Investors have generally chosen to refrain from this high-risk investment as it is extremely difficult to predict the commercial success of a film, especially before shooting even begins. But the tax benefits offered by the enterprise investment scheme (EIS) may prompt some to reconsider, especially at a time when conventional asset classes such as equities, bonds, gilts and property all look dicey.
Stephen Fuss, investment director at Ingenious Investments, observes: “There is plenty of opportunity for investment in film funds at this time. In particular, a lot of investors are increasingly attracted to film funds structured as an enterprise investment scheme, due to the very attractive tax reliefs on offer.”
Ingenious has financed mega-budget films like Avatar and The Rise of the Planet of Apes, as well as smaller flicks like The Descendants, starring George Clooney, and offers anticipated tax-free returns of 13.7 per cent a year. Its film fund, Shelley Media 5, invests mainly in film and TV production companies.
For EIS investments, the UK government has no capital gains tax (CGT) on profits and, in case of a loss, it allows the investor to offset 30 per cent of the amount invested against their income tax liabilities in the first year. Under certain conditions, it is also possible to offset a loss against the gains on other assets.
However, investors in an EIS cannot get their money out before the fund has wound up and are unlikely to find a buyer if they want to offload their stake early, as there is no secondary market.
That said, going into an investment on the basis of how much money you might lose makes no sense. Advisers recommend people looking at EIS funds should look for operators with a track record before investing large sums. This is particularly the case when looking at the film sector.
In spite of the quirks of the structure, a number of different providers have found a route in. The Aegis Film Fund, for example, which carries a minimum investment of $100,000 (£64,390), was one of the entities that bankrolled The King’s Speech. The fund focuses on films that star big-name actors, are produced and directed by some of the best-known names, and are distributed in the major markets with a budget of £3-£20m.
Other films that the firm has co-financed include St Trinian’s 2: The Legend of Fritton Gold, starring Colin Firth, Rupert Everett and Gemma Arterton; The Guard, with Brendan Gleeson and Don Cheadle; and Sex & Drugs & Rock & Roll, a biopic about singer Ian Dury.
While one might think that film fund management involves as much creativity as it does financial skills, James Swarbrick, partner at Aegis Capital Partners, manager of the fund, views the issues differently.
“At Aegis, we perform a very scientific and non-creative analysis. We review the sales agent’s estimates and the counterparties in the transaction to assess their credit worth. We act as a media bank taking no risk on the success at the box office or on DVD, although we do share in the upside. Our risk is one of counterparty risk which is quantifiable rather than the more nebulous assessment of what the public will want to see,” he says.