Broadway show investments bring bright lights, small returns

The producers of Broadway and the brokers of Wall Street, 15 minutes apart by train, don't socialize much, but they do have one thing in common. They'd love to invest your money for you. The producers have more to offer than dividends or capital gains. In exchange for your $50,000 check, they might hand over tickets to opening night or introduce you to Sting. They're also far more likely to lose every cent you invest. On Sunday, we'll find out which shows win Tony Awards. Just remember, as the statuettes and whitened teeth gleam in the hot lights: Behind all the glamour is a desperate game of chance that makes Wall Street look like Walden Pond. LUCK BE A LADY “It's all a crapshoot,” says Jamie deRoy, who has produced A Gentleman's Guide to Love and Murder and The Addams Family. “Using your good taste often helps, but not always.” Expensive musicals by famous pop stars can close within 17 weeks, as Sting's $15 million musical The Last Ship did in January, while a Sesame Street parody with a small cast of singing puppets, Avenue Q, is still sending checks to its original investors 12 years after it opened, earning them an eight-fold return. RAZZLE DAZZLE 'EM What about the overall track record for investments in Broadway? Do the hits — such as The Book of Mormon, which four years after its 2011 debut still charges more than $300 for its best seats — make up for the flops? No one really knows. Every production is a private company, generally as open about its finances as murderous Chicago chorus girls are about their crimes. When shows make back their initial investment, or “recoup,” they sometimes issue press releases announcing this feat. Broadway veterans guess that 20% to 25% of shows eventually recoup. But that doesn't tell you a lot about their overall returns. While every season features a dozen shows that do better than The Last Ship but come nowhere near The Book of Mormon, there's no Dow Jones Broadway average to tally up those losses and gains. SUGAR DADDY Broadway shows are expensive, so they need benefactors with deep pockets. A play can cost a few million dollars to put on, while a typical musical costs $7 million to $15 million. Spider-Man: Turn Off the Dark, which ran from 2011 to 2014, cost $75 million. Those are the initial capitalizations, or the costs to get shows up and running; regular weekly expenses are additional. With all that money to raise, producers generally won't bother with investments of less than $25,000. There are also legal reasons to avoid thousandaires. The government tries to protect financially unsophisticated Americans from especially risky investments. The law makes it difficult for shows to raise money from investors who aren't “accredited,” or with a net worth of more than $1 million or a yearly income of more than $200,000, or $300,000 for couples. The fabulously wealthy get extra perks. Fork over $250,000 and up, and the lead producer may agree to share credit as producer with you. If the show wins a Tony, you can be part of a small crowd of other “producers” who go on stage to claim it. Last year's winner for best musical, A Gentleman's Guide to Love and Murder, had more than 30 producers. You'll also get to attend some meetings and give advice. They might even listen to you. WE'RE IN THE MONEY Predicting the next hit is impossible. There's conventional wisdom: Plays with big stars are the surest bets to break even, but their upside is limited. Once the star goes back to Hollywood, the show may close. A musical is riskier than a play, but a hit can produce profits for decades. That said, a long-running show isn't always profitable. Sometimes the theater is only full enough to cover the show's expenses — not enough to pay investors any profits. Until a show recoups, investors get all the show's profits. Afterward, they split them 50/50 with the producer. Sometimes the goal is to keep the show open until the Tony Awards. A big award or an impressive musical number staged on the live broadcast can boost sales. The Tonys can also whet the appetites of theater fans in the rest of the U.S. While a national tour is a more reliable moneymaker, it usually requires investors to write an additional check. POPULAR For some investors, the profits on a show are pretty much an afterthought. Maybe they just love the theater and are happy to fund good shows that are likely to lose money. Producer Ken Davenport proudly notes that his 2013 production of Macbeth, a one-man version with Alan Cumming, "got 91% of all our money back" — in other words, lost investors 9%. "A lot of people saw that as a win for a very risky show," he says. Others love meeting Broadway legends, getting dressed up for opening night, or having access to the best seats in the house for friends and business associates. Most of all, becoming a Broadway investor can be a fantastic way to network. “You are meeting the crème de la crème of New York City,” Mr. Davenport says. “People invest in order to get into those circles.” Broadway producers may use the Internet for all sorts of things, but rarely for raising money. Shows are financed pretty much the same way they were 50 years ago, face-to-face and on the phone. “This is a business 100% about relationships,” says Rich Affannato, who has produced The Visit and Peter and the Starcatcher. Unless you know somebody who knows somebody, you probably can't invest in the next hot musical. An exception is this season's musical revival of On the Town. Producers Howard and Janet Kagan raised about $500,000 of the $8.5 million cost through the crowdfunding platform Wealthforge. The Kagans could also advertise the investment opportunity; until a 2013 rule change, such ads were illegal. “We brought in a lot of investors that never would have invested,” Howard Kagan says. “They didn't have to know someone who knew me.” IF I WERE A RICH MAN If you're not wealthy, Broadway generally can't and won't take your money. On the Town was open only to accredited investors. A 2011 revival of Godspell was open to non-accredited investors for as little as $1,000, but the experiment hasn't been repeated. It created a “marketing army” of Godspell lovers, producer Ken Davenport says, but federal and state regulations were a huge hassle. A 2012 federal law called the JOBS Act (which prompted the 2013 rule change) may be the best hope for middle-class Broadway lovers who think they can spot the next Fiddler on the Roof. The law is designed to make it easier to fund private businesses. That might help more shows get financing both on and off Broadway, entertainment lawyers say. The law has yet to be fully implemented by the Securities and Exchange Commission. Accounting rules could still make crowdfunding a hassle, and limits on how much can be raised could make it useful for cheap Broadway plays and off-Broadway shows but not for expensive musicals. “Crowdfunding works so well for projects that might not otherwise get funded,” Mr. Affannato says. “I'm not sure if it's a great idea for commercial theater.” I AM CHANGING There's no business like show business. That will always be true. But some of Broadway's archaic methods are changing. The main reason: More expensive shows require a steady stream of new investors. There's the new Broadway securities broker Opening Night Capital, for example. Founder Ruben Brache promises to connect investors to the theater and spread their risk over several shows. “People will be able to have Broadway in their portfolios,” he says. And while the industry waits for the full implementation of Internet crowdfunding through the JOBS Act, investors are already forming clubs that let them put up less money and invest in more shows. For now, most producers rely on the old tricks to raise money: glamorous stars, a great piece of theater and old-fashioned showmanship.