The thrill (and terror) of investing in film

It may be an off-market asset class, but Nik Bower, director for Ingenious Investments, argues the film business offers significant opportunities for investors...

The great British film director John Boorman once penned a memoir entitled ‘Money Into Light’, and in those three words is captured both the thrill of investing in film, and the terror.

Even a modest motion picture costs a fortune to produce, and all that money has been turned into nothing more (or less) than the play of light and shadow across a silver screen.

Despite the many risks, though, the film business offers the well-informed investor uncorrelated exposure to a cash-generative industry that has shown sustained resilience across multiple economic cycles because it is based on modest, discretionary spending for a universally-appealing product.

As an off-market asset class, film is often seen as the preserve of large banks and institutional investors. In fact, the movie business is open to investors of every stripe, whatever their resources and appetite for risk.

One way to mitigate risk is to invest with the major Hollywood studios, because they dominate the industry. The six majors are vertically integrated global entertainment conglomerates that produce and distribute the vast majority of the motion picture products consumed around the world. With annual turnover running to billions of dollars, these studios do operate at scale. Typically, the only way for individuals to invest with them is through a fund.

Terms of the deal

The first thing to consider here is not the films that a fund finances, but the terms of the deal it has with the studio. Ask what level of distribution fee the studio earns (they can range anywhere from the low teens to over 40%) and whether marketing and distribution costs take priority over the production cost.

Does the fund’s money recoup shoulder to shoulder with the studio’s? Does the studio account for gross revenues or only royalties, and are any classes of revenue excluded? If an equity fund only shares in profits, rather than revenues, that is probably a warning sign, as is any cap or constraint on the total amount the fund is entitled to recover.

An initial proxy for these detailed questions is the manager’s track record. A company like Ingenious, which has been investing in Hollywood for more than 12 years and has raised several billion dollars for film production, should command competitive commercial terms: recouping against gross revenues from first dollar, pari passu with the studio with a low distribution fee, a share in merchandising and other ancillary revenues and an entitlement that runs in perpetuity without any cap or constraint.