http://www.ftadviser.com/InvestmentAdviser/Investments/AssetClass/AlternativeInvestments/Features/article/20091130/e160a402-d5b6-11de-8eea-00144f2af8e8/Highlight-Film-funds–All-set-for-good-returns.jsp
- Story by: John Kenchington
From wine funds to art trusts, the weird and wonderful world of alternative investments is rarely afforded much time by the serious investor.
But there may just be one such asset class that is worth attention from investors looking for a diversifier with the opportunity to get decent returns – film.
One City investor who took the plunge into the world of film investment is James Swarbrick.
He started his career at stockbroker Teather & Greenwood, before moving to Smith & Williamson Investment Management in 2004 and then Aegis Capital Partners, whose sister group Prescience Film Finance offers equity funds that finance independent film productions.
Prescience currently operates a pair of funds called Omni Films, with a minimum investment of $10,000 (£6,300) to appeal to the higher end of the retail market.
“We probably invest roughly 20 per cent of a film’s budget, and you are looking to get that back at a 20 per cent premium,” says Mr Swarbrick. “That will be part of a slate of, say, six, seven or eight films we are involved in.”
The group has taken part in financing recent cinema releases including Dorian Gray and Harry Brown. While film funds generally target a return of 20 per cent per film production and some claim to achieve 30 per cent returns per film, Mr Swarbrick refused to comment on the returns generated by specific productions.
He says funds start reaping the benefits of their investment in film projects after roughly 18 months. After that, the funds can receive a regular income from the rights to each film. The manager spends a lot of time distinguishing between genuine film opportunities and flops-in-the-making.
“I’m not going to name-and-shame, but there tend to be a lot of people looking to make ‘worthy’ films but we are looking for genuine commercial opportunities,” he says.
The manager, who works under group founders Tim Smith and Paul Brett, rejects approximately 150 film concepts per year - bearing in mind that the company does not accept unsolicited pitches.
Producers have to first persuade an independent sales agent to produce a set of estimates. These will tell potential investors the cost of producing the film and how likely it is to succeed. The producers then have to sell their project to a preseller, who will take on commercially viable films and pitch them to distributors.
Distributors provide deposits for the film’s production, making sure that, not only is it produced, but it also gets distributed and viewed. Consequently, films that have already gathered support from distributors tend to be safer investments.
“We know all the good producers, so we know who is going to deliver,” Mr Swarbrick adds, reiterating: “They have to be commercially viable, and they have to be able to find other investors to make the film.”
Prescience also operates an enterprise investment scheme (EIS), which provides tax breaks for fledgling projects but operates in a similar way to its equity fund, Mr Swarbrick says, by also investing 20 per cent of the film’s budget yet benefiting from the compelling tax breaks for EISs.
EIS schemes offer income tax relief on smaller investments and Prescience is on the verge of launching an EIS with an investment threshold of $50,000.
Christopher Wicks, associate director of advisory firm Alexander Beard Group, says the EIS structure is one of the prime attractions for film investment.
Under the scheme investors can draw out a portion of the earnings and reinvest that lump sum in a film EIS. When the film project concludes, investors can then take out their earnings tax free.
An EIS allows a tax break of up to 20 per cent of the total initial investment in the scheme, which effectively means a basic-rate taxpayer who invests this way does so tax without a tax hit. EISs permit investments of up to £30,000.
Mr Wicks says: “Generally people invest in these just because they want their tax back. Whether you get any extra returns is largely irrelevant.”
However, he concurs that film investment does entail “some risks”, but says provided the scheme is investigated closely, these are minimised. For example, often the producers have sufficiently pre-sold a film to guarantee the end product will find a home - and the investors will reap the targeted rewards.
HM Revenue & Customs (HMRC) is also doing its due diligence: the adviser adds that HMRC has stepped up its focus on film EISs in recent months, now generally investigating each one to ensure the project is worthy of the scheme’s tax breaks. It is therefore critical that advisers and investors ensure the fund manager has secured EIS status before they invest a penny.
This caution is echoed by Martin Churchill, editor of taxefficientreview.com, a website specialising in Venture Trusts (VCTs) and EISs.
“No investor should look at this as a homogeneous sector. You have to look at exactly what you are getting into,” he says.
He also warns that investors can find themselves locked in a “recoupment waterfall”, where the senior investors in a film project get their money back first while others are left with their fingers crossed.
“The idea is there’s a river at the top, and you hope there’s a bit of a trickle left for you at the bottom,” says Mr Churchill. “It can be very difficult to work out where you stand in all this.”
Contrary to what might be expected, investment in film funds does not often allow you to participate in any runaway success a film might have at the box office, Mr Churchill says.
“The box office doesn’t feature in any of this. What they do is make a film and then worry about getting distributors to buy it. They [the distributors] get the box office [returns],” says Mr Churchill.
This shouldn’t worry investors too much; the box office tends to provide scant returns for distributors anyway, because roughly 70 per cent of takings are pocketed by the cinema group. Of the 30 per cent remaining, a high proportion goes toward marketing for the movie.
For investors content to consider offshore, unregulated investments - if but for a small portion of a well-diversified portfolio - Aegis Capital Partners runs a Cayman-domiciled, open-ended vehicle (the aptly-named Aegis Film fund), which Mr Swarbrick describes as more akin to a corporate bond fund.
He explains: “What investors are getting is asset-backed lending, but the asset tends to be a film,” he says. The vehicle provides financing for a film project, and when the project is complete, that financing (the capital investment) is returned with interest.
There is no exposure to whether the film is successful with distributors, as films are obliged to take out insurance bonds before going into production. Those insurance bonds pay out to cover the costs of production if the project fails to complete.
“The insurance bond ensures the producer makes the film on budget, on time,” says Mr Swarbrick. “And we also get our own independent auditors in as well.” He says the insurance bonds are underwritten by specialist companies such as Film Finances.
In addition, the types of independent ‘Brit flicks’ the fund invests in have an added bonus, Mr Swarbrick says.
Under a government incentive scheme from 2004, British film producers are able to claim back 20 per cent of a film’s production costs once it is completed and ready to be sent to distributors. The caveat is that the film must cost less than £20m, therefore able to claim a maximum tax credit of £4m.
The measure is designed to prop up the British film industry to create jobs and as a cultural investment, but the 20 per cent payout provides an added kick to the fund’s absolute returns, says Mr Swarbrick.
The Aegis Film fund will launch a new share class by the end of the month for retail and institutional investors – although the minimum investment will be a relatively steep $100,000. It will aim to deliver at least 10 per cent a year, although Mr Swarbrick admits his investors will be “disappointed if we don’t do at least 15 per cent”. The fund can also provide funding during a film’s production, and it takes security over assets and income streams of the film to further protect its initial outlay.
Since the fund launched in March this year, it has delivered gross returns of 9.2 per cent to September 30.
For the less adventurous investor who lacks the necessary commitment to due diligence, is unperturbed by EIS tax breaks and who doesn’t mind shunning trips to meet the actors, perhaps the most mainstream way to access the film industry is the mainstream stock market. Highly liquid, plain vanilla shares of UK film production giant Pinewood Shepperton can be snapped up for a mere £1.33 each on the London Stock Exchange.
John Kenchington is senior reporter at Investment Adviser
