LOOK closely the next time you watch the latest blockbuster at the cinema or on DVD and the chances are you will see some of financial services biggest names on the credits, as the City continues to help Hollywood bigwigs raise the cash.
Film investing is de rigueur at the moment across a range of different investor types, from high net worth individuals to the man in the street with his £5k nest egg looking for an alternative to ISAs.
Film investing opportunities are growing at such as rate that many are predicting that film investing could rival many of the more well known alternative investments out there such as VCTs. Yet despite the glitz and the glamour, film investing is a specialist area and one that should be entered with extreme caution.
True there are tax advantages of up to 60% tax relief in some cases. But if a film is a flop an investor may never see their full investment again..
Background
WITH many film partnerships complicated, in need of tax specialists and often purely for high net worth investors, IFAs looking to give their typical client a slice of the film action usually come through the Enterprise Initiative Scheme (EIS) route.
Enterprise Investment Schemes such as Formosa Films offering allow stakeholders to benefit from 20% income tax relief and tax-free profits. B shares are being offered at a price of £1 per share with a minimum investment of £5,000. Having announced a net 20% tax credit to be applied to British films from April this year, giving a significant increase in value for the investor; the Government in their budget on 23rd March 2006 made some additional exciting improvements concerning EIS.
This included the doubling of the investment limit that qualifies for income tax relief: from £200k to £400k. In addition, 100% Capital Gain Tax deferment is also still eligible under the EIS scheme but is no longer an option under VCTs, which have also seen their minimum holding period extended to 5 years as opposed to 3 years under EIS. With Section 48 funding shut down by the government in April 2006, EIS is now seen by many as the main funding mechanism for feature films.
When it was announced in 2005 that the old Section 48 and Section 42 tax incentives were being phased out, many observers predicted the demise of the British film industry. Yet now almost two years on, with recently revamped government incentives designed to help promote film rather than promote easy tax breaks, the opposite is perhaps true with the film industry offering up more and more investment opportunities into the UK retail marketplace.
Many film partnerships in the past have usually invested in low budget predominantly UK made productions and were used as investment for high net worths for tax perks rather than solid investment opportunities.
But, now that is far from the full picture and as long as an investor is aware of the potential pitfalls, there is potential for real capital return.
For example, earlier this year, the Pacific Continental Fund Management Film Opportunities fund reported returns of more than double its projected figure.
Since its inception in February 2005, the fund had returned 23% by October 2006, exceeding its annual target return of 10% growth.
The fund, which is available to investors as is an open-ended investment company based in the Isle of Man has been investing in gap finance for film.
Peter Phelan, fund manager, Pacific Continental Securities, said: "The Film Opportunities fund allows people to invest in the film industry, with the potential for risk managed capital growth from an asset class uncorrelated to other investments. "Productions don’t have to be a smash at the box office to guarantee returns which gives investors an added layer of protection."
Film production and distribution company Syndicate Films, prefer the increasingly popular EIS route, pointing out that unlike VCTs, the EIS allows capital gains tax liabilities from the past three years or following year to be reclaimed or deferred through an investment in the company, so with the initial relief the net cost of investing is reduced by up to 60%. Formosa Films EIS even offers the investors the chance to get close to the action and has received investments from lots of individuals investing just £5,000 (the minimum amount) or £10,000. In its latest project a UK small budget offering called Clubbed, the nightclub scenes in this film will feature many of the actual investors themselves. A spokesman said: "We need lots of bodies in there. It is great that the investors have this opportunity, but it is also good for us as it saves us having to pay £80+ every day for 100s of extras."
Tim Willis is director of Pact, the film industry trade body that has helped steer UK film back on track following the demise of Section 48 and Section 42. Willis is delighted to see the successes of EIS projects but warns investors not to enter into film investing without understanding the risks.
"Film has to be classed as high risk," he says. But that is not to say that investors will not make money," he says. "There is an angle that you can take regarding digital advances with online downloading and the rest that means that there are now better opportunities for films to make money.
"But the reason that we have been able to work out the tax breaks with the Treasury is because film is an industry where there is, quote, "potential market failure". That is why there are government subsidiaries."
Key facts
In 2005 thanks to the success and growth of homegrown films, cinema audiences boosted the share of British Films at the UK box office to 34% compared to 23% in 2004, the highest figure for ten years. Latest UK Film Council Statistics.
The British Film Industry has seen earnings rise by 45% over last year’s figures.
Box-office takings for the top 20 British films totalled £176m in 2004, compared with £121m in 2003. And the number of UK films taking more than £3m at the box office jumped to 16 in 2004, from eight in 2003.
Film is in a boom period at the moment and strong genre pieces have always performed extremely well at the box office and in the lucrative DVD, soundtrack and television markets. Almost 4m Britons went to the movies in just one weekend as cinemas sold the most tickets since records began 20 years ago, according to Screen International (November 2005).
According to the Film Distribution Association, the global filmed entertainment business, which currently has annual revenues of approximately $60bn, will offer compound annual growth of around 6% forecast to 2007.
To those that can afford it (ie high net worths ) Scion Financial and Brass Hat are offering the chance to invest in some of the world’s biggest films. Scion is currently offering investors the chance to be part of the new Scion Premier film partnership, with one of the best track records in film investing following recent successes with The Constant Gardener, Pride and Prejudice and The Phantom of the Opera.
And the Scion roster within its latest portfolio is impressive with stakes in Jane Austen biopic Becoming Jane, starring current favourite Anne Hathaway and James McAvoy, Sir Richard Attenborough’s final film Closing the Ring and David Cronenberg’s next film starring Vigo Mortensen and Naomi Watts are hotly anticipated.
Brass Hat Films Slate uses the traditional 'slate' film partnership route. It also aims to provide asset allocation exposure to films produced and distributed by major Hollywood Studios, such as Dreamworks and Disney.
Among the recent projects that the company was involved in was Steve Martin’s last film Shopgirl, which also starred Clare Danes and a Dreamworks production entitled Dreamer starring Kurt Russell and Elisabeth Shue.
Simon Conder, managing director of Brass Hat, said: "Fundamentally, film as an asset class is almost recession proof. Compare it to the FTSE or Dow Jones or any other world indices and cinema going has increased at a faster rate. What a lot of people don’t realise is that it is an industry with a $60bn turnover, but people are not actively encouraged to have it in their portfolio."