City & Business: Striking the right note

FORGET buying a piece of David Bowie or Rod Stewart. The deals through which the two rock stars sold future earnings from their music to investors in the form of asset-backed notes were cute. But they were crude.

Last week Dorian Klein, a London-based managing director of Merrill Lynch raised the game in the financing of the creative industries. Whereas Bowie and Stewart notes were backed by the earnings of individual artists, Merrill Lynch devised a way for small, specialist creative companies to tap the capital markets.

He and Merrill were talking to Cecchi Gori, the Italian film company that made Il Postino, about financing its purchase of rights to sporting events in Italy. Out of these talks emerged a whole new way for companies in the creative industries to raise money cheaply.

Cecchi Gori is family owned. It is growing fast. Besides making movies, it has acquired the rights to show over a thousand Hollywood films in Italy. Ordinarily, Cecchi Gori would go to its bank if it needed money. Klein hit on the idea of taking future revenues from the company's film library and selling them to investors in the form of notes secured against those future revenues. Then he separated the credit risk on those revenue streams from the credit risk of the company Cecchi Gori itself. "Even if Cecchi Gori were to go bankrupt, the revenues flowing to investors would be protected," Klein says.

Cecchi Gori thus got access to the global capital market traditionally available only to giant, publicly held companies. It raised pounds 170m through the issuance of notes listed on the Luxembourg exchange maturing in seven years.

Merrill, and other City houses looking at the financing of the creative industries are now taking this pioneering form of creative businesses forward. For one thing, they are at "warehousing" the future work of a collectives of artists, not just single performers. For another, they are looking at ways to raise money against intellectual property rights.

This is good news for indie music companies, film producers, computer game inventors, and small publishing houses rich in ideas and poor in everything else. Such companies traditionally scrape together the capital they need by selling their intellectual property rights to media and entertainment multinationals. They thus in effect turn into sub-contractors for the giants, with no hope of growing through retained earnings.

Now, through creativity of another type - financial engineering - alternative sources of capital which will empower them, allow them to keep control of their destinies, may be opening up.