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I've gotten a lot of questions from readers all over the world expressing interest in investing in a Broadway or an Off-Broadway show. Usually they are unsure about how to get involved and, more importantly, they want to know how to pick their first show.
Since this seemed to be such a hot topic, I thought I'd take a couple of blogs to dispel a few of the nasty rumors associated with investing in Broadway or Off-Broadway shows, and also give you my checklist of how to choose a show to invest in.
Today, we'll deal with the rumors. Tomorrow, the checklist.
BROADWAY INVESTMENT RUMOR #1: Investing in Broadway shows is only for the super-rich.
Because Broadway capitalizations can range from $2 million for a Play up to $20 million for a Broadway Mega-Musical, many people fear that the "entry point," or the amount of money required for an initial individual investment, must be astronomically high.
Not true.
While the average smaller investor in a big Broadway show is probably about $25,000, I have seen many shows where investors were able to get in for as little as $10,000, and even a few where the entry point was only $5,000! There are a lot of publicly traded mutual funds that don't allow you to get in at that level. These lower investment thresholds are very common in the Off-Broadway arena.
What determines the lowest investment level? Here's how it works. Capitalizations are divided into 'units', just like shares of a stock. What defines a unit is up to the Producer. Some Producers like to have a round 100 units per show, regardless of the capitalization. Some like to pick the lowest amount they can accept as an investment (some shows are limited to the # of investors they can have). Some just make it up arbitrarily.
Here's a tip. If you're considering a show and you get sticker shock when you hear the price of one unit? Ask for a partial. Splitting units ain't like splitting an atom. It can be done with ease. Depending upon a variety of circumstances, including how hot the property is, who the producer is, and whether or not other investors took "round units," it may be possible for you to invest in a smaller amount than the "ask."
The key is, of course, never be pressured into investing more than you're willing to lose. If the entry point on one project is too high, don't worry, there are others.
BROADWAY INVESTMENT RUMOR #2: Investing in Broadway shows is only for the super-crazy.
So many people think that it's bonkers to get involved with Broadway.
The fact is, if you're an individual of a certain net worth, your traditional financial advisor will probably recommend that you allocate a certain amount of your investment portfolio (usually about 10%) to higher risk instruments or so-called Alternative Investments in order to diversify yourself (most Broadway and other AIs require investors to be "Accredited," although this is not always the case for shows). Look at the Smith Barney site here to see a description of the Alternative approach.
Why would Broadway, with its high risk but potentially high return, be excluded from that list? In fact, it isn't. Check out the Wikipedia entry for Alternative Investments here. Recognize anything?
Alternative Investments, including Broadway and Off-Broadway shows, are high-risk, without a doubt.
The commonly quoted statistic is that only 1 out of 5 Broadway shows recoup their investment (that ratio is even lower for Off-Broadway shows). But it's not the only high risk instrument on the market, by any means. Investing in Broadway shows is a lot like investing in a restaurant, a piece of art, or frankly, in any entreprenurial start-up. Look at this statistic that puts the success rate of start-ups at the exact same percentage as I just quoted above - 20%! See, it's not as bad as we thought.
And, if you do proper due diligence, as we'll discuss tomorrow, you can increase those odds.
Also, with big risk can come big rewards. Even if you do end up performing according to the stats, the goal and hope is that the 1 show out of 5 ends up paying for any other previous losses (it's a marathon not a sprint) and then some. Imagine what it would have been like to invest in Annie, West Side Story, Cats or Wicked.
BROADWAY INVESTMENT RUMOR #3: Investors in Broadway shows belong to an exclusive 'club' that doesn't accept new members.
While it is true that there are a lot of investors in the Broadway world that have been in the circle for a long time, it's not as closed door of a club as you think. While it can be hard for a new investor to get in on the hottest shows coming to town, it's not impossible, and sometimes, Producers will let you get in on a 'sure-thing' (which doesn't exist, by the way) if you also agree to come into something a bit more risky.
However, it is a relationship business, and preferential treatment is often given to investors who have been doing it longer, and to those that have been faithful to the Producer.
So what does a new investor do?
Start the relationship.
Call a Producer. Email them. Fax them. Simply state that you're looking to invest in a specific show (if you know one that they are about to do), or ask to be put on the list to be called about their next show. It's not a commitment for either party, and I don't know any Producer out there who would mind putting you on a "potential" list. Just make sure you are serious about your interest.
Those are three of the biggest obstacles potential Broadway and Off-Broadway investors tell me prevent them from taking the first step and joining the ranks of Broadway investors. Tomorrow, we'll talk about just how you choose a project to invest in, once you've decided that investing in Broadway is something you definitely want to do.