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And Why You Probably Shouldn’t Do It….

In late 1919, Harry Frazee, owner of the Boston Red Sox and a Broadway producer, sold Babe Ruth to the Yankees for $125,000 and a $300,000 loan.

Thus began the Curse of the Bambino.

Frazee used the money to finance a new show called NO, NO, NANETTE….

I doubt if any other investment can produce as unpredictable results as investing in the theater:

  • A friend of mine put $10,000 into an Off-Broadway show called STOMP.  When I last saw him, the total payout on his investment had reached $860,000. 
  • Last season, a show called HIGH opened and closed in the same week, presumably losing it’s entire capitalization.
  • The really big hits – PHANTOM, LES MIZ, CATS, THE LION KING, JERSEY BOYS, WICKED – probably have or will pay their original investors profits one to two hundred times the initial investment.
  • Last season, THE SCOTTSBORO BOYS and BLOODY BLOODY ANDREW JACKSON closed without returning anything.
  • Original investors in "Rent" made back 675 percent on their investments, according to John Corker, the show's general manager.

Economists call investments like these “high-risk/high-reward”.

Which is why you probably shouldn’t invest in the theater....

High-risk isn’t for the faint of heart or the slim of wallet, nor should it be.  By investing in star-driven revivals, you’ll mitigate the high risk, unless of course the star turns out not to be the draw everyone expected.  But you won’t eliminate it.

I like people to invest because they care about what they’re investing in.  It’s not just some ambiguous stock that you don’t really understand. It’s more human than that, you see it on stage, you feel it, there’s an emotional involvement as well….Patrick Catullo, a producer of NEXT TO NORMAL

Anybody who calls is going to want your money and try to persuade you that their show is a sure fire hit, and so you have to do some digging about reputation and integrity and longevity….A majority of shows fail. It’s as simple as that….we don’t really want people to invest unless they can afford to lose all their money….Stephen Baruch, producer of many Broadway shows

I tell potential investors they shouldn’t come in unless they can answer these three questions in the affirmative:

  1. If I lose the entire investment, it won’t change my lifestyle or cause me sleepless nights.
  2. I don’t look at theater investing as an alternative to stocks, bonds, and real estate.
  3. Whether the show hits or doesn’t, I’ll enjoy being a part of it.

The first question is of course the most important, but it’s followed closely by the third question.  Some of us just like being around theater, and find the experience much more enjoyable if we feel a part of things.

Depending on the size of the investment and the policies of the lead producer, the perks can include billing, seats at the dress rehearsal and opening night, the right to attend marketing meetings, or occasionally auditions and rehearsals, free memorabilia and cast albums, etc.

If these kinds of involvement set your heart beating faster, you’ve answered “yes” to the third question, and are the right person to make theatrical investments.  (In which shows is a different question for a different post.)

So whether to invest in the theater comes down to whether you’re the right person for it. 

In brief, here’s how a theater investment works:

  • A budget is made that covers all of the costs up to the moment the curtain rises on the first performance.  The budget should have a reserve for any unforeseen events.
  • A partnership or limited Liability company is formed, and capitalized by at least the amount of the budget.
  • Once the show is running, all net profits are paid to the investors until they’ve recouped all their invested funds.
  • When/if the show recoups, further profits are divided between the investors and the producers.  In the U.S., the division is 50/50; in the U.K., 60% goes to the investors, and the remaining 40% to the producers.  This seems like a better deal for the investors, but certain rights that accrue to the benefit of the investors here are retained solely by the London producers.

When I started out 21 years ago, it was oft said that one show in seven was profitable.  In the intervening years, that perception has changed to one profitable show out of three or four.  I think the success rate has has in fact gone up due to the increasing number of star-driven shows: if you have Al Pacino or Denzel Washington in the cast, you’ve likely got a profitable show.

In fact, nobody knows what percentage of shows are profitable, because the shows don’t publish their financials.  You can get a pretty good idea by watching the weekly grosses, which are published, but even then there’s no way to be sure, and even less to know how much loss or profit a show may produce.

I’ve made 35 or so investments in shows.  Without considering the producing income that may have come to me on some of them, I’ve made a profit on roughly two-thirds of those investments.

But I’m the right kind of person to do it (and have generally been able to avoid the dogs).

So before you invest, answer my three questions, and – if you’re still game – find a show you feel passionate about that’s produced by someone you trust.

Investing in the theater can be great fun, and once in a while turns out to be super-profitable….

But it has to be right for you.

(Note: some of the quotes used in this post came from an excellent 2010 CNBC article entitled “The Risks, Rewards and Realities of Investing in Theater”.)

 

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Guest Monday, 22 December 2014