, that Chinese investors are immune to mistakes or that they can’t be fooled. And that’s why, if we in Hollywood hope to have a long term relationship with China, we’re going to have to treat these investors differently. If you’ll indulge me in a bit of ‘Jerry Maguire’ style pontificating, we could all stand to be a little more enlightened about how we treat the money. I’m talking about working earnestly to understand the investors’ motivations and keeping their best interests in mind.  Being willing to meet them halfway. Let’s not poison the well this time. And let’s be mindful that, in Chinese, the word ‘greedy’ ( 貪 ) and the word ‘poor’ (貧) look almost the same.

Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at and at

Legendary East’s Fortune Cookie Crumbles

By Robert Cain for China Film Biz

December 30, 2011

Legendary Pictures’ China ambitions ran into a great wall of investor resistance yesterday, as Hong Kong financing partner Paul Y Engineering (PYE) announced that it has been unable to raise sufficient investor interest to complete its $220 million investment in Legendary East, a planned three-way partnership with Legendary and Beijing-based Huayi Brothers.

Here’s the first part of the press release that was issued by PYE and its parent company, PYI:

The most revealing phrase in the press release is the statement that “some or all of the parties… may continue, in the near term, to discuss potential changes in the transaction structure…”

While PYE Chairman James Chiu blamed “the current difficult environment of the capital markets” for his failure to raise the necessary funds for the joint venture, I strongly suspect that other factors were the real reason for his quashing the deal. As I wrote in a previous post, the deal terms as originally announced were decidedly lopsided in Legendary’s favor, and in any event it made no sense for a construction firm like Paul Y to be putting shareholder money into movies, a business about which PYE’s senior executives openly admitted they know absolutely nothing.

PYE had originally explained its participation in the Legendary East joint venture as an effort to diversify its business into a more profitable industry sector with less cyclicality than its core construction operation. But as my former boss, Harvard Business School professor Michael Porter, would tell you, this is just the sort of misguided thinking that almost always leads to ruin.

In a study I conducted for Porter that led to a seminal article he wrote for the Harvard Business Review, we found that corporate diversifications like the one PYE proposed most often dissipated instead of created shareholder value. Investors are almost always better served by making their own diversification decisions within their personal stock portfolios instead of having corporate managers try to make these diversifications for them.

PYE’s and PYI’s investors no doubt took issue with their management team’s intentions and refused to go along.  PYI Chairman Tom Lau made himself an easy target for investor revolt in November when he said. “We do not understand the business of motion pictures nor do we pretend that we can contribute anything more than money.” It was one of the most candid statements I’ve ever seen from a major company Chairman, and also one of the least confidence inspiring.

I’m a big fan of Legendary, and I hope they find a way to realize their ambitions. My friends at the company tell me they’re pushing ahead with their China plans, and for their sake I hope that either PYE or other investors will provide the capital they need. But for Legendary to succeed in the long run in China they’ll have to do so on business terms that make sense for both sides. Even if the initial capital raise had succeeded, the PYE-Legendary East deal wasn’t a good one for PYE or for Huayi Brothers, and therefore looked to me like a partnership that would have been doomed from the start.

Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at and at

Legendary East Deal Terms Unwrapped

By Robert Cain                                                                                                      November 17, 2011

In an announcement that was remarkable for its candor and for the amount of detail disclosed, Hong Kong construction firm Paul Y. Engineering (PYE) revealed on Tuesday the terms of its $220.5 million investment in Legendary East, Ltd., the film co-production joint venture that will be co-owned and managed by Legendary Pictures and Beijing based Huayi Brothers.

The joint venture aims to produce two films per year through 2017, and three per year thereafter, to be shot in English and “based on Chinese culture, mythology and history, with a view on distributing globally,” according to PYE deputy chairman Tom Lau. By qualifying these films as locally made ‘national productions’ the company will be able to avoid China’s stringent import quotas so that it can freely distribute in China.

Outside of China the films will presumably be released by Legendary’s studio partner Warner Brothers, though there has been no official announcement about that yet.

PYE, which has no prior experience in entertainment, will retain a 50 percent stake in Legendary East, with Legendary Entertainment taking 40.1 percent and Huayi Brothers 9.9 percent.

PYE explained its investment as an effort to diversify its business into a more profitable industry sector with less cyclicality than its core construction operation. Although PYE has been a major player in shaping the skyline and infrastructure of Hong Kong over the past six decades, it presumably sees China’s booming film industry as a more promising area of growth and profitability than its traditional business of building skyscrapers, airports and tunnels.

The terms of the deal appear to be very favorable for Burbank based Legendary, which maintains a great deal of control while shouldering little risk. In assuming the chairmanship of the new venture, Legendary Entertainment’s chairman Thomas Tull will control the company’s board of directors and he will exercise full greenlight authority, but will take on little to no financial exposure.

Minority partner Huayi Brothers, on the other hand, appears to be hungry to participate because it will make substantial sacrifices for its relatively small stake in the deal. In exchange for its right to distribute Legendary East films throughout the mainland and greater China, Huayi Brothers’ will be required to:

  • Give Legendary East films ‘first priority’ over its own titles by carving out a two week blackout period ahead of each Legendary East film during which time Huayi will be prohibited from releasing any other films.
  • Put up a minimum of 5 percent of the negative cost of each joint venture film, with budgets set at a floor of $50 million and a cap of $150 million.
  • Invest 100 percent of each film’s P&A, while limiting its distribution fees to 11 percent.
  • Shoulder the responsibility of taking each script through the government’s censorship hurdles, production approval process and distribution license authorization, in return for which it will earn producing fees of $500,000 per picture.

For its part, U.S. based Legendary Entertainment will take a $3 million producing fee from the budget of each film.

The partners had previously announced that their first joint production would be The Great Wall, to be directed by Edward Zwick (The Last Samurai; Blood Diamond) and based on a screenplay by Zwick and Marshall Herskovitz. Other early Legendary East investments will include co-financing two existing Legendary projects: Paradise Lost, to be directed by Alex Proyas (Dark City; I, Robot) and star Bradley Cooper; and Seventh Son, which will be directed by Sergei Bodrov (Mongol) and star Jeff Bridges.

In a curious display of candor, PYE Chairman James Chiu seemed to go out of his way to explain how little he knows or even cares about movies.

“I have no patience to sit in the cinema for two hours,” he is quoted as saying.

With $220 million at stake, perhaps he can be persuaded to show up and sit through a premiere or two for the company’s benefit.

Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at