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

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 2)

Relativity doesn't exactly fit the mould of a typical Elliott investment. The firm has $17.5bn of assets under management and specializes in distressed debt: when Lehman Bros. collapsed in 2008, Elliott stepped in and began buying bonds. Still, the firm found Relativity to be a compelling investment. "The Elliott guys are analytical, not emotional," says one person who has worked closely with them. Referring to clashes between the hedge fund and Kavanaugh, he says the two sides have "had their moments … Ryan's a colorful guy and the one thing you can say about the Elliott guys is they're not colorful."

The contrast in styles hasn't, however, stopped Kavanaugh benefiting from the firm's backing. Over the years, he has received as much as $100 million, which includes money he received for the share of the business he sold to Elliott, according to a person familiar with the two companies. Once Elliott was on board, Kavanaugh also became a heftier presence at international film festivals such as Cannes, where he began competing with the likes of Harvey Weinstein, the co-founder of Miramax, for the best new projects. With his company flush with cash he had become a force to be reckoned with.

But Kavanaugh wanted Relativity to grow more quickly. While his relationship with Elliott progressed well for the first couple of years after the hedge fund bought into Relativity in 2008, it has recently threatened to come unstuck.

At the end of last year Kavanaugh was rebuffed by Elliott when he tried to garner support to buy a film library—a large collection of films that could provide a steady flow of cash, thanks to their availability on DVD or pay TV. Elliott was unwilling to back any more deals. "They just didn't have the appetite for it," says a person familiar with the situation. "They wanted the company to make good films, get its distribution in place … you don't run before you can walk."

There have been other bumps in the road on Kavanaugh's journey from broker to head of his own studio. He is no stranger to the courtroom and has had several high-stakes legal battles over the years. In 2008, he sued Citibank after it tried to change the terms of a five-year slate deal Relativity had arranged with Sony Pictures; Citi launched a counter suit and the case was eventually settled out of court: Citi and Relativity continue to be partners but the decision to sue was damaging, according to other bankers active in entertainment lending. "None of the bigger banks would go near him after that," one told me. "You just don't sue your bank."

More recently, he has been embroiled in a dispute with Harvey Weinstein, a rival who is no stranger to legal action. A flurry of lawsuits was triggered by Weinstein, who alleged that Kavanaugh had breached a contract regarding the global distribution rights to a remake of The Crow. Relativity sued back, alleging that the Weinstein Company had made a mess of its release of Nine, the flop musical starring Daniel Day-Lewis—and a film in which Relativity had invested $20 million. The dispute is now to be decided in private arbitration.

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Kavavanaugh has had his own scrapes with the law. He was arrested in Malibu in 2006 and charged with driving under the influence of alcohol: He was later convicted on a lesser charge of being slightly above the legal blood alcohol limit. Kavanaugh's lawyer submitted a video testimonial to the court, which included a character endorsement from, among others, former U.S. president Jimmy Carter—a fan of Kavanaugh's charity work. Then, in another incident in 2008, he was stopped by police who alleged he had violated the terms of his probation. The allegation was withdrawn following a petition, but Kavanaugh pleaded no contest to a traffic offence of reckless driving.

. . .

He may be a colorful Hollywood character, yet none of the noise that surrounds Kavanaugh has stopped him building his company into a competitive studio. His relationship with Elliott Associates, however, has grown even more strained recently. This is largely due to an ill-timed leak to the Wrap, a Hollywood news site, which claimed that Kavanaugh was planning to sell Elliott's stake in Relativity to a consortium led by JPMorgan. JPMorgan declined to comment but several well-placed sources with knowledge of the deal told me that the story, published in May, was correct. When Kavanaugh took on investment from Elliott he negotiated a clause that allowed him to sell the firm's stake in the company if he found a buyer willing to pay $700 million. Now, after several months of talks, a deal is close, according to those sources.

Relations between Kavanaugh and Elliott soured further two days after news broke about the talks with JPMorgan, when Elliott took over the management of its $600 million slate fund at Universal Pictures. Until that point, Kavanaugh and Relativity had been jointly managing the Beverly 2 slate fund, deciding which Universal films to invest in. The fund, which covers all movies put into production by Universal until the end of 2012, has not performed well so far—one person intimately familiar with the situation said it had lost $100m although this was disputed by another source who said it was "marginally" breaking even.

The real problem with Kavanaugh's role ­managing the fund arose when Relativity—backed by Elliott's money—began producing and releasing its own films. As a new studio it suddenly found itself competing with Universal for hot scripts, access to the biggest stars and key release dates. Matters came to a head when both Relativity and Universal began developing new film versions of the Snow White story; Relativity's version, which is due to star Julia Roberts, will hit cinema screens before Universal's. The latter declined to comment but Kavanaugh's evolving role clearly rankles. "If I was running Elliott's Beverly 2 fund but I was also running a competitive studio, I wouldn't want the same person running both," says a film financier. "If the guy managing Beverly 2 at Universal is also trying to date his own films … that creates a big problem."

Michael Joe, an Elliott executive who, until recently, worked with Kavanaugh at Relativity, appears to agree. "The big change was when Relativity decided to move into distribution," he told me. "Prior to that Relativity distributed movies through Universal [but] they would compete when Relativity decided to move into distribution. Here was a company that had a partner which was now a competitor."