Listen to this article
It was an investment opportunity with a difference. Nearly 20 years ago, Nick Archer spotted a chance to be involved in funding and filming a low-budget movie.
Intrigued, the private equity executive injected £1,000 in the film project called Out of Depth that set out to tell the story of a “poor boy made good”. He soon found himself on camera, mingling with actors in a pub scene exploring the life of an East End gangster.
“That very first experience was magical,” he says. “It was so far removed from my day-to-day job in financial services. It was a bit of an escape.”
The film had a premiere in London’s West End but was not a financial success. Even so, Mr Archer was hooked. Since then, he has been an enthusiastic backer of the arts — helping two more films and about 80 plays get off the ground — as a sideline to his other personal investment activities in the financial markets.
The experience has been a rollercoaster ride with many losses and a few big hits. One of the successes was Billy Elliot, a stage musical about a coal miner’s son who becomes a professional ballet dancer. As well as getting his capital back, he went on to almost triple his stake over the 10-year run.
Investing in film and theatre is high risk, he says. When he backs a production he does so without any expectation of making money. Even so, he detects some encouraging trends. “Audiences have picked up. I like to think it’s slightly more profitable for us than it used to be.”
He is not alone in being upbeat about the sector. “The UK’s creative economy stands tall on the world stage,” said James Murdoch, chief executive of 21st Century Fox, in February. Last year, a record £1.6bn was spent on film production in the UK, up 13 per cent on the previous year. West End box-office receipts have more than doubled since the turn of the century. Overall, the creative industries is one of the fastest-growing sectors of the economy.
Yet for all its glitz and glamour, it is often difficult for investors to make money in the entertainment sector. Those considering getting involved need to ask some hard questions. How much can they afford to lose? How best to judge the risks and minimise or spread them? How far should tax breaks influence their investment decisions? How can outsiders get a slice of the most promising projects?
The smell of the greasepaint
Opportunities in the arts range widely but investors often specialise. Sean Egan, a consultant, detects what he describes as “a distinct cultural difference” between investors in theatre and film. In his view, people who put money into the film industry tend to be “investment savvy”, while theatre investors are driven by the “adrenalin kick” and “the whole first night experience”.
Joseph Smith, producer at Elton John’s theatre company Rocket Stage and chief executive of Stage One, a charity that trains producers, agrees about the motivation of theatre investors. “I have never, ever, raised money from anyone who doesn’t have an interest or a passion for theatre. If someone is purely looking at it on a numbers game, most producers will tell you it will be very hard to get them over the line.”
He argues there is scope to be excited by the potential for financial rewards, citing the spectacular returns enjoyed by investors in long-running shows such as Phantom of the Opera, Cats and Les Misérables, that paid out, year after year. “It’s almost like your own endowment.”
But he says a big reason — apart from “passion” — why investors get involved is access. “It is not just shaking the lead actor’s hand, it means coming to the show, it’s being able to access tickets to the show for friends and family . . . And the first night party, that’s always a big part of it.”
Film investors can also get a thrill from being part of a creative project. Some are offered film set visits, invitations to pre-release viewings of films and tickets to the premiere and parties with the stars. But many choose instead to view it as a purely financial decision, relying on the advice of their financial advisers. Tax breaks also play a big role in film investments, increasing their appeal to wealthy taxpayers who may not be particularly interested in the arts.
That appeal is not what it used to be. An earlier generation of tax breaks in the film industry have left a toxic legacy. Some schemes that were designed to generate massive tax losses with minimal risk have instead resulted in big tax bills — and even financial ruin — for investors after HM Revenue & Customs (HMRC) successfully branded them as tax avoidance schemes.
Some investors who have been served with unexpected tax bills have ruled out ever investing in films again. When Martin Sherwood, a partner of Enterprise Investment Partners, who has been involved in film financing since the late 1990s rings up an adviser about his media funds, he says the reaction can be “Media! I am not doing that again”.
The right kind of tax break
The tax breaks currently on offer are very different from those used in the film partnerships in the first decade of the century. The film tax relief introduced in 2007 gives a generous cash rebate to the company making the film. In addition, many film production companies have in recent years taken advantage of the Enterprise Investment Scheme (EIS), which offers investors 30 per cent income tax relief.
The combination, says Mr Sherwood, “is quite a decent cocktail”. The downside of investment in schemes can be managed by agreeing presales to distributors and investing in a portfolio of projects. Risks are further reduced by the practice of securing an upfront clearance from HMRC to assure investors that EIS relief is available.
That said, many advisers are wary of film investments because of the complexity of the financing model and the risks of distributors going bust. Even apparently low-risk schemes that cite “preservation of capital” as their objective can go wrong, such as an Octopus fund investing in film rights companies which left investors with heavy losses in 2015.
Film and media is one of the most popular sectors for EIS as well as for the junior version, the Seed Enterprise Investment Scheme, according to Wealth Club, an advisory firm researching tax-efficient investment ideas. But Ben Yearsley, a founder, says there are limits to how far film projects can minimise the risk. “The more schemes look and feel guaranteed the more likely HMRC will crack down on them.”
Martin Smith, a special adviser to Ingenious, the largest independent film investment business in the UK, says it is now getting more involved at an early stage in film development, partly to boost potential returns and partly in response to rules introduced in 2015 that require EIS funds to be used for the “growth and development” of a business.
He says that EIS has played a vital role in sustaining the independent film industry after other sources of finance dried up, pointing to a string of high-profile films supported by EIS money including Pride, Mr Turner, Suffragette, Testament of Youth, Selma, Carol, A United Kingdom and Viceroy’s House.
Even though money is flooding into UK film production from the big US studios and companies such as HBO, Netflix and Amazon, independent producers are finding that money is tight. He says: “Any film producer will tell you now that things are very difficult in terms of finding finance. It is hard to see how some of our films would have been completed without the EIS.”
EIS schemes only play a fleeting role in the theatre business, Edward Snape, who heads Fiery Angel, a production company behind hits such as The 39 Steps, has twice used the scheme. But he says the requirement for active trading for at least three years makes it unsuitable for many theatrical ventures. Most investors do not want to wait for their money. Indeed the speed with which investors in a successful production can bank their winnings is a big part of the appeal of investing in the theatre. “It is a bit like betting on a horse,” he says.
From a tax perspective, investing in theatre is about to become slightly less attractive. From April, HMRC is withdrawing a concession allowing investors to offset losses against profits made on other theatrical investments. That means that the only relief available for theatrical losses will be against capital gains.
It is a relatively minor change and its impact is likely to be outweighed by the benefits of generous new tax breaks for theatre productions introduced in 2014, which improve the chance that investors will see a return. Even so, the tax treatment of losses may be of particular interest to theatrical investors because of the frequency with which they are likely to be forced to write off their investments.
“The odds are stacked against you,” says Neil Adleman, head of the theatre group at solicitors Harbottle & Lewis. His “finger in the air” assessment is that only a third of productions in the West End will earn their money back. “It’s very high risk. It’s a high stakes game.”
Where the money goes
The cost of putting on a show has risen in recent years. A West End musical will be “capitalised” — the total costs and contingencies — at between £2m and £6m, while a straight play might cost up to £500,000. Marketing can account for as much as a quarter of the costs.
If successful, the profits after “recoupment” — the point at which the pre-production costs are paid off — are split 60/40 between the investors and the producers. If unsuccessful, investors will lose part or all of their money although their exposure is limited to their stake. That is likely to be at least £10,000 for a musical or £5,000 for a play.
Investment opportunities are limited to “sophisticated” investors and those with an annual income of more than £100,000 and net assets — excluding their home — of £250,000 or more. The restrictions are designed to avoid the chances of a real-life version of The Producers”, the 1968 satire in which a washed-up producer romances elderly ladies in exchange for money for his next show.
Mr Smith says there is an “unwritten moral code” that producers take their responsibilities to investors seriously. “If you play fast and loose you are not going to have a career in this business. It probably is one of the last big high-risk investments where there isn’t regulation.”
Making your stage debut
So how do would-be investors with no contacts get involved? Matthew Byam Shaw, one of the founders of Playful Productions, one of the largest independent production companies, says it has traditionally been viewed as “quite a dark and inaccessible art”. One investor introduced himself by sidling up to him in the stalls; another he met by chance on a flight delayed out of Heathrow.
Now producers have their own websites, making it much easier to get in touch. Mr Byam Shaw says that, despite his attachment to existing investors, he is always interested in the prospect of building new relationships. He says he likes to start by offering them “a small piece of something good”. He says it is best not to start by going in “wildly big”. “We don’t want to say goodbye to someone after a show. Building a relationship takes a long time.”
But while it may have become easier to break into theatrical investing, would-be angels still have to decide who to back. Mr Snape advises people to consider producers with plenty of experience and “whacks over the head”. “Your hit rate is likely to improve,” he says.
Luke Johnson, a former chairman of Channel 4 television and a director of two theatre production partnerships, Playful Productions and Fiery Dragons, says his advice is to work with “a tiny number of very good producers”.
“When you have found a few producers you can trust, back everything they do,” he says. “That way, even when a show is oversubscribed you get your share.”
When one of his favoured impresarios emails him about a show he decides on the spot. Investors, he says, should be prepared to be prompt, reliable and “grown up” about losses.
He compares investing in theatre to venture capital in that “the winner takes all” but warns that “unless you are very lucky or very clever, you are unlikely to make outstanding returns”.
Overall, his returns have been positive but modest. “Bluntly, the returns are not terrific compared with investing in the stock market,” he says. But investing in shares does not leave you feeling that you are part of a creative process. “I do it for fun and to support the arts,” he says. “You have to look at it as more than just money.”
£1m for The Wind in the Willows
A rare example of a regulator becoming involved in an offer document occurred in 2013 when producer Jamie Hendry used a version of crowdfunding to part-fund his musical Wind in the Willows — a version written by Downton Abbey creator and writer Julian Fellowes.
He pitched to ordinary investors — who could put up stakes of as little as £1,000 — in an offer approved by the Financial Conduct Authority. The response was “overwhelming”, he says, raising £1m in five weeks. It also created a cadre of enthusiastic ambassadors for the show, which opens in the West End at the London Palladium in June.
The initiative was an attempt to broaden the pool of potential investors. He wanted to dispel what he describes as a “myth” that investment opportunities are limited to a very closed circle of longstanding investors, whose names are closely guarded in a secret “black book”.
He is concerned that theatre investors are skewed to an older demographic. Part of his mission is to try and convince young professionals who regularly go to the theatre very often to support it. “There is a lot more work to do to attract younger investors but we have started.”
Other producers might admit to guarding their own “black books” jealously, but are also mindful of the case for broadening the investor base. Mr Smith says he would love to give a 20-minute lecture on theatre investment to a roomful of bankers. He thinks “it’s a bit nuts, really” that the onus is on investors to find out about opportunities in the industry.