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Elizabeth Morgan Hemlock
Malcolm McGregor. directors of Screenwriter Festival Ltd and Arturi Films Ltd.pilotcottage.com CRITICAL BUSINESS NAVIGATION www. An Investors’ Guide to Film Investment is published by Pilot Cottage™.uk .co. ™ MAKING STORIES TRAVEL www.Introduction An Investors’ Guide to Film Investment has been prepared by David Pearson and Elizabeth Morgan Hemlock. regional director of Beer & Partners asked the question “What do investors need to know to enable them to consider investing in film and I therefore welcome this concise introductory guide to the industry”.arturifilms.
" Hollywood Reporter 11th April 2006. Over the past two years. Dune Suisse First Boston. "You have the growth of the international marketplace." says Thomas Tull finance executive who has structured 25 major film investments for Hollywood studios. include Dresdner Kleinwort. “The pie is bigger in general. and you have home video markets that were not available years ago. private‐equity funds and investment banks. these investors have provided more than $4 billion in movie financing. opportunities exist in Britain for individual investors in a market which with modern digital distribution and new outlets is increasingly worldwide‐ wherever the films have been originated. has stimulated an awareness of the attractiveness of film and media investment in an exciting sector with a growing world market. the highly successful Sacha Baron Cohen comedy which grossed $258M on an $18m budget.” 29th April 2006 Wall Street Journal. While hedge funds that have invested in films. including Borat." • Worldwide the gross box office for films increased by 11% in 2006 to $26 billion • UK films generate 8. and now in Europe. or Slate funding? What Guiding Principles can be used in a Film Investment Decision? A significant surge of hedge funds successfully entering the film finance market in the last couple of years in the US.What do you need to know about how film investment works to get a great return? In this short introduction the most common approaches for investment in film are outlined and summarised in a simplified manner. • • • • What are the main investment opportunities? How does investment in a film work and how does revenue flow? Single Film Investment. “The biggest influx of money these days is coming from hedge funds. Goldman Sachs.5% of the world Box Office market and is valued at US$ 2. Deutsche Bank.960 million in 2006 (Source UK FC annual statistics 2006/7) 1 .2 Billion • The top 10 performing UK films worldwide grossed $1. “Experts also note that the recent slowdowns of real estate and the stock market in delivering solid returns on investment have helped shift Wall Street's focus to Hollywood.
2 . A slate of produced films also accrues greater value as a library of rights. then a single film. and film funds. Investment into a production company that produces a slate of feature film productions. Hedge funds have brokered deals with Hollywood Studios and large production companies. offer an opportunity to spread the risk to investors and secure a participation from wider range of income. and work at the upper end of the budget scale. a slate of films (several films to allow a spread risk across several projects) or into a formally set up film fund run by fund managers who invest in a range of single films . appraisal of the project package etc. Investing in a particular film as an individual is more common in the USA. So how can a new individual investor in the UK safely enter the market and what do they need to know about how film investment and returns work? There are three main ways of investing in films for private investors: • Production finance – equity as part of a film’s production budget • Production Company investment – equity in a production company with a slate of films • Invest in a Film fund – the fund itself then invests in film productions All of these routes offer particular advantages and issues. Funding in a single films production budget is perhaps the highest risk but can give the biggest returns.What are the Main Investment Opportunities? Individual private film investors’ directly financing part of a films production budget has traditionally been much more common in the USA Canada and France than in Britain‐ despite the tax advantages that have existed here for many years‐ now principally EIS. market awareness and slate spread of projects. Canada and France. but they charge management fees etc. Production finance can be agreed for an individual film. but requires more industry knowledge‐ awareness of the market. Finance houses that set up a specialist film fund to invest in films from established relationships they have with production companies or studios offer industry connections to projects. as the production company receives income as soon as the film is produced and before its released into the market. However the notion of film investment returns being largely based on tax efficiency detracts from the very real opportunities that are based on effective film product recouping in the market‐ sometimes with spectacular returns.
Revenue from cinemas.5% of net profits depending on the finance plan. TV broadcasts. so finding a company with a larger slate to spread risk is probably a good starting point. Revenue from cinemas. bank Gap fund. and Video On Demand. TV broadcasts. merchandise etc Typically 3 years for main returns 3 . bank Gap fund. Revenue returns from sales of each film made in market and from repaid development costs. finds finance and sets up a wholly owned single Purpose Company to produce each film. and Video On Demand. distributors and private equity along with soft public finance. studios. studios. bank Gap fund. and Video On Demand. Revenue from cinemas. Typically after paying off the film production finance costs the company will retain about 65. production companies set up a unique SPV (Special Purpose Vehicle Company) for each film made. TV broadcasts. distributors and private equity along with soft public finance. studios. DVD. Many small production companies only have one or two projects in development. PRODUCTION COMPANY Develops film projects and scripts. shoots and meet the cast etc. DVD. merchandise etc Typically 3 years for main returns Production Finance from a basket of sources including film funds.Investing directly in a production company with a slate can give an equity holding with the originator of the project beyond the film production vehicle itself. distributors and private equity along with soft public finance. Single Purpose Company Film 1 Development costs paid back from films budget Single Purpose Company Film 2 Development costs paid back from films budget Single Purpose Company Film 3 Development costs paid back from films budget Production Finance from a basket of sources including film funds. merchandise etc Typically 3 years for main returns Production Finance from a basket of sources including film funds. DVD. Company build library of rights. Being a company investor allows a closer connection to the films and the opportunities to attend premieres.
TRAINS MOBILES ETC MERCHANDISE 4 .How does investment in a film work and how does revenue flow? PRODUCTION COMPANY Develops film projects into scripts with talent and finance package When film finance is available production company sets up a wholly owned Single Purpose Vehicle for each film within which to produce it Revenue returns from sales of each film made in market INVESTMENT PROFIT COMPANY INVESTORS 67.5% of film’s net profits FILM INVESTORS Provide Film Production Finance and share in revenue FILM FINANCE SPV Single Purpose Company Makes Film Production funded by Film Financiers Production Company owns SPV Parent company’s project development costs paid back from films budget PROFIT & REPAY INVEST INCOME INCOME FROM SALES (After paying distribution exhibition and sales costs) •THEATRICAL CINEMA RELEASE •DVD •VOD •TV •PLANES.
In addition to looking at the potential rates of returns. meeting cast and crew and attending the film’s premiere’s are also a potential added incentive. The entertainment benefits of visiting film sets. rewards are significantly higher £100K Film Fund Risks amatorized across 20‐25% annual rate of films earnings but return recouping dependent upon Fund investment from Manager's choice of 21months ‐5 years films Provides specialist market information •£100k investment figure is for demonstration only and the percentage of profits from a single film production investment will depend upon the actual budgets. individual films' earnings earning variable income plus % of value in library of rights held £100k = 10% of the film Single Film Production Films do not generate 10% of net profits paid If film is hugely production cost Investment net sales profit within majority 3 years successful. 5 . the sum invested and the terms negotiated. •£100k into production company reflects 67% industry average return dependent upon the actual financing plan for each feature film and the terms negotiated. then investors may gain further tax advantages depending upon your individual circumstances. INVESTMENT £100k SUMMARY OF INVESTMENT RISKS AND RETURN VEHICLE RISK RATE OF RETURN BEST CASE SENARIO Production Company Films do not enter 150% when film begins Share of growing value Slate of films production ‐ offset risk shooting plus share of of library of films which by amatorized earnings 67% of company net will be greater than any across several films profits within 3 years.Summary Investing in Film can provide good returns depending upon the model and level of risk an investor is willing to take. if the investment vehicle is EIS certified.
working with David Pearson and Elizabeth Morgan Hemlock at Arturi Films. A key output from this original work is the film valuation matrix summarised in this Appendix.Appendix In December 2007. ™ . We include it here as a prospective framework for film library valuation. Pilot Cottage founder Michael Howes facilitated a film slate valuation workshop.
5M Median: £3M Released 35mm. 16mm & HD Distribution agreement DVD. biograpghy Price agreed by term novel.film valuation matrix Film Development Stages Optioning source material Format Contract Key Factors Reputation Genre Ease of funding Speed to production Scalability Marketability Work in progress Sector experience Market trends Work in progress Distributor interest Production experience Trust Brand Reputation/relationships Soft money know how Wow factors Audience profile Value Range: £1 to £1M Average: £50k Median: £15k Idea.co. Multi-platform Collection agreements www.uk . game.5M Median: £1.arturifilms.com www. news article.pilotcottage. Extension terms outline story. VOD. spec screenplay. song.8M Range: £1M to £75M Average: £12. cartoon 80/120 pages draft Option price Stage payments Purchase price Stage payments Purchase price First Draft Script Range: £5k to £2M Average: £75k Median: £20k Range: £8k to £3M Average: £120k Median: £50k Range: £50k to £5M Average: £250k Median: £120k Final Draft script 80/120 pages Packaged Budget & schedule Locations Cast Legal contracts Finance Plan Sales Agent attached Marleting/PR plan 35mm. TV programme. 16mm & HD Basket of contracts Production Delivery to Agents Legals (variation of the above) Actor profile Sales agreement Genre trends Genre/Actor profile Reputation Marketing plan Release strategy Range: £500k to £10M Average: £7.
. It may not be reproduced without permission Disclaimer This document seeks to address general business and financial issues and we have taken due care in its preparation. as a result of any material in this publication can be accepted by Pilot Cottage or by Arturi Films. Specialist advice should always be sought in relation to your own circumstances. please contact: Michael Howes on 01452 759 481 michael@pilotcottage. or failing to act.uk Pilot Cottage offers a business mentoring and investment readiness service to clients that need to focus on developing their business or are getting ready for business financing and you can access their website at: www.co.pilotcottage.uk This guide is copyright © Pilot Cottage/Arturi Films 2008. No responsibility for loss incurred by any person acting.If you would like to discuss any of the issues raised in this guidance note.co.
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