- Private lenders, Wall Street’s dealmakers du jour, are investing across media and entertainment.
- Investors said they are cautious about new scripted projects and bullish on tech offerings.
- Dealmakers are treading carefully as defaults on these types of loans tick up across industries.
Flush with cash and buoyed by investors’ growing interest in private debt, asset managers have piled into the business of lending to privately held media companies. Private credit assets under management in media swelled to nearly $80 billion in mid-2022 from some $31 billion in 2018, according to an analysis by the data firm Preqin for Insider.
Entertainment and live sports are increasingly drawing interest from some of the largest non-bank lenders like Carlyle, Ares Management, and Apollo Global Management, which specialize in making loans outside the public markets — known as shadow lending, alternative lending, or private credit.
Last year, Apollo provided $300 million of debt financing to the North Road Company, a studio formed by veteran Hollywood executive and investor Peter Chernin. Carlyle’s credit arm backed a venture called Litmus Music that aims to acquire and manage music catalogs. And Ares raised $3.7 billion for a fund last fall geared specifically toward sports, media, and entertainment investments across private debt and private equity.
Ares is now evaluating opportunities globally across sports, media, and entertainment, said Kort Schnabel, the firm’s co-head of US direct lending and sports, media, and entertainment strategies. “I expect you will continue to see us remain active in 2023,” he told Insider.
Unlike private equity investing, where managers take stakes in companies or buy them, private credit investors lend to businesses and make money on interest payments. Overall private debt assets are set to exceed $2.6 trillion by 2026, according to Preqin.
Private lenders have tailwinds behind them. Producing new projects and owning media rights is growing costlier, and companies are calling on private players instead of traditional banks for funding. Distress in the traditional banking sector since the collapse of Silicon Valley Bank and moves to pare back risk are emboldening their counterparts in the private space, whose deals are generally more opaque and less regulated.
Plus, there’s the glam factor. Even Wall Street’s buttoned-up dealmakers at alternative asset managers are drawn to the worlds of Hollywood, media, and live sports. (Private investment firm KKR’s media, entertainment, and sports portfolio includes Insider parent company Axel Springer.)
A slowing economy tests credit managers
But the world of sports and entertainment is vast, and some pockets are less attractive than others. Schnabel said he’s wary of backing individual scripted projects, as predicting what’s going to resonate with audiences can be hit or miss.
But he’s optimistic about the rising value of content overall and of businesses participating in that arena — like casting and talent management software providers and equipment rental operators that service production studios. These kinds of targets could prove more resilient in the event of a looming writers’ strike, which could slow or pause development of stories flowing out of writers’ rooms in Hollywood.
At Carlyle, head of illiquid credit strategies Alex Popov and Ben Fund, a managing director on the credit opportunities team, handle the firm’s investment in the company Content Partners. It buys films, TV shows, and their royalties and has amassed a library of more than 500 movies and 3,000 hours of television.
“We find strong demand for companies that blend tech and entertainment, particularly companies delivering data aggregation,” Popov told Insider. Carlyle’s $146 billion credit arm has also provided capital to Clair, a media tech company that specializes in live production services and audio products.
And as the economy slows, these dealmakers will face tests of their own. Private credit defaults through the end of 2022 are leading the rise in broadly syndicated loan defaults, though from overall low levels, UBS investment strategists wrote in a note to clients this month that did not specify companies or managers.
The strategists said driving that uptick are private credit defaults that include so-called softer forms of default, like breaching a loan’s terms and conditions, along with private credit portfolio companies having generally lower ratings and less diversified businesses.
“We do see some risks associated with less predictable consumer preference shifts for different types of entertainment products and formats, as well as cyclical risk, as consumers might pull back on entertainment spending during an economic downturn,” Ares’ Schnabel said. “We are very careful to analyze and mitigate these risks in our portfolio.”
Lenders eye AI in media
Like Popov, others see a potential windfall that could come from combining the latest tech transfixing investors and consumers — artificial intelligence — with Hollywood’s mass appeal.
More than ever before, investment firms are using tech and vast sets of data to inform dealmaking. “What we’re interested in right now are companies that are creating a more automated way of identifying valuable IP,” said Aria Vossoughi, head of special situations and revenue finance at New York-based Serengeti Asset Management, which manages some $1 billion in assets across public and private strategies.
Vossoughi pointed to a new group of startups using historical data to predict whether prospective projects are bound to be commercial or box office smashes — or to fizzle. That could mean companies using tech to automate the process of scouring scripts for ideas that could be commercially viable. Serengeti is also active in the sports sector, deploying credit capital to gain control of some commercial and broadcast rights for Latin American soccer leagues.
Does this mean creators should worry that Wall Street-backed robots are coming to take their jobs? Vossoughi downplayed that fear.
“I don’t think it’s going to replace the judgment on creativity. It supplements it more than replacing it,” he said of AI tech. “If this thing is actually done appropriately, then it should enable a more effective process for analyzing what works versus what doesn’t.”
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