The Risks, Rewards and Realities of Investing in Theater

By most accounts, investing in the theater is high on the risk scale, but there are opportunities to make a respectable return on your investment. And there's always the perks.

The Producers
Greg Wood | AFP | Getty Images
The Producers

“It’s a feast or famine kind of business,” explains Steven Baruch, who's experienced more feast than famine in his 25 years as a Broadway producer.

Baruch, who ran a real estate company for two decades, got his start in the theater in the mid 80s when he and a business partner stumbled upon two little-known magicians in Los Angeles—Penn and Teller.

“We were completely entranced by them,” says Baruch, who brought their act to New York, joining forces with producer Richard Frankel.

“We had lots of access to money, but didn’t know anything about producing, and he knew a lot about producing, so we formed an alliance and produced "Penn & Teller." Low and behold it became a huge hit and motivated us to try again,” he says.

Baruch and his partners have since produced 75 shows—including Broadway hits, such as "The Producers," "Gypsy" and "Hairspray"—and boast better long-term results than the US stock market.

According to their calculations, someone who invested in every one of their shows since 1985 would have netted an average annual internal rate of return of 27.11 percent though Dec. 31, 2009. That compares to a 7.29-percent return for the S&P 500 and a 8.57-percent one for the Dow Industrials.

“The returns have been excellent,” according to attorney Robert Feder, who estimates he has invested in 40 to 50 of Baruch’s shows.

Even though he invested in some of Baruch's highest grossing productions, including "The Producers", he says the most successful one for him financially was the Pulitzer Prize-nominated play "Love Letters."

“I would have to guess that we tripled our money on that show."

The Risks

Baruch’s success aside, the theater tends to be more famine than feast.

“A majority of shows fail. It’s as simple as that,” acknowledges Baruch. “The risk is that you’re going to lose all your money, and therefore we don’t really want people to invest unless they can afford to lose all their money.”

Only one out of five Broadway productions recoups its investment, according to Charlotte St. Martin, executive director of theBroadway League, the industry's trade organization. She says history has proven that figure true for about 60 years.

How It Works

The amount invested in a Broadway or off-Broadway production can range anywhere from just a few thousand dollars up to $500,000, according to Broadway producer David Binder, whose credits include "Hedwig and the Angry Inch"and the recent revival of "A Raisin in the Sun" with Sean Combs. He estimates the average investment is in the $20,000-to-$25,000 range.

“It really depends on the show, what the demand is, what the interest is from investors, the circumstances of the producer and how much they need that money,” explains Binder. “If a show is hard to raise money for, a producer will offer to take money in very, very small amounts. It could be a few thousand dollars.”

Binder has his own success story about investing in a show that many seasoned investors passed on. When"Rent"was about to open on Broadway in 1996, Binder, in his 20s at the time, invested $5,000 of his own money. The show went on to gross more than $274 million in its 12-year run on Broadway.

“I have made many, many, many times my investment on 'Rent'". he says. "In fact, for many years it paid my rent."

Original investors in "Rent" made back 675 percent on their investments, according to John Corker, the show's general manager. They were also given the opportunity to invest their pro-rata share in the subsequent national tours, which everyone did.

“When the show’s a mega huge success on Broadway, to reinvest the same proportion of money in the subsequent tours is a no brainer at that point,” says Binder. (Slideshow: 15 Highest-Grossing Broadway Shows of All Time)

Generally, in order to invest in the theater, one must be considered an “accredited investor,” a government-defined term that means a person with income exceeding $200,000 in each of the two most recent years (or joint income with a spouse exceeding $300,000) or someone with a net worth, or joint net worth with a spouse, that exceeds $1 million.

“There’s a limit on how many investors of limited means you can have in a given show,” adds Baruch. “You’re allowed 35 so-called non-accredited investors, and everybody else needs to be accredited.”

Assuming there is positive cash flow, investors get back their full investment before profits are split with the producers. If the show has a low production cost, the initial investment could be paid back very quickly, but if there is a big cast and an elaborate set, even a successful could take a year to recoup the initial investment. After that, profits are split 50-50 between investors and producers.

"That’s the uniform format that’s evolved (in the United States) as being fair to everybody,” says Baruch.

Getting Started

For those who are looking to dip their toe into theater investing for the first time, Baruch’s number one recommendation is to “find the right people."

“Anybody you call is going to want your money and try to persuade you that their show is a sure fire hit, and so you have to do some digging about reputation and integrity and longevity,” he advised.

St. Martin recommended reaching out to theCommercial Theater Institute, which provides resources for aspiring theater producers and investors.

Binder recommends people have a “genuine interest” in the subject and pick production in their home city, so they can take part in the opening night and all of the other perks that go along with being a theater investor.

Aaron Tveit and Alice Ripley in Next to Normal
Aaron Tveit and Alice Ripley in Next to Normal

For Patrick Catullo, one of the producers of "Next to Normal", a Broadway musical that won three Tony Awards and the 2010 Pulitzer Prize, seeking out a project you are passionate about should be a priority.

“I like people to invest because they care about what they’re investing in,” he explains. “It’s not just some ambiguous stock that you don’t really understand. It’s more human than that, you see it on stage, you feel it, there’s an emotional involvement as well.”

Rewards Beyond Money

So, for some it is more than the profit motive.

“A lot of it has to do with the fun and the glamour, particularly with a Broadway production,” says Baruch.

Generally, investors are invited to the opening night performance and the parties that follow; get sent albums, posters and other souvenirs from the show; and have access to the producers’ house seats, which are not available to the public.

For others, it is a matter of passion.

“For a show like "Next to Normal", where everyone thought we were crazy in the middle of an economic recession to bring a rock musical about mental illness to Broadway, a lot of my investors on that show invested because they believed in it,” says Catullo.

Patrick Trettenero is one of them. He describes his investment in the show as more of a “labor of love” than a financial decision.

“I thought it deserved a shot, and I was willing to put my money on the line to make it happen, and frankly, I was glad for the opportunity to support it,” he explains, adding he knew the odds of making a profit were against him.

Trettenero has gotten back his initial investment in the show, but has not yet seen a profit.

“Any profit is totally gravy on this. To me, the Pulitzer Prize and three Tonys were the profit,” he added.