Providing financing to the film industry sounds risky - and with good reason - but evolving ways of putting money into the sector highlight important advantages in terms of tax efficiency and returns.

Rather than lending the banks £500,000, why not do what the banks do with the money they borrow from you, and cut them out?  In times when borrowing is difficult, those who make money available stand to be very popular and can command excellent rates.

This is now the case in the film industry, where the combination of withdrawal of almost all forms of tax relief from film funding, coupled with the credit crunch, and the withdrawal of almost all the primary lenders to independent film producers has lead to excellent opportunities to step into the gap.

How? By providing cash-flow to the film production process, you can cut out the banks and get the full rate for yourself.  An offshore roll-up fund is a mechanism that allows you to do this in a highly tax-efficient environment, particularly for higher rate taxpayers.

Here is an example: Some £1,000,000 is on deposit in the bank at 2 per cent, equal to £12,000 per annum after tax at 40 per cent, or £10,000 after tax at 50 per cent. (The UK now has a top income tax rate of 50 per cent on annual incomes of £150,000 a year or more).

However, £100,000 in the offshore roll up fund will also provide £12,000pa untaxed at 40 per cent or 50 per cent and with tax payable at your own choice. Equally it can be held in a SIPP (Self Invested Personal Pension), free of tax.

By lending 10 per cent of the value of the fund held on deposit, you can invest in a low risk vehicle that is cash-flowing film production against secured and guaranteed revenues, in the form of government tax credits and guaranteed pre-sales, for the same return or better than the other £900,000 on deposit.

Process and security of capital

These funds are cash-flowing the manufacturing process of film and TV productions globally of from 10 – 30 per cent of the total film budget. The lending is secured against UK and other government tax credits and also secured against guaranteed presales or in first position to recoup ahead of all other investors. This form of film financing is not contentious as far as HM Revenue & Customs is concerned; it can be held in a SIPP and is completely uncorrelated to any sectors or markets

For example:

P&C Arcade targeted a return of 12 per cent pa net of costs and is building a good track record.  The December net asset values for P&C Arcade Film Fund are shown below. This fund’s 15-month track record demonstrates that Grand Arcade´s 12 per cent return target is not only possible, but realistic.

B Share Class

Q4 2009                                   +3.81 per cent

Calendar Year 2009                 +12.11 per cent

Since Inception                         +15.48 per cent

(1 October 2008)

C Share Class

Q4 2009                                   +3.70 per cent

Calendar Year 2009                 +11.66 per cent

Since Inception                         +14.87 per cent

(1 October 2008)

How can lending to film-makers be secure?

Since the demise of most of the available UK tax reliefs, and combined with the credit crunch independent film and television producers usually find it difficult to get the last bit of their films financed. They have probably spent several years getting everything together and finding the bulk of their finance. The banks, which used to make very good returns from financing this last bit of lending, have currently - after the credit crunch - fallen away, providing individuals and funds like Grand and P&C Arcade, with great opportunities for these high returns.

The fund is effectively cash-flowing the manufacturing process only, as items like the government tax credit and guaranteed presales are only available on completion of the film, yet the producer needs the money up front to make it. This is absolutely not an equity investment dependent on box office success for the return of the investment.

There are three ways that roll-up film funds help cash flow the film production process.  The three types of loan are all secured against future revenue expectations and the fund will provide financing in one, two or all three areas.

1), UK tax credit (or other government backed tax credit from around the world).

For example, the UK government will give a production company up to 20 per cent of the production budget dependent on the amount of money spent in the UK. This is independently audited, and is claimed back from the Department of Culture, Media & Sport once the money has been spent. It does not even require the film to be completed.

2) Discounting pre-sales contracts

Once a film has reached the pre-production stage (before the film starts shooting and before completion) a sales agent is appointed, who will pre-sell the film into one or two of the major world territories. At this point a distributor will pay up to 20 per cent deposit for the film against the guarantee of purchase and the film fund can advance the remaining balance to the production whilst taking security over all the sales contracts. The remaining balance is paid on delivery of the completed film to the distributor who pays it into the collection account controlled by the film fund. In this case, the production company is required to insure the production against non-completion, in the form of completion bonds and personal insurance.

3) Pure gap

These film funds may finance up to around 15 per cent of a film's budget as a straight loan (this what the banks used to do pre credit crunch). On this form of financing, the lender will typically require at least 300 per cent coverage based on the sales agents lowest estimates. This is where the pre-sales help to value these estimates.

If the pre-sales already made exceed the low estimates the film fund would have confidence in the figures, if not then they would not lend the gap money. Overall, the gap lenders are the first to be paid from all funds returned to the independent collection agent from sales. Apart from the sales agent’s commission (which can often be deferred until the gap investor is repaid).  No one receives any money until the gap financier has had all their capital plus their interest back. The gap financiers will own the film in its entirety including all materials and intellectual rights until they have all their money.

Successful cash-flowing of the film production process is dependent on the experience of the advisors and their knowledge of the film business, the producers, directors, distributors, and sales agents etc. There is a substantial due diligence process applied before each loan is made, and no funding is done until the whole film budget financing comes together at the same time. Perhaps the best analogy is that of a racing driver in a lovely vintage car you have paid for. You wouldn’t drive it yourself as you haven’t the skills, but you can acknowledge their skills and expertise at getting round the track without wrecking the car – and trust them to do it.