Seek absolute returns with low risk? Try investing in films, suggests a Canadian firm called Productivity Media.

The alternative investment management space is full of people promising absolute, lowly correlated returns. The idea that the film industry possesses such conservative qualities might seem, well, something from a Hollywood fantasy. But that might be wrong.

The business of making and distributing films is not all about taking big risks on a potential blockbuster. As some governments now offer relatively generous tax breaks to movie-makers, investors with a strict limit on risk may still be interested. That is certainly the case for a firm called Productivity Media, which operates a fund vehicle called Productivity Media Income Fund I LP, or PMI. Productivity Media is, its website says, a “late-state, senior lender to film and television productions, providing senior secured debt to films and television production”. The firm provides short-term financing for projects serving Canadian and international producers, it says.

To find out about a “cautious” way to invest in films, this publication recently spoke to Andrew Chang-Sang of PMI. He has been president of the firm since 2013 and has been involved in it since the creation of the business in 2012.

“We are about demystifying film finance and look at it from a risk-averse point of view,” Chang-Sang said in a telephone call. Unlike the riskier equity style of investing that many associate with films, the PMI approach is around debt, he said.

Loans are typically to cover a minority chunk of a film’s financing requirements; loans are typically an average of 18 months in duration.

Loans are secured against government tax incentives. For example, in Canada, if a loan is made to film, upon completion of film production, the creditor can receive a rebate in the form of a cheque from the government equal to as much as 30 per cent of the film’s total budget. The PMI fund has a maximum loan-to-value ratio in deals of 50 per cent.

So far, the PMI business has made an internal rate of return, after fees, in the high teens, net to investor, he said.

According to a factsheet dated 30 September, annualised returns since inception on 1 October 2012 are 16.74 per cent; the average monthly return is 1.51 per cent. Since January, net fund performance has been 10 per cent. That compares favourably with a 3.41 per cent total return (reinvested dividends and capital growth) on the MSCI World Index of developed countries’ stocks. PMI Income Fund I LP is structured as a limited partnership with various share classes; investment minimums vary depending on the share class type; there is a management fee ranging from 0.5 per cent to 1.5 per cent; the fund has a performance fee of 50 per cent over preferred return of 8 per cent. Apex Fund Services is the administrator.

How does this entity compare with others? Chang-Sang said that Grosvenor Park – a Canadian business in the same field - has a similar model but as it is private and no financials or results are published. “That said, the one difference we see per their website is they will do up to 80 per cent of a film’s budget while we will only do up to 40 per cent as to avoid concentration risk in a particular film,” said Chang-Sang. Another firm, he said, called Hemisphere Film Capital, does select independents but it focuses on blockbuster, “tent pole” productions whereas PMI focuses on the independent film space.

The film industry has, like other sectors, had to change how it gets financing for producing, marketing and distributing products in a world where banks, which once provided sources of credit, have pulled back due to tighter capital constraints after the 2008 financial crisis. Withdrawal of bank finance has created a gap which non-banking sources of funding, sometimes dubbed the “shadow banking” sector, have sought to fill. In the UK, as reported here some years ago, a fund advised by Aegis Capital Partners used a similar approach to that of PMI. (See here.)

Chang-Sang argues that the movie sector has lots of inefficiencies as banks can be bureaucratic and take a long time to approve loans - this can be problematic for producers who can lose talent to other projects due to delays in obtaining funds. He argues that an entity such as Productivity Media can get something agreed and terms set in as little as five business days.

There are a number of measures PMI takes to curb risks, he continued. “We build takeover provisions into our agreements,” he said, noting that these terms give the creditor the right to takeover a production to bring it to completion and trigger the government incentive and other collateral.

“With films with a budget of $4 million or over there are completion bonds under written by Lloyds’s of London and Allianz,” Chang-Sang said. Such bonds insure lenders against the risk of a movie not getting made.

PMI is targeting investors such as family offices, as they have the kind of long-term horizons and willingness to examine relatively illiquid asset classes.

In the jurisdictions where PMI lends into, there is around $70 billion of films in production per year; over 9,000 independent films were made last year. With big studios making bigger-budget films, but less frequently, there are many household name actors/actresses who want to stay visible, making it more likely they want to be in “indie” productions.

“We are looking at an asset class that is not correlated to macro-economic events; it is not correlated to traditional assets; it has a quantifiable exit and it is asset-based.”

And with any luck, the returns will cheer investors as much as the productions cheer cinema audiences and critics.