Here are two of the latest twists concerning investing in intangible assets: movies and universities.
First, movies. Hollywood has always attracted people willing to invest in that most intangible of intangibles – the “Hit” – just like Broadway (remember the plot of “The Producers”?). But as Steven Pearlstein writes in the Washington Post – “Big Deals Are Sequels to Tradition In Hollywood”,
over the years, J.P. Morgan’s office in La-La land has painstakingly built a $7.5 billion portfolio of movie loans with the help of a computer model that has been remarkably prescient in calculating box-office success and failure based on genre, actors, directors, target audience and the season of the year. By spreading its risk over scores of different films, imposing tight covenants on production spending and syndicating 80 percent of the loans to other banks, J.P. Morgan has enjoyed a steady stream of above-average profits for its movie-lending business.
That is intangible asset investing the old fashioned way.
But, according to Pearlstein, new money has come to town:
Now, in the latest remake of “The Carpetbaggers,” hedge funds and private-equity boys have arrived noisily in Hollywood. Having already bid up the price of stocks and junk bonds, real estate and commodities, and with cash pouring in at the rate of $12 billion a month, they are about to create another bubble, this time in “entertainment assets.”
Pearlstein is skeptical of this new wave of investment:
by the time the movie theaters take their 50 percent of ticket proceeds, and the studios take their 15 percent distribution fees, and the banks get their loans back with interest, and the insurance companies are paid 3 percent of production costs to insure against cost overruns, and the studios are reimbursed the $150 million it takes to produce and market the average film — and once the big-name actors and directors and their agents take their “points” off the top — there’s not a whole lot left over for the equity partners.
It will take years before the last of the DVDs is sold and the last check received from Showtime to determine how it all comes out. But my guess is that when that day is reached, the returns on these movie investments will turn out to be rather mediocre, and that the flood of hedge fund and private-equity money will have simply bid up the incomes of Tom Cruise, Steven Spielberg and their agents.
The big lesson I take away from this is that it is not the intangible which is risky; it is getting caught in the wrong deal.
But, then again, isn’t the ability to structure the deal the real intangible asset here?
The second example of investing in intangibles is universities. As the Economist – “An education in finance” relates, universities have been more comfortable hitting up rich alumni than going to the bond market. But this is changing:
Poor schools were worried about being unable to service debt. Rich schools with huge endowments ($25 billion at Harvard, $12 billion at the University of Texas, $4 billion at Cornell) may have seen no need. And college administrators may not have considered that their institutions’ primary assets—reputation, inspiration and insights—were suitable as collateral.
So much for an academic perspective. A growing number of investors saw things differently. Those lovely buildings on rolling campuses, the better universities’ reputations, taxpayers’ backing of state-owned institutions: all this looked to them like a deep pool of assets against which lots of money could be borrowed. The money raised could be used to attract more customers, who are choosy about the product and whose demand varies little with the price (loudly though they may complain).
The idea has flourished. Colleges throughout America are building classrooms, stadiums, theatres, climbing walls and whatever else it takes to hold teenagers’ imaginations. This costs a lot and much of it is financed by debt. So far, credit quality has been excellent.
Investing in “reputation, inspiration and insights”? What a novel idea.