Ryan Kavanaugh's emergence as a rising studio mogul was on display at the Golden Globes on Jan. 16 when Christian Bale gave a shout-out to the Hollywood financier as he accepted the supporting-actor award for his role as a drug-using former boxer in The Fighter. Backstage, the bearded actor joked that he singled out Kavanaugh, one of the film's producers, because "he said if I thanked him personally he would actually pay me for my next film."
Kavanaugh has been wowing Hollywood with deals since 2002. The 36-year-old former Internet investor with spiky red hair and a penchant for wearing brightly colored Keds has flooded studios with almost $8 billion in a series of private-equity-financed deals that eclipsed those placed by some of the more established Wall Street players. The whispers among Tinsel Town veterans were that Kavanaugh, the son of a Beverly Hills doctor, who invested in high-tech companies for clients before using his local contacts to move into film financing, wouldn't last.
Yet Kavanaugh not only remains welcome among the power lunchers at the private Soho House in West Hollywood, but his Relativity Media studio also works with some major Hollywood players such as Avatar director James Cameron and Netflix (NFLX) dealmaker Ted Sarandos. "He's surprised a lot of people who thought he was this young producer who only knew how to raise money," says Chris Albrecht, chief executive officer of Starz (LSTZA), the parent company of the Starz Entertainment cable channel. "He is a serious businessman."
With two films among the 10 nominated for Best Picture honors, Relativity could get a boost if The Fighter, which it produced, takes home the Oscar. The company, which has a deal to finance films made by NBCUniversal's Universal Pictures and Sony (SNE), also helped fund Sony's hit The Social Network.
Kavanaugh has said he's building a film operation that has a far lower cost structure than Hollywood's traditional big players. Backed by Elliott Management, a hedge fund that manages $17 billion, Kavanaugh bought the distribution and marketing arms of Overture Films in July from John C. Malone's Liberty Media. Overture distributes films with a staff of just 45 people, fewer than many similar-sized rivals, by using computers to book theaters, keep track of prints, and monitor audience results.
Picking through Hollywood's cast-offs, Kavanaugh in 2009 also bought Rogue Pictures, a maker of low-budget teen movies such as Seed of Chucky that had 30 pictures in development and a money-generating film library. He quickly created a website, The Rogue Network, where he pitches news and ads for future films to Rogue's 15-to-30-year-old fans. "We feel like we're a major studio," says Kavanaugh. "We can make and distribute films just like everyone else in town."
When deciding which films to make, Relativity Media executives rely heavily on data. They use what they call a regression analysis—a computer deep-dive into dozens of variables that could affect a film's potential performance, such as genre, release date, and actor's appeal—before deciding to greenlight a film. The goal: limiting the company's risk.
Relativity Media hedges its bets on films in which it invests. Kavanaugh has agreed to fund as much as 75 percent of Universal's films, basically spreading the company's risks across a pool of films, investing in Universal's successes such as Mamma Mia to offset bombs such as Land of the Lost. (Relativity Media has produced some stinkers, including the Nicolas Cage medieval film Season of the Witch, which generated U.S. ticket sales of $24 million while costing Relativity Media $44 million to make and an additional $20 million to market, according to movie box office tracking site IMDB.)
Relativity tries to limit losses by filming in countries that offer lucrative tax incentives and selling off foreign distribution rights before a film is released, which people with knowledge of the company say can cover more than 60 percent of production costs. (They say such dealing helped limit Relativity Media's exposure to $8 million for Season of the Witch.) Offering a film later for airing on television brings in added revenue. "I know how hard it is to create a studio, but I am not going to bet against him," says Jon Feltheimer, CEO of Lions Gate Entertainment (LGF). "He is a guy who seems to be able to pull rabbits out of his hat."
The biggest coup so far has been sealing a deal with Netflix to digitally stream Relativity's films to its subscribers. The DVD subscription service last year was willing to pay more than Time Warner's (TWX) HBO and CBS's Showtime for rights to the films, say two people with knowledge of the deal, quieting some critics who wondered whether Relativity could survive without large hits. "I wouldn't make a long-term deal with them if I didn't think they were going to stay in business," says Netflix Chief Content Officer Sarandos.
For now, Kavanaugh has to please only one investor: Elliott Management, which owns a 40 percent stake in Relativity. The New York-based hedge fund is happy with the financier's track record and even discussed backing a Relativity Media bid last summer to buy then-bankrupt MGM Studios. "Elliott believes that Relativity's progress over the past year is impressive," says Jesse A. Cohn, a portfolio manager at Elliott Management who oversees its investment in the studio. "As partners, we are focused on assisting the company as it grows into an innovative studio."
Kavanaugh's low-budget, limited-risk production philosophy may be changing. Relativity has given the green light to two films, each with budgets of up to $80 million: Snow White, with Julia Roberts, and the superhero fantasy Immortals that's being made by the team that created 300, Warner Bros.' 2006 low-budget blockbuster about an ill-fated Spartan battle.
Meanwhile, Kavanaugh continues to charm Hollywood, which always has a warm spot in its heart for fresh cash. "He's more than just some money guy," says Avatar director Cameron, who produced the thriller Sanctum, in which Relativity owns a 50 percent U.S. distribution stake. When audience-tracking research for the movie showed its TV ads and theatrical trailers weren't reaching a young demographic, Kavanaugh started pitching it to Rogue's more than 30,000 monthly online visitors and got Cameron to use Twitter and YouTube (GOOG) to hawk the film. "He's young, he understands that stuff better than I do," says Cameron. "And the tracking started moving after we started doing it."
Kavanaugh's magic didn't extend to the box office, however. Sanctum, which cost $23 million to make, according to Cameron, opened on Feb. 4 and generated $19 million in ticket sales after 10 days, according to film site Box Office Mojo.
The bottom line: Financier Ryan Kavanaugh's Relativity Media is using rigorous data analysis, rather than instinct, to select its Hollywood films.