Investing in film offers attractive tax breaks – but hits are few and far between, and big profits are even rarer. Tim Dams looks at how to maximise your chances of making your money back.
The Oscar season is over and the winners are by now proudly displaying their golden statuettes on their mantlepieces. Many of the nominated films benefited from a huge boost from the coverage received during the awards season. Oscar winner The Shape of Water, for example, saw its box office takings rise by 65% to £111m in the weeks after being nominated.
Meanwhile, the two highest-grossing nominees – World War II drama Dunkirk and horror movie Get Out – rang up $525m and $255m respectively. And Hollywood has been marvelling at the huge success of Black Panther, which has taken an astonishing $1.2bn-plus at the global box office since mid-February. In short, film can be big business – but can you make money out of it as an investor?
It’s possible. But let’s be very clear upfront – for the unwary and inexperienced investor, the movie business is a very easy place to lose money. Many seasoned investors shun the film industry entirely. As far as they are concerned, many of those who do invest in film are more interested in being associated with the glamour of the movies, rather than making cold-hearted, sensible investment decisions.
The industry has also had terrible press in recent years, with news stories about star footballers and City professionals facing large tax bills, and even financial ruin, after investing in controversial film schemes that HM Revenue & Customs (HMRC) argues were merely tax-avoidance vehicles. And even those who work in the film industry warn that investors need to take great care.
The industry has a poor reputation for transparency and openness; it’s home to many unscrupulous characters (Harvey Weinstein being just one particularly egregious example); and very few film projects make it into production, let alone go on to make a profit. “It’s a glamorous business, and people are sold on the glamour,” says one experienced producer. “But the likelihood is that they will lose money.”
Of course, you could make strong returns if a film is one of the fortunate few to become a box-office hit. But the headline box-office takings bear little relation to the profits an investor might eventually make, because so many participants take a cut of a film’s revenues. For example, cinemas keep anything from 50%-70% of ticket sales. Then there are the hefty advertising costs – a British film with a production budget of £10m-plus would typically spend about £2m on advertising, according to the British Film Institute (BFI). On top of that, there’s the distributor and sales agents fees, plus VAT to pay too.
A rule of thumb in the industry is that a film has to make about twice its budget at the global box office before it is likely to have made a profit. Any cinema release itself is usually a loss leader. Films tend to make their profits further down the line through sales to television and home entertainment (DVD and video on demand, for example).
How to invest
After all that, it perhaps hardly needs to be said, but we’ll repeat it just in case – the film industry should only be considered by investors who are comfortable with high levels of risk. That said, if you are happy to take the risks, it’s not a total “no-go” area – there is a case to be made for investing in film production. The industry itself has enjoyed a long period of growth.
The UK box office grew by 3.7% to £1.38bn in 2017, according to the British Film Institute, while a record £1.9bn was spent on film production in the UK. Upcoming Hollywood movies including Ron Howard’s Solo: A Star Wars Story, Guy Ritchie’s Aladdin and David Yates’ Fantastic Beasts sequel The Crimes of Grindelwald were all made in the UK last year, alongside independent British features such as Mike Leigh’s Peterloo and Idris Elba’s Yardie.
Neil Forster, the chief executive of Ingenious, which specialises in investing in the media industries, says there are five good “macro” reasons to invest in film. First, film has the potential to deliver venture-capital-style returns – success stories might be few and far between, but when a film does hit, it hits big. Second, films have a “long tail” of income and successful ones can play for years, particularly movie franchises.
Third, film isn’t correlated to the performance of stock-markets, so investing in the industry can help an investor to diversify their portfolio. Fourth, companies like Netflix and Amazon have become substantial acquirers of films and TV series, driving up demand for world-class content. Finally, Forster notes that the UK is a global leader in film, and that onscreen and offscreen British talent is in demand throughout the world.
It’s not easy, however, for investors to get involved in the film industry unless they have personal relationships within the business. And it is also difficult for producers to locate individuals who want to invest in film. Certainly, Hollywood movies are really only accessible for the mega-rich, given their big budgets and complex financing needs.
The tax-efficient route into the movies
Currently, the most effective way for most private investors to invest is through film funds, which are structured as Enterprise Investment Schemes (EIS). The EIS was specifically designed to encourage people to invest in shares of small, unlisted but high-risk companies – such as those that produce independent British films. To compensate for the potential downsides, investors benefit from a number of tax advantages. For example, they can claim 30% income-tax relief and benefit from capital-gains and inheritance-tax reliefs. These generous tax reliefs can also act as a partial safety net if and when films don’t perform as expected.
A small number of firms specialise in structuring EIS vehicles that invest in film, including Ingenious, Enterprise Investment Partners, Goldfinch Studios and Motion Picture Capital. Ingenious’s EIS fund Shelley Media, for example, has invested in a slate of British independent films. Shelley Media has backed Oscar-nominated features such as Brooklyn and Carol, and claims to have raised more than £350m since its launch in 2010.
Its prospectus says it targets an average annual tax-free return to investors of between 7% and 16%. But it’s not cheap – it comes with an upfront fee of 3.5%, an annual fee of 1.5% plus a performance fee. Ingenious also runs the Greenlight Media EIS fund, which gets involved earlier in the production process, so takes a slightly higher risk with investments. Its target returns therefore fall in a wider range, set between 2.4% and 30% a year.
Enterprise Investment Partners, meanwhile, manages the Hindsight Media Fund, which invests in a portfolio of film, television and video-game companies. The team running Hindsight has funded projects such as The King’s Speech and TV drama Wolf Hall. With a typical minimum investment of £10,000, these funds tend to attract high-net-worth individuals from the so-called “mass-affluent” market who invest partly to access the tax reliefs. They are also only suitable for those prepared to invest over a medium-term time frame. Investors have to hold an EIS for a minimum of three years to get the all-important tax reliefs, and should be prepared to invest for up to five years in a film fund.
Most investors get involved in EIS film funds via an independent financial adviser (IFA), who will advise on the suitability of the investment – although as the unpleasant experience of all those footballers and other celebrities demonstrates, you really need to be on top of the small print yourself – make sure your IFA goes through the details exhaustively with you, and if there’s anything you are unsure of, ask the questions before you invest.
The crackdown on film investment schemes
EIS rules regarding film investment have recently changed with the passing of the Finance Act 2018, which received Royal Assent on 15 March. HMRC took issue with a perceived lack of risk for investors in some schemes. These sought to offer guaranteed returns (which is against the spirit of the EIS), usually by investing only in films against an upfront production tax credit, and that had locked in a certain level of pre-sales to international territories.
From now on, investment in EIS film funds that are based on a capital-preservation structure will no longer be allowed. EIS investment into film will continue, but the structure of the funds will have to change. At the point of investment, there will have to be significant risk to capital. The upside of this increased risk element is that the funds will likely have to invest earlier in a film’s life cycle – which gives the potential for higher returns for investors.
Ingenious says it fully endorses the changes and has supported the consultation process with the government. Its two dedicated film funds, Shelley Media and Greenlight Media, have recently closed to new investment. But it will launch at least two new film funds over the next three months. Ingenious can’t say what their precise structures might be because it is still waiting for revised EIS guidance notes from HMRC following the recent consultation.
Enterprise Investment Partners has also closed its Hindsight Media fund to new investment, but says it is working on a new fund. “The structures are going to be higher risk, but quite probably higher return as well,” says Martin Sherwood, a partner at the company.
How to reduce your risks
Still, media-investment firms say it is possible to reduce your risks somewhat. Diversify – don’t put all your money into one film, says Sherwood. It is far more effective to back a range of films in the hope that one may become a hit and thus make up for any disappointing performers. Sherwood also says it is possible to de-risk by working with top-quality executive producers who establish very good recoupment positions in a film. “It is quite possible to invest in a production which was a complete failure but to get your money back if you have structured it skilfully and if you are in a good recoupment position.”
Working with investment companies with an established track record and detailed understanding of backing film is vital. There are risks running all the way through the film-production process, from development to release, and expert knowledge is needed to mitigate it as much as possible. Choosing the right script, and attaching “bankable” on-screen and off-screen talent, are key to the future success of a movie, both in helping to raise finance as well as attracting audiences at the box office.
Investors should also work with experienced production companies, with a track record of delivering successful films. Leading British producers include Blueprint Pictures (Three Billboards Outside Ebbing, Missouri), DNA Films (Ex Machina), Number 9 Films (Their Finest) and Wildgaze (Brooklyn). For other respected names, it’s worth looking at industry magazine Televisual’s annual list of the top 40 British production companies (the latest is at Televisual.com).
Many films make it through development, but stumble at the funding stage, unable to put together a financing package, which usually requires multiple partners. Strong financial and legal skills are needed to close complex funding deals, while production itself needs to be monitored to prevent the budget spinning out of control.
Last but not least, global distribution also needs to be put in place to maximise cinema and home-entertainment revenues. Along the way, hundreds of fine judgment calls need to be made. For example, funders might want to raise money by selling the movie to a few key international territories ahead of release, but hold back from selling to others to maximise profits, in case it is a major hit. It is those kind of decisions that ultimately lead to financial success for investors.
Needless to say, bringing a film to financial and legal close, while working with all of the creative talent and their advisers, is complicated and time-consuming, and requires a large team with a wide range of skills. Ingenious’s Forster says: “You need to be right at the heart of the creative industries. You can’t suddenly magic up that knowledge and those relationships.”
And remember – if you really are only interested in the idea of rubbing shoulders with the rich and famous, investing in film through the EIS probably isn’t for you. You won’t see much by way of Hollywood glamour – the only perk might be a ticket to a pre-release screening of a film. Indeed, film-investment companies go out of their way to explain that the film industry is not suitable for those seduced by the lights and the tinsel. That said, at least it’s an investment class you can talk to your friends about.