For most, the theatre is simply a pleasant evening out, but for those investors that aren’t adverse to taking on risk, there are opportunities in this niche area to make pretty decent returns.
Investing in theatre is very high risk, with an average one third of productions flopping and investors losing most or all their money.
A typical play also needs between £500,000 and £600,000 to launch, but a major musical will cost at least £2m to get off the ground and can require as much as £10m over its lifetime.
However, for every third theatre event that flops, another third will at least recoup their costs and the top third will pay a return to their investors averaging 20-30 per cent a year.
If investors strike gold with a Cats or a Mamma Mia! that runs for decades, profits can be astounding. The original backers of Cats made an estimated 17,000 per cent profit.
Even the recession hasn’t derailed the interest in theatre productions. Current hits include Billy Elliot, Jerusalem, The Lion King and War Horse, and recommended in the must-see lists are newcomers Matilda the Musical and One Man, Two Guvnors.
Although box-office and attendance figures aren’t yet in for 2011, all the signs show that, after a shaky start, it’s going to prove no less a bumper year than 2010, when attendances exceeded 14m and a record £512.3m was taken at the box office.
In fact, this was the seventh year running that total box-office revenues posted new record levels, up 1.46 per cent on a like-for-like basis on 2009 and topping £500m for the second time ever.
Nica Burns, president of the Society of London Theatre, says: “ was a great year for London theatre. A huge range of superb productions ensured that a visit to the theatre was a must-do for large numbers of the public. London theatre is something for everyone to be proud of and is a great ambassador for UK plc.”
Of course, unless you are substantially wealthy and are prepared to run the risk of losing big, there are few options available to access this sector.
Most theatre plays are funded using around 50 to 60 angels investing their own money. In many cases they are investing relatively small amounts of between £500 to £10,000.
When a production is in planning, the producer gathers the budget for the total cost of a production. Costs include the capitalisation which covers up to the first paid public performance, together with weekly running costs. Box-office income will be included in the budget forecasts which are set out in detailed brochures for the investors.
Producers are responsible for the balance of any further capital which is required, and as such will work hard to find enough investors. Finally, investment contracts between the producer and individual investors are exchanged.
At the point where the whole capitalisation has been repaid, profits are then divided by way of a 60/40 split in favour of the investors. If the initial capitalisation is not recouped and the play is not successful, then the investors will lose their money, or in some cases, may get back a small portion.