In a downturn people turn to the silver screen
Gary Bellot, chairman, Horizon Group looks at film financing in Jersey
While much of the economy is teetering between bust and bailout, the movie industry has been startled by a box-office surge that has little precedent in the modern era. Suddenly it seems everyone is going to the movies, with ticket sales this year up 17.5%, to $1.7 billion, according to Media by Numbers, a box-office tracking company. And it is not just because ticket prices are higher. Attendance has also jumped, by nearly 16%. If that pace continues this year, it will amount to the biggest box-office surge in at least two decades.
Investment of course comes in different guises, personally I never thought I would be writing an article for a finance supplement talking about the film industry, indeed I would never have thought that I, or my colleagues, would be on the advisory board and instrumental in the structuring of a film and media fund.
Over recent years there has been a great deal of bad publicity in relation to film funds specifically as a result of tax driven schemes investing in low grade films that never reached the silver screen. However, to the contrary, there has been an abundance that have been successfully managed, providing valuable tax benefits to investors. Sometimes we lose track of the importance of the film industry, which is a major generator of revenue worldwide.
Investment into film finance funds has been regarded by many as risky business. I would argue that this is not the case and hope that after reading this article you will have a greater insight into the industry. I do encourage those considering alternative investments to look at film finance funds and realise the potential for risk managed film participations.
Films generally fall into one of two camps, the first being the films produced, financed and distributed by the major US distributors - Universal, Disney, Warner - and the second being the films that are produced and financed independently and distributed worldwide through a combination of independent distributors, plus of course the US studios who also acquire independently made product.
Independent feature films are financed with a mix of funding from different sources:
• Development finance - This is secured by the script and rights to the film, which is repaid on commencement of principal photography.
• Distribution pre sales - Licensing the film for individual territories to distributors before production starts. Distributors pay, or guarantee to pay, advances against a share of income, which are then discounted with major banks operating in this area. It should be noted that the distributors also bear the cost of marketing, prints and advertising when releasing the film.
• Gap finance - discounting the sales values of unsold territories with banks.
• State and local Government subsidies and tax credits.
• Cco production finance - two or more producers from different territories combine to finance a larger share of the budget than their territory is valued at on a pure sales distribution basis taking advantage of local subsidies or TV sales so that each producer shares the copyright and retains their local territory rights outright.
• Equity finance - this can represent up to 50% of a films budget but in certain circumstances can be more.
The selection of suitable film projects is one of the most important elements in the mix, although history shows there is no absolute film model. Creativity lies at the core of successful movies and the smartest analysis cannot always cater for the unpredicted hit, which arises from unexpected origins. As an example, Slumdog Milliilonaire was made on a budget of a reported $15 million but has now generated over a $100m at the US box office alone. This in itself is truly remarkable but who would have thought that not so long ago it looked destined to miss out on a cinema release because its distributor, Warner, decided to shut down its independent film arm, seemingly condemning the film, made in 2006, to a straight-to-DVD release. However the film was eventually picked up by Fox Searchlight, and quickly became the subject of heated buzz on the film festival circuit. As they say the rest is history.
It is also important to note that most independent films will also secure a completion guarantee, which is a form of performance bond that guarantees completion of a film and delivery to its financiers and distributors in return for a premium. The completion guarantee minimises risk and eliminates the economic risk of any delays in production or overspend on budget incurring financial participants in increased participation.
Working with a reputable partner with a first class track record is extremely important. It's also important that investment is made into funds with every likelihood of reaching the screen. Whilst this may not in itself prove as easy as it sounds, there are factors that can be considered and we would recommend looking at the quality of all the parties from cast through to directors and importantly the distributors.
To put this into perspective, as an example, Horizon teamed up with Handmade Films, the film company started originally by George Harrison in 1978 which soon became one of the most successful independent film production businesses of its time producing amongst others "Life of Brian", The Llong Ggood Friday, and Mona Lisa to name a few.
Our first Film and Mmedia Fund closed at the end of December 2007 and has interests in a number of films, many of which will hit the screens this year. The first film premiered in London early April, Fifty Dead Mmen Wwalking, a powerful film, starring Sir Ben Kingsley and Jim Sturgess and based on a true story of a British government infiltrator into the IRA, which given recent events has gained a great deal of public interest. Other films due for release include the remake of The Long Good Friday, Eloise in Paris and the much anticipated Planet 51 an animated film from the writer of Shrek, Joe Stillman, due for release at Tthanksgiving (November 2009).
Forgetting any tax considerations, investment into film funds can produce significant benefits to investors. Many of the associated risks can be mitigated, and of course the investment itself provides an interesting alternative to any portfolio, which can be talked about at dinner parties for years to come.
