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.
Secondary market
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.
Creative elements form only a small part of film investing. In the beginning, all the managers can rely on is the track record of the film-makers and the cast. The marketer plays the most important role in determining the gains.
According to Mr Fuss: “Access to distribution is critical to the success of any film, and we look for either studio distribution or the attachment of a first-class international sales agent with major territory pre-sales in place to demonstrate the film’s commercial appeal to the market.”
However, under the terms of the scheme, EIS funds in this sector must invest in British film – the future of which remains uncertain. The government’s decision in 2010 to close the UK Film Council was massively controversial, resulting in many Hollywood stars speaking out and more than 50,000 people joining a Facebook page to back the Council.
To some, it seemed to spell the end for future film projects. However, Mr Swarbrick remains positive. “The UKFC has been replaced by the British Film Institute with a mandate to invest into commercial British films. While this is a broad remit, it is difficult to assess the impact on the industry in the short term. Overall, this should be positive as there is no reduction in the funding available to producers from the BFI/UKFC,” he says.
As well as the climate for investing in UK film, the risks and rewards of the EIS must be carefully acknowledged. Income tax relief on EIS funds rose from 20 to 30 per cent on April 6 of last year, while both EIS funds and VCTs are likely to be able to invest in larger companies from April 2012. In spite of the greater tax advantages of EIS funds, however, they are generally let down by the lack of transparency and liquidity.
There is no publicly published information on EIS performance that compares with the market data on VCTs, which have to meet far stricter criteria for the regular publishing of accounts. As they are traded companies, investors can see how they have performed.
However, although the British Film Council has fallen victim to the UK’s austerity drive, VCT and EIS funds are benefiting from the corresponding drive to kick-start British growth. VCTs will be able to invest up to £10m a year in a company from April 2012, instead of the current £2m, and the annual amount investors can put in an EIS will also be increased from £500,000 a year to £1m, while for VCTs the annual investment limit stays at £200,000.
In spite of all the incentives however, Ben Seager-Scott, senior research analyst at Bestinvest, urges caution: “Investors should also look carefully at the structure of the investment they make as these schemes typically have convoluted structures that provide different risk/reward profiles to different parties involved, which could also see investors lose a lot of money in a film that is otherwise marginally successful.
“It is notoriously difficult to make a highly successful film, and very easy to lose all of your money in these investments.”
Mitali Patel is a freelance journalist
