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How to invest in the film industry

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03/06/2013
If the glamour of Hollywood leaves you wanting a piece of the action, investing in films might be a good way to add some diversity to your portfolio.

Investing directly in a film could be a risky venture. Scouting out the right talent, managing production costs and finding the right distributor are just a few of the hurdles that investors share as the production moves forward to fruition or, in some cases, not.

Then you also have to take into consideration the changing trends of the cinemagoer. Even if Ryan Gosling is the biggest draw this year, he might not be in 18 months’ when the film hits the screens. Again a storyline with a broad appeal in one year could fall flat in the next.

Remember Gigli? Not many do. Gigli was a 2003 mobster comedy starring Ben Affleck and Jennifer Lopez, collectively known as “Bennifer.” The duo had been dominating tabloid headlines and the gossip columns for a while, so putting them together in a film was a no-brainer.

Unfortunately for the film makers, every critic on this planet hated the film. According to CNBC, the film earned $4m in its opening weekend, but then dropped 80% in its second-weekend. Gigli was withdrawn from cinema screens after only three weeks, one of the shortest theatrical runs on record for a major Hollywood production, and a net loss of $66,733,791.

Therefore if a film does well, it may open the possibilities of a franchise; if a film crashes – it could claim a number of casualties, and not just the careers of the stars and starlets.

As with any other kind of investing – use due diligence. The hedge fund vehicle seems to be the most common way to directly invest in this asset class. If you’re a novice investor the films industry may not be the best place to start. The risks of such an enterprise can be considerable and you may be better seeking out ‘safer’ asset classes.

Due diligence throughout is critical. What is the producer’s reputation? How much experience do they have? Backing one with shady a track record is a lot like investing in a mutual fund with gung-ho asset managers.
What is the film’s potential market? Blockbusters tend to have a broad appeal; understandably foreign films and documentaries, black and white and silent films have less appeal.

Is the scheme itself backed by the relevant regulators? The Enterprise Investment Scheme (EIS) set up by the government to channel funds to less well invested asset classes is now widely used to finance certain UK films, allowing investors to enjoy a range of tax reliefs.

Returns are unpredictable and the market is rather volatile, so doing your homework and speaking to the right people could potentially save you a lot of heartache in the long run.


Tax relief schemes to stop a disaster scene playing out on your portfolio

Under the EIS, investors can invest up to £1m a year. But the minimum varies depending on the investment vehicle. Even if films don’t make a profit, EIS projects can limit losses through tax relief. If you keep an investment for three years, you can offset 30% of the amount invested against your income tax liability in the first year and any profit made is free of capital gains tax.

If you make a loss, you can offset it against gains you make on other assets or, under certain conditions, against your income tax. Losses can be set off against other capital gains and no inheritance tax is payable if they have been held for two years at the time of death.

But remember, just because a film scheme is under the EIS structure it is not a guarantee that it will be free from HMRC scrutiny, as recent headlines with the tax man and high profile individuals have highlighted. Tax advisers claim that film schemes are still a viable and legal way to invest in the entertainments industry, where investors can enjoy the benefits of both positive returns coupled with a good tax relief, but as with any investment vehicle can be subject to thorough regulation.

Leon Clarence, CEO of Motion Picture Capital, said: “When you make a film there are often localised production incentives for physically making it in a particular jurisdiction, whether that is the film production tax credit here in the UK, or a similar producer’s tax credit in Australia. There are localised US Federal credits in Hawaii, Louisiana, Rhode Island, where if you physically shoot a film there, you can get a reimbursement of some of that spend from the local government or the national government. That is effectively saying if you shoot this film here, we will give you back 20 cents in the dollar of the money you spent making that film here.”

“That piece of revenue invariably comes in once the film is completed and a tax return is delivered. Once you file that tax return, you have effectively certified that you have spent the money, you have made the film and then what happens is the revenue authorities will repay that tax credit or give you a tax certificate in some jurisdictions that you can sell on a transferable basis. So if a company has a tax bill, it can buy tax certificates at 95 cents in the dollar and use them to pay its tax bill. So they are readily realisable tax certificates.”

“Those tax certificates or that tax refund are effectively sovereign or local state paper. So your risk of getting repaid isn’t how well the film does or how many people tune it at 8 o’clock on a Thursday. It is a tax refund. So that is very, very predictable.”

 

Understanding your investment

If you plan to add this asset to your portfolio – you should probably familiarise yourself with where exactly your money will be invested. A quick caution – despite the fact that there are not that many differentiating investment vehicles in this asset class – you should note whether the investment opportunity you are looking at is a third party financier, or investment straight into a production house itself. The film industry is set up in the form of common shares, and is available to individual investors, who need to understand where in the chain of production the company is and if there particular risks it will be subjected to depending on where the film is shot.

Typically, any revenues garnered are first used to repay any debts incurred during the production phase, followed by repayment of investor’s initial investments. After the investors get their initial investment back, the profits are shared out. Often, the split in the returns is pretty even between investor and producer, with the stars, writers and director getting paid directly from the producer’s profits.

Any investment proposals should be in writing and contain an arbitration clause for a more cost-effective dispute resolution. Filmmakers would do well to have such a clause when dealing with financially stronger distributors in order to protect the former’s interests.
The producer should have secured a completion bond which is a guarantee that kicks in to pay for cost overruns rather than having the investors shoulder the burden. Different fundraising options should be considered, depending upon the script and budget.

There are also other ways to invest in the film industry. Film fans can make smaller investments in the form of film memorabilia. Of course it is difficult to predict exactly which items will end up being value investments, but generally memorabilia investors tend to go for those they like rather than focusing on the capital gains. Items from iconic stars perform consistently well – a Stars Wars Dewback head from the original 70s production can fetch around £10,000 to £15,000. Buying autographs and original posters is also another fun, affordable way to invest in the industry.

As an asset class, film would appear to be uncorrelated to other types of investments and to some extent recession-resistant, as people still go to the cinema or rent out DVDs. According to PwC’s media and entertainment outlook, consumer spending on entertainment is proving to be quite resilient, and ‘going against the grain of any other industry’.

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