Finding beauty amid the ugliness of films as an investment
Picking the right film can result in an asset-backed low-risk debt investment with a premium of 16% over 12 months, according to The Fyzz Facility.
Admit it. After the screening of an old or new epic, produced on a shoestring but raking in millions, you wonder whether you should invest in film. Maybe you can visit the set, meet the stars, or perhaps the generous tax wrapper tempts you? Wrong, wrong, wrong.
As with many investments, in film, emotion is the enemy of reliable returns. Far from the romance of performance and production, say veterans Robert Jones and Wayne Marc Godfrey (pictured) at The Fyzz Facility (TFF), it’s a tough business based on contracts and distribution. The two, with 40 years’ experience between them, have raised $10.3m across 26 feature films in two years, generating an average annualised premium of 16% for investors, with a zero default rate.
Jones says: “We are about return rather than glamour. We don’t break our rules and we don’t fall in love with our films.” The ‘rules’ he cites include sticking to debt rather than equity investment, and joining the end of the financing chain. “The earlier you commit, the bigger risk you take,” he explains. Having sat on all sides of the table, he and Godfrey understand how the ‘recoupment waterfall’ of a film is best structured.
To secure the film’s route to market, the producers need to partner with a distributor or sales agent. Agents often offer a recoupable Minimum Guarantee (MG) in exchange for the sales rights to the film. They provide sales estimates for all international territories, which reflect the minimum value they hope to achieve for each individual territory.
A deal may also include a ‘pre-sale’, when the agent brokers a deal with a distributor before the film even goes into production. Distributors will pay a deposit (typically 10%-20%) upon signature, and the balance once the completed film has been delivered. A feature film budget may also be made up of government tax credits or subsidies.
TFF structures senior debt (a loan secured against specific collateral such as pre-sold distribution contracts or the estimated revenues from tax credits or subsidies), or junior debt (gap financing), against the likely minimum revenue streams from the sale of any territories not pre-sold.
Godfrey says: “Senior and junior debt always sit at the top of the recoupment waterfall, recouping (with a premium) first from payment of the contract(s) against which the loan is secured.” The real skill is in assessing the value of the collateral assigned to the potential loan: the security of the contracts, the ability and track record of the sales agent and their estimates, and other film-specific factors.”
Says Jones: “We know the agents but we do our own checks on everything, taking into account the budget, the director, the story, the track record of the producers and the type of film. The films we like are genres that have a quantifiable, pre-existing market, where the success of the film, in terms of sales to international distributors (and therefore TFF’s recoupment) is not correlated to the box office performance. These genres include action, horror and sci-fi, for example.”
TFF gets offered 15 to 20 films a month from international producers. “The opportunities we seek offer our investors a solid and reliable return and that keeps them coming back,” Jones adds. “We know how to assess and estimate the market value for the films we consider even before shooting begins.”
Godfrey says TFF looks for “a fairly speedy or well defined time frame, with low risk, no legacy issues and a quick payback”. TFF seeks at least 200%-250% cover for any loan, and typically never invests more than 25% of the film’s total budget.”
Both are wary of government ‘tax wrappers’ that incentivise investor interest. Jones says: “We don’t like incentives that put the wrong motivation behind a deal. We don’t want to be forced to invest in a particular deal because of a fiscal deadline. It leads to bad decisions, and structures involving tax angles tend to carry high legal, compliance and legacy costs.”
Instead, TFF spends a lot of time educating prospective investors long before they are invited to participate. “We are talking to sophisticated investors, because these financing structures are not regulated. Normally, we require an investor to pledge a sum against a loan and then we draw down as required. Each trade is ring-fenced so the investor is protected.” That process enables TFF to openly identify the risks, which generates more rather than less confidence among investors.