Movie-making has been a notoriously hit or miss affair, which makes investors in films understandably nervous. But a fund that uses debt financing to earn returns claims that it can make a steady profit on this sector.

In an industry noted for its budget-busting overruns and box office flops, high net worth investors will be tempted to give the sector a wide berth and try something less exciting instead.

After all, for every Avatar – the current 3-D hit by James Cameron – there are box office failures such as the 2006 film version of the political novel, All the King’s Men. In the latter case, the movie earned just $9 million on a $55 million budget, according to Forbes.

So investor wariness is understandable but there are ways of making a steady return from films, an advisor to a Caymans-registered fund called the Aegis Film Fund told WealthBriefing recently.

Instead of having an equity stake in films, the fund, which is advised by UK-based Aegis Capital Partners, provides debt financing to producers and makers of films at the pre-production and production stages of film-making. The fund uses assets and income streams from a film as security for any loans. Its finance typically comprises bridge and gap financing, and the discounting of pre-sales and tax credits.

The film was launched just under a year ago – 6 March – and earned gross returns of 9.2 per cent from inception to 30 September last year, equating to 8.32 per cent on the share subscriptions that have been received, the fund says in its latest performance update. Combined investments made in each film are all projected to earn more than 15 per cent.

“It is a fairly low volatility [form of investment]; you can usually get a pretty good idea of what a return is going to be on the day you sign the deal. For the next five, seven or 10 years, we should be making at least 10 per cent per year – after fees – quite comfortably,” James Swarbrick, director of Aegis Capital Partners, said in a recent interview.

“There is some initial scepticism because films are seen as risky, but once you get over that point and people can see that there is little specific film performance risk, then they can see it as a banking play and that [the investment idea] is very good,” he said.

Part of the reason for the fund’s success is that filmmakers have struggled to obtain traditional bank finance because the recent financial turmoil has frozen up lending - so funds such as Aegis are filling the gap.

The fund is not unique. Another Cayman-registered fund operating in this area is the Aramid Entertainment Fund. This fund has been involved with films such as W, How to Lose Friends and Alienate People, In the Loop, Bronson and Edge of Love. FilmHedge, a Danish fund operated by QED Financial Engineering, invests in domestic movies, offering capital-protected returns in the sector. In Hollywood, meanwhile, actor Tom Cruise approached private equity funds to help finance films back in 2006. Such developments highlight how traditional dividing lines in financial markets have become blurred to the point of invisibility.  

As for Aegis’s Mr Swarbrick, he is no novice in the investment world: he started his career at City stockbroker Teather & Greenwood before moving to Smith & Williamson Investment Management in December 2004. He has raised, structured and managed funds for over 30 productions including, Ladies in Lavender, Green Street and Irresistible. He has also raised funds for a number of AIM, private equity, Enterprise Investment Scheme and Venture Capital Trust transactions in sectors including retail, leisure, media, insurance and technology.

Financing types

Bridge and gap financing typically involve providing short-term, interim loans to cover certain costs before and during the production of a movie. In the case of tax credit finance, an investor such as Aegis provides a film producer with almost all of the benefit of a tax break up front, later obtaining the full value of the credit plus an interest payment. Governments, in a bid to encourage movie-making, typically provide tax breaks in a number of countries, including the UK.

In the UK, for example, filmmakers can obtain up to 20 per cent of the budget of their film back from UK government when a film has been made and they need the value of the tax break up-front, which is where the fund comes in. A fund such as the Aegis one then obtains an independent valuation of the value of the credit, and then provides 90 per cent of the value of the tax break. Once the film has been made and accounts are settled, the fund can collect the full value of the credit, plus interest.

Provided that the film passes various checks to ensure that it is “culturally British”, film-makers in the UK can qualify for various reliefs, he said. For films with a budget of up to £20 million ($32.4 million), they can secure a relief equal to 20 per cent of their budget back, and for those above £20 million, 16 per cent.

One film recently financed by the fund was The Guard, a crime drama set in Ireland. Other films financed by Aegis include Sex & Drugs & Rock & Roll (based on the life of musician, the late Ian Dury) and St Trinians 2.

At the time of interview (late January), the fund has come close to completing the financing of four film productions, with a further two in negotiation, and intends to finance between 12 and 20 for the whole of 2010, Mr Swarbrick said.

Investors seeking to enter the Aegis fund must commit at least $100,000, or the sterling equivalent; there is a one-year lock-up for investors and they must give 90 days notice to redeem investments thereafter, which makes sense given that film financing takes several months – say about four to five months – between the start and completion, he said.

The fund charges an annual management fee of 2 per cent of assets and takes a performance haircut of 20 per cent, Mr Swarbrick said. Access to the fund is via such intermediaries as independent financial advisors and private banks, he said.