Investing in film isn’t about finding the next blockbuster movie but ensuring the films you do invest in aren’t duds
Investing in the next Avatar would be a dream for film investors, but the more realistic outcome is investing in a film that generates modest returns and decent press.
Blockbuster films – the original Avatar film grossed $3 billion – are rare and difficult to invest in, so investors shouldn’t get their hopes up that the film investment they make will be the next box office hit.
Instead they should be focusing on making sure that the fundamentals of the film they are investing in stack up, and so do the tax breaks, according to film investing experts who joined an IFA Magazine roundtable in Belfast.
Ben White, Co-Founder of Ober Private Clients, which specialises in sourcing EIS investments, says the highest priority was not so much picking a winner when investing in film but avoiding the losers – a third of the EIS investments that Ober Private Clients brings to market are film opportunities.
“Avoiding losses is the highest priority,” he says. “I would rather have a modest return with good prospects for upside on a consistent basis as opposed to one in every 10 shooting the lights and the others not.”
The right mix
For White, the most important feature of an investment case for film investing is not that it will be a runaway success but a strong set of fundamentals, including experienced film-makers, a strong script, an established recognised brand and an investor friendly financial structure.
The financial structure includes the “waterfall” which determines where investors sit in relation to profit distribution from the film.
“In terms of investing in feature films, our investors like to see a strong established brand or IP, with the right producers and director, a good structure, and an investor focussed finance plan and waterfall,” he says.
“You can then produce an investment opportunity where risk is well mitigated and where the level of potential returns is more attractive. You can also take advantage of portfolio diversification by spreading capital across a range of film and non-film EIS.”
For Raimund Berens, Producer at Iron Box Films, passion is just as important as film development due to the length of time it takes to produce a film.
“For us the film development side is important and, really, it is about passion,” he says. “If you have a team and want to make a film, it takes years from initial inception to the final audience so you have to have passion.”
He believes the important factors affecting the success of a film also depend on the route to market being taken.
“It also depends on the route to market; traditionally it was business-to-business but, with modern technology, you can go direct to the audience if you want. But it is about the waterfall – the return of investment structure and who your final end audience is.”
He adds that “a lot of people are passionate but their projects are not good so we have to drive it at all levels”.
“It is also about the film itself, not the EIS,” says Berens. “The EIS is there to reduce risk for investors but it is more about whether the film can make money on its own.”
While those sourcing and producing the EIS investments seek out the positives in the films being invested in, it is natural that financial planners are looking for the potential pitfalls.
Looking at the figures
Independent financial adviser Brian Hamilton, of Hamilton Financial Services, says discerning a return from film investing was difficult for advisers to do.
“For feature films, it is almost impossible to gauge the return because it is not like TV where X amount of people will watch TV for five hours a day. A feature film is a culmination of things,” he says, adding that this includes who stars in the film, or what Hamilton describes as “attraction magnets”.
“In the end if comes down to money, because you can take an average script and, in the hands of a very good producer, editor, director, and one or two others, you can still make quite a good film,” says Hamilton.
However, the process does not just stop with hiring the most expensive people to work on a film.
The film director might make a good film but then the next critical step is to sell the film to the distributors and more and more nowadays they want to know who is in the film,” he says. “That being said, sometimes, an interesting film comes out of nowhere with almost no one in it, it is well made, becomes nominated for one of the major awards and suddenly gets huge interest.”
This unknowable nature of film investing makes it tough for advisers to understand whether their clients will make a return on their investment. This explains the attitude that White has faced from financial advisers when trying to encourage film investment.
He says the perceived riskiness of film investing puts both advisers and clients off backing a movie.
“I find the main obstacle that prevents investment into film is the perception from IFAs and private investors that film is a particularly risky area for investment,” says White.
“It is still, even now, tarnished with the film industry’s previous involvement in aggressive tax avoidance, and more recently within EIS there has been an unhelpful trend towards a investment model of ‘£1 in and £1 out’, with the focus being on the tax relief.”
He adds that the recent scandals in the film industry and HM Revenue & Customs’ (HMRC) changes in the regulations relating to film EIS have not helped the situation.
“The appetite towards investing in film has not been helped by the latest scandals which have further highlighted that the film industry can be unscrupulous, which in turn impacts on an investor’s perception of investment risk” says White.
“To overcome that, a new IFA or investor has to educate themselves that there are certain ways of investing into film where risk can be reduced, through careful structuring, working only with reputable film makers and being highly selective with the projects to get involved in.”
Cost versus production value
Berens adds that investing in TV series works in a similar way to investing in film but with the added bonus of the constant need to fill airtime.
“With the exception of IP, it works in very similar ways but with TV there is basically some demand all the time,” he says. “There is always a slot to fill somewhere in some channel somewhere in the world but with film you have to create more.”
For the investors who are looking purely at returns and not investing in film as a passion project, the genre that film experts say provide the best returns is horror due to the low production costs.
“You put a film together and other investors outside the UK come in and we then advise people to put 2% to 10% of their risk capital in, and always in an IP film, and go for a succession,” says Berens. “The horror films are interesting as you don’t need the big stars.”
David Lovell, Operations Director at EIS and SEIS platform GrowthInvest, says Jimmy Sangster and his brother Michael who worked at the home of horror, Hammer Film Productions, were “astute at picking their actors…but were able to keep their costs down”.
However, he says there are two separate, and opposite, issues with costs in the film industry; those productions that do not know their costs and those who are only looking at the cost.
“This is one of the things with the film industry; the lack of financial cost information in production and then the other side of the coin, with emerging film makers who think only of production costs and don’t think beyond that,” says Lovell.
“That is almost the first mistake in the business plan: no research.” He adds that there needs to be a “change in finance” when it comes to film funding.
“There is a difference in what attracts private investors into the film world as opposed to the IFAs, in that private investors are drawn to a particular project and they will look at it in great detail, and it will be a special reason or person that draws them into it, while others might be put off by perceived risk,” says Lovell.
“It might be a Billy Elliot but it probably won’t be, the private investors want to be investing in something real and different from Bond or whatever else.”
When it comes to maximising returns, the key is to invest across a number of different films, and HMRC is keen for investors to do the same.
White says HMRC has “clarified” its approach to film investing via EIS and it does not want it “to be just for a single project but across a slate of films or an ongoing business”.
However, he says Ober Private Clients does not adopt a fund approach but focuses on “single company EIS structures where the company produces several films or focuses on one film that leads to an ongoing business”.
“We continue to avoid a fund structure so that EIS3 Certificates can be applied for as soon as an investor invests and so that investors can also see and choose what they are investing into.” he says.
Berens says Iron Box Films operates in a similar way to Ober Private Clients “to a point”.
“If we have three EIS opportunities, one will allow a spread of investment across four different areas and, because we have anticipated projects and have set them up by team and genre, we can say which will be the first film and the rest of the investment will go across say…horror for the international market,” he says.
It is not just the number of films that HMRC is looking at when it comes to EIS, it is the financial information that is being offered to investors, in particular what returns they can expect and when they can expect it.
White says the changes are applicable to EIS more generally as a result of the Patient Capital Review, not just film investing. It is particularly important as it puts the emphasis back on the investment rather than looking at EIS purely from a tax perspective, and ensures that the investments are not focused on capital preservation.
“The way HMRC has gone about changing the qualification criteria, not just for film but for the wider EIS market, is important,” he says.
“In the past, many investors and advisers have been focusing on the tax and not focused on the underlying investment. We don’t agree with this practice, particularly as the tax relief is only a percentage of the capital outlay and there is always some risk exposure, there is also the scope to make attractive returns in a well-structured film EIS.”
He adds that Ober Private Clients ensure the investment is the main focus and the tax relief is “secondary”. “Those funds that focussed mainly on tax led to a plethora of “mediocre” films being made”.
“Within the British film industry, a lot of these films were being funded and made via this model of capital preservation. Whereas now, the EIS promoters and the film makers actually need to be a lot more selective about the films they get involved with, because now they really need to make sure that an underlying investment return is produced, otherwise their reputation will be seriously damaged,” he says.