Relativity's Ryan Kavanaugh: His meteoric rise and possible fall.

FT
Stories from the Financial Times. 
July 23 2011 7:05 AM

The Would-Be King of Tinseltown

The meteoric rise and possible fall of Relativity's Ryan Kavanaugh.

(Continued from Page 1)

. . .

Ryan Kavanaugh is young compared with the cigar-chomping studio heads of yore such as Louis B. Mayer, the legendary co-founder of Metro-­Goldwyn-Mayer, or MCA Universal's Lew Wasserman, who amassed Hollywood power and influence over decades. "He's in a league with some really heavy-hitting producers but the difference is he's so young and has done it in such a short period of time," says one person who knows him well.

He doesn't dress like a movie mogul and usually wears jeans, Converse trainers and a shirt with a black tie askew. His grandparents were Holocaust survivors: His father Jack changed his surname from Konitz to the Irish-sounding Kavanaugh when he began practicing dentistry. Jack has also started several companies—and seems to have given his son the entrepreneurial bug.

The latter manifests itself in restlessness and endless energy: Kavanaugh, who declined to be interviewed for this article, works and parties hard, friends say. A number-cruncher adept at structuring complex financial deals, perhaps his biggest talent is his charm, with few in Hollywood rivaling his skill as a salesman. He has earned notoriety in the business for his lavish spending: At one dinner at the Ago restaurant—Robert De Niro is one of the owners—Kavanaugh left a $20,000 tip, according to someone who claimed they saw the credit card receipt. Relativity would not comment on the terms of Kavanaugh's remuneration package but the company's growth has given him access to perks enjoyed by other studio heads such as use of a corporate jet for some of his personal outings.

The millions he has earned brokering the Hollywood investments of Wall Street firms has also allowed him to indulge a passion for helicopters. A recent story in the Los Angeles Times revealed that Kavanaugh had earned the ire of some West Hollywood residents for using a local helipad as a private landing spot in order to avoid gridlocked traffic. The helipad was supposed to be for emergencies. In the past, Kavanaugh has suggested that flying gives him a degree of peace. "I think about work 24 hours a day," he told the Hollywood Reporter. "But when you fly a helicopter, for that hour or two you can't think about anything else."

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When he began raising money from Wall Street to invest in the groups or "slates" of movies produced by film studios each year, Kavanaugh hit upon a formula which did much to position him as a Hollywood kingpin. Each time a movie was produced using financing arranged by Relativity, Kavanaugh's company would pocket a $1 million fee paid by the studio and investors in the slate and Kavanaugh would receive an executive producer credit. Executive producers typically have little or nothing to do with the technical aspects of a film's production, but Kavanaugh was able to capitalize on the association with films that his partners were making.

"Here was a guy who was a broker," says one person with intimate knowledge of Kavanaugh's company. "The smartest thing he did was demand a credit in each of the films. It looked like he was a producer, and he played that up. It became very valuable currency."

An associate of Kavanaugh's insists that he used this early period to educate himself about the production process. He started to develop projects of his own, buying scripts and striking deals with actors. "He was acting as an executive producer but he was on the set learning from the people making the movies." But sitting in on movie productions that were being financed and controlled by other companies was only appealing for so long. Kavanaugh wanted his own seat at the table—but that meant he needed his own money.

Kavanaugh first met executives at Elliott Associates—the New York hedge fund founded 35 years ago by the Republican donor Paul Singer—in 2005, when he persuaded them to make a small investment in one of his slate deals. The slate did not perform particularly well but the deal was structured well enough to convince them to do more work with Kavanaugh.

In 2008, Elliott was the only investor in a big slate deal with Universal Pictures—a deal that was arranged by Kavanaugh and Relativity. Elliott invested about $600 million in the fund—dubbed Beverly 2—and followed up with an investment in Relativity itself. The hedge fund realized early on that the real opportunity lay in owning a piece of Relativity—especially if it could turn the company into a studio capable of producing and distributing its own titles. How much it has invested is a matter of some debate, with both Elliott and Relativity declining to comment. However, a person close to Elliott says the firm invested $20 million at first and gradually increased the amount to about $250 million—a mix of debt and equity—in return for about half of Relativity. But an informed source close to Relativity says Elliott has invested more for its stake, putting about $700 million in debt and equity into the movie studio.

Whatever the real number, Relativity "has developed into a real operating business," according to Jesse Cohn, a portfolio manager at Elliott—and one of the first people at the firm to work with Kavanaugh. With Elliott's backing, Kavanaugh acquired a distribution network so Relativity could release its own films in cinemas rather than pay a rival studio to distribute them on its behalf. He struck a lucrative pay-TV deal with Netflix, the online streaming movie service, which guaranteed additional cash for the films he produced, and he signed a DVD distribution deal with the Fox studio.

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