Now the local bubble has burst, Korean funds are starting to invest in foreign films. JEAN NOH reports

Inthe late 1990s, South Korea's government came to the realisation thatit takes a comparatively vast number of Hyundai car exports to equalthe profits of a single Hollywood hit. Economic motivation to createemployment, coupled with a cultural policy to develop national cinema,spurred the government to create several film funds through the Smalland Medium Business Corporation (SBC) and the Korean Film Council(KOFIC).

At this time, marked by watershed local hits such as Shiri in 1999 and JSAa year later, the two government-funded organisations started to putseed money into funds created with venture capitalists (VCs) attractedto the up-and-coming film industry.

Film companies includingCJ Entertainment and later Showbox Mediaplex also became involved withthe aim of limiting their risk on productions for their owndistribution slates.

Starting in 1999, a series of five-yearfunds ran with an estimated $300m. By the time the first wave of thesefunds started closing and evaluating accounts in 2004 and 2005, theMinistry of Finance had decided to turn the SBC's mandate over to theKorea Venture Investment Corporation (KVIC), which was much moreparticular about profitability.

At the same time but unrelatedto this, manufacturing companies looking for stock-market valuationentered into mergers and acquisitions with entertainment companies,resulting in a series of KOSDAQ backdoor listings.

Telecommunicationsleaders Korea Telecom (KT) and SK Telecom (SKT), which later absorbedHanaro Telecom, also started to buy up shares in entertainmentcompanies such as Sidus FNH and iHQ.

With plenty of capital andshareholders eager to see action, a host of ill-thought-out productionswere greenlit, creating a glut of local films that left audiencesunmoved in 2006 and 2007.

'Towards the end of 2005, you couldtell from the overall quality of the projects that came up forinvestment that the industry was looking at a downturn,' says Shin MoonChul, investment analyst at Wooridul Venture Capital.

'At onepoint, there were 14 or 15 different VCs running film funds, but in2005-06 that number went down to only four or five. VCs get a fee ofabout 2.5% for putting together and running a fund, but that's notenough to offset the risks and burden involved.'

'Before,financiers like Korea Development Bank and Industrial Bank of Koreawould invest in film funds, too,' says Lee Se Hyong, a partner atCenturion Technology Investment Corporation.

'Lack ofprofitability and transparency in accounting are problems. Now almostonly strategic partners - like distributors and broadcasters interestedin owning different rights - are left.

'The film industry needsto develop an investment analysis system, and overhaul theprofit-sharing structure for film funds to be attractive tonon-strategic partners,' he adds.

But overall, lack of capitalis not an issue, especially for conglomerate-backed companies such asCJ or Showbox which work with affiliates and/or partners in cable,internet and exhibition.

The number of VCs running funds hasgone back up to about 10 or 11. New funds such as Asian CulturalTechnology Investment's (ACTI) $15m content fund, which covers films,online games, TV dramas, animation and performances, and the $4m SovicDiversity Fund for low-budget arthouse films, have continued to launchthis year and last.

But after some expensive lessons in trial and error, fund managers have become more cautious.

'It'snot as if there are so many good scripts but no money,' says UnkyoungPark, Showbox's general manager of investment planning.

On theother hand, producer/investors still like to hedge their risks, andhave cash on hand for a revolving slate of productions - hence the caseof My Boss, My Teacher (an unexpected gangster comedy hit in 2006), offering investment options up until two weeks before its release.

Meanwhile,leading rival telecoms companies KT and SKT have been investing infunds, such as the $40m global new-media fund KT launched with SoftbankVentures this April, with the aim of picking up exclusive IPTV rights.

(However,CJ has recently managed to strike fund deals with non-exclusive IPTVrights with both companies. This has led to some concern the telecomgiants might lose interest in investing in funds when they do not needto compete with each other for exclusivity.)

Alternatively,funds are finding a new focus on foreign films. 'Compared with localfilms, you won't make a blockbuster profit but neither will you see ahuge loss, and returns are quicker,' explains Kim Tae Hoon, COO ofDaisy Entertainment, an importer/distributor which has set up a $10mcontent fund with Hanhwa Venture Capital.

The fund aims toinvest annually in a minimum of 10 films. Analysts will evaluatepotential investments - usually foreign-film acquisitions for whichimporters have already paid royalties.

Wooridul Venture Capitalhas teamed with KD Media to put together an $8m fund with a specialinterest in foreign films - mostly imports, and possibly also equityinvestments in safe bets with high transparency.

The conglomerates are also moving into the game. Showbox recently bought into John Woo's Red Cliff, and CJ put $1.5m into Warner Bros' August Rushfor equity and local distribution rights. The $30m romantic fantasy,starring Jonathan Rhys Meyers, took $7m at the Korean box office alone.

'The axis of the market is moving away from just trying to addto your local slate or produce for shareholders and towards investingin good, solid content,' says Park.