Film funds offer a possible route for investors

Recent flops underline the fact that there are still risks
Opulent award ceremonies might suggest that film backers always hit the jackpot

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The glamour and glitz of the film industry with its blockbusters, opulent award ceremonies and legions of celebrities might suggest that film backers always hit the jackpot.

But while this might be the case for some investors, the reality for many is far removed from this dream scenario. It can be high risk — many British films, for example, do not even make it to the US box office, and miss out on the world’s largest movie market as a result.

“Film has a reputation of being highly risky and only a very small number become blockbusters, so the stats are against the investor,” says Martin Sherwood, a partner at Enterprise Investment Partners. “A lot of UK movies do not make much, if any, money. Only occasionally one or two do.”

But there are a number of British films that have achieved accolades and financial success, most crucially in the US, including The King’s Speech, which was directed by Tom Hooper and starred Colin Firth, and Slumdog Millionaire, directed by Danny Boyle.

Film industry analysts say both of these films were in part reliant on funding from individuals, showing that it is possible for private investors to win big. They also say that there are a number of ways in which backers can mitigate risks if they wish to try to safeguard capital when investing in a film.

“Only invest with experienced producers and financiers,” says Martin Smith, founder of West Bridge Consulting, an advisory firm specialising in arts, media and entertainment.

But how can an investor gain access to such experience? One answer could be to invest in films through film funds, a number of which have emerged over the past few years.

Shelley Media, for example, which requires a minimum investment of £10,000, has delivered an average annual return of 11.5 per cent since launch five years ago. The Enterprise Investment Scheme (EIS) fund has raised a total of £200m and has been involved in successful British films including Mr Turner and Testament of Youth, for example.

However, there have been well-publicised flops. In June, it was reported that an Octopus Investments EIS fund in the UK had almost halved in value since it first started making allocations in 2011. It had invested in 10 companies, nine of which were film rights companies that all made losses.

About 170 people had put at least £50,000 each into the Octopus EIS 2 fund, which raised £18m. By June they had lost nearly £8m.

Meanwhile, new funds are preparing to come to market. Ingenious Investments, which provides access to alternative asset classes from media to clean energy, is set to launch a fund called Greenlight Media, pending regulatory approval. It will target higher returns for investors with a greater risk appetite than other products in its range.

One way for funds and their investors to be more confident about the risks involved in chasing returns from investing in film is to ensure that some of the movie’s revenues are locked in before it is even made. Nik Bower, co-founder of Riverstone Pictures, a film production and financing company, says professional investors often “look for films that mitigate production risk through pre-sales”.

Pre-sales involve agreeing contracts with distributors, often based on the script and the cast, while a film is in development. The buying and selling of rights often takes place at important film festivals. Such agreements allow a loan to be taken out against the pre-sales deal to help fund the film.

Mr Bower says investors should also look out for “strong genre and cast”.

Professional investors would also be wise to spread their risks by backing a slate of several films rather than betting everything on a single title that may flop.

Individual investors must also be aware of their position in the capital structure of film financing, in order to help determine the level of risk they are taking on. Taking a stake in a film through equity entails a higher level of risk than taking on a debt position where lending is secured against income from pre-sales, for example.

“Single picture financing does exist, and will always, but should only ever be contemplated by investors who really know the business and who are willing to take on a very high level of risk, because most independent pictures lose money on a box office or equity return basis,” says Mr Smith.

In terms of recouping investment, tax plays a huge role. One of the main ways for UK-based individuals who are outside the industry but wish to gain access to film is through enterprise investment schemes. These are structured to provide 30 per cent upfront income tax relief, if the investment is held for three years.

“For every pound put in, you get 30p back through income tax relief,” says Mr Sherwood. “EIS is the main route.”

Investors can also indirectly benefit from the film production tax credit. In the UK, for example, this system provides filmmakers with 20 per cent of costs back as a rebate from the government.

“Rebates vary around the world,” says Mr Bower. “Always look for where you can make your film that creatively works but also maximises those subsidies.”

He adds: “If we’re making a film or funding a film, we look to tax credit as a source of recoupment.”

In spite of the inherent risks, there are steps investors can take to avoid the worst. However, even if they do place their money with professional managers running film funds, it would still pay for them to undertake their own due diligence. In spite of their potential artistic merits, many films might never even see the light of day — let alone achieve Hollywood-style rewards and recognition.

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