This article originally appeared in Financial Times. Click here to read more coverage from the Weekend FT.
High on the cliffs of Anacapri, overlooking the blue waters of the Bay of Naples, sits Da Gelsomina, a renowned restaurant and hotel. Surrounded by vineyards, it is known for its beautiful swimming pool and fine food: the pickled aubergines are one of its specialties.
The venue was booked a few weeks ago for a lavish private wedding party. Capri used to be the holiday destination of choice for vacationing Roman emperors but at the beginning of July it was the Hollywood elite that descended on the island. Leonardo DiCaprio attended; Bradley Cooper, the star of the Hangover films, was also present, as was Ryan Seacrest, the host of American Idol, and Gerard Butler, who starred in the sword-and-sandal epic 300. They were there to see their friend Ryan Kavanaugh marry his fiancée, Britta Lazenga, a dancer with the Los Angeles Ballet. The guests are household names but it is unlikely you will have heard Kavanaugh's name before—although you may have seen it, or that of his company, as the credits rolled in one of the many films he has produced, such as The Fighter, a winner at this year's Oscars, or Limitless, the March hit that starred Cooper and Robert De Niro. As the founder and chief executive of Relativity Media, a company which has, in only a few years, evolved into a fully fledged movie studio, Kavanaugh is a mogul in the making, his ascent to the upper echelons of Hollywood's hierarchy as rapid as it has been unexpected.
At just 36, the red-headed Kavanaugh has already produced more than 30 movies. He has raised billions of dollars from Wall Street firms, money which has been invested in more than 100 films released by Hollywood studios—Sony Pictures and Universal Pictures, among others. Hancock, Mamma Mia!, The Social Network, Salt, and the upcoming Cowboys & Aliens, starring Daniel Craig and Harrison Ford, have all been partially financed by blockbuster deals that were arranged by Kavanaugh.
Such a meteoric rise has not gone unnoticed: The film trade paper Variety recently anointed Kavanaugh its "Showman of the Year" in a special issue which included 20 pages of gushing tribute ads from friends and business partners. Variety also declared that Kavanaugh "eschews sleep, clocking a mere 90 minutes to two hours a night" and revealed, among other things, that when not producing movies he spends his time "working with sick kids in hospitals," practicing "transcendental meditation," and "closing in on a cure for cancer" through his involvement with a bio-tech venture.
Kavanaugh's is an unlikely path to movie moguldom. After attending UCLA, he started a small venture capital and stock trading firm, which attracted several film-industry clients. The company would eventually collapse, but while pondering what to do next Kavanaugh realized there was money to be made funneling Wall Street funds into Hollywood.
Films have not always been the best bet for Wall Street: They are unpredictable investments and big budget releases can be risky. But in the heady days before the 2008 financial crash Wall Street could not get enough of Hollywood, and Kavanaugh had a ringside seat. Private equity firms and hedge funds poured billions of dollars into movie "slates"—the multiple movies produced and released by Hollywood studios each year. These deals had typically been arranged by big banks but Kavanaugh carved an opening for himself, utilizing his Hollywood connections and financial acumen to perfection.
Kavanaugh was new to the party and spoke openly about how he was going to fix a broken entertainment industry that he claimed wasted too much money. This made him as many enemies as friends yet he struck gold and the studios lapped up the cash he sent their way.
But Kavanaugh was not content to be a financial middle-man. In 2005, he formed a pivotal bond with Elliott Associates, a mammoth New York hedge fund, when it made a small investment in one of his slate deals; within three years it had invested hundreds of millions of dollars in Relativity to help him achieve his dream of starting his own movie studio. Other banks pulled out of Hollywood financing, scarred by the financial crash, but Kavanaugh kept going, backed by Elliott's millions.
Recent events have sorely tested those ties. Kavanaugh wanted more money to expand his company late last year but the hedge fund wouldn't play ball. Barbs were exchanged via the Hollywood press, relations soured and the drama has left Kavanaugh at a crossroads. He has plenty of detractors and many people have told me they think he is heading for a fall. And yet he is close to selling part of his company to new partners in a deal with the potential to power Hollywood's youngest movie studio to new heights. The question is, does he have what it takes to stay in the game as one of Hollywood's most influential players?
. . .
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."
. . .
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.
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.
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."
Several people told me that Joe and Kavanaugh sharply disagreed with each other about the management of Relativity when they worked together at the company. Joe left after less than a year but he had only nice things to say about Kavanaugh. "He's a very hard-charging entrepreneurial guy … he's one of the few people to bring a truly analytical perspective to the movie business."
. . .
Relativity has several possible hits on its upcoming slate, including Immortals, a 3D epic set in ancient Greece, due for release at the end of the year. But Kavanaugh needs to conclude the JPMorgan-led deal if he is to keep developing projects and expanding into new areas.
Elliott Associates and Relativity declined to comment on talks with JPMorgan and other investors. However, the guest list at Kavanaugh's wedding this month may offer a clue to the progress of negotiations. Alongside the Hollywood stars at the celebration on Capri were two senior JPMorgan executives: Greg O'Hara, the head of JPMorgan's Special Investments Group, and Ina Drew, the bank's chief investment officer. She is one of the most senior executives at the bank, reporting directly to Jamie Dimon, its chief executive.
The presence of two of JPMorgan's executives in Italy is an indication of the close ties that have developed between Kavanaugh and the bank. Their attendance also has broader implications for Hollywood which, since 2008, has not had the best relationship with Wall Street. After the financial crash most banks and other lenders opted to give the film business a wide berth, with several banks closing their film finance units. But after not being on speaking terms for a few years Wall Street and Hollywood seem to be interested in each other again, judging by the behaviour of JPMorgan.
It is unclear if the deal will go through, and the rest of Hollywood is watching closely, keen to see if renewed Wall Street interest in owning entertainment companies is real or, like so much else in Hollywood, a carefully crafted mirage. But Kavanaugh has worked in the movie business long enough now to know that a good film has to have a compelling third act. If he succeeds in closing the deal he could not have scripted a better finale.
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