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A girlfriend who may disappoint

If you’re thinking of investing in film it may be worth bearing in mind Alec Baldwin’s words in Seduced and Abandoned, a documentary about financing films: “The movie business is the worst girlfriend in the world. You are seduced and abandoned over and over again.”

Investing in film offers a good counterbalance to traditional assets and, if the movie’s a hit, the returns can be huge. The downside is, if it’s a flop, expect to wave goodbye to your capital for good.

“There is a rich history of high-net-worth individuals in the UK being attracted to back film production by the opportunity to mingle with the stars and journey around the international circuit of film festivals,” says Nik Bower, investment director at Ingenious Media. “Even where that is not the lure, film as an asset class is inherently more interesting than many others, and offers returns uncorrelated to major markets and indices.”

While British film has performed fairly steadily over the past decade, the financial crisis had taken its toll. However, recent commercial success of films, such as The King’s Speech, which cost $15 million to make and went on to make more than $200 million globally, has rejuvenated interest.

But be warned: film is highly risky. The latest figures from the British Film Institute show that in 2012 the top 100 films earned 92 per cent of the gross box office, leaving 547 films to compete for revenues of just £93 million. For every Bond, Harry Potter and Avatar there are hundreds of films failing to break even.

There are significant tax advantages which can make investing worthwhile irrespective of return

“There’s a truism in Hollywood – nobody knows nothin’,” says Leon Clarance, chief executive of Motion Picture Capital. “There’s only so much you can do in advance to get comfortable you’re investing into a commercially successful film.”

And famous actors don’t necessarily mean fabulous fortune. The 2010 movie How Do You Know featured Oscar winners Reese Witherspoon and Jack Nicholson among others, but the top billing had a budget to match, recouping just 40 per cent of its $120-million budget at the box office.

Yet despite this risk, there are still compelling reasons to invest. Not all returns rely on box-office success.

Some film companies use tax credits paid by the UK government to repay investors, which rely only on the film being finished. Others pay investors from pre-sales – income generated by selling the rights to show the film internationally. Some offer investors a share or capped share of the profit or revenue.

This last structure is one to be wary of as profits can be eaten up by promotion costs running into the millions. On the flipside, if the film is a stellar success, a 150 per cent capped return can be a terrible deal.

“For any investor, it’s very important to get as close as you can to the actual film,” advises Michael Coulson-Tabb, high net worth adviser at Dante Partners. “Cut out any middlemen. Studios are there to make money and don’t necessarily treat investors with the respect they’re due. It’s critical to check your interests are aligned with the producer’s.”

That’s why he likes Motion Picture Capital’s fund which doesn’t take its share of profits until investors have seen a 160 per cent return, after which returns are pro rata.

There are also significant tax advantages which can make investing worthwhile irrespective of return. Early-stage companies are eligible for the Seed Enterprise Investment Scheme providing 50 per cent of an investment back in income tax reliefs, 14 per cent back in capital gains tax (CGT) reliefs and no CGT to pay on profits. The Enterprise Investment Scheme (EIS) provides up to 30 per cent of investment back in income tax relief for slightly later-stage companies.

While the advent of crowdfunding platforms has opened the door to smaller retail investors who can invest as little as £10 – last year Nicola Horlick’s Glentham Capital became the first film fund management company to raise equity through Seedrs, receiving £150,000 from 135 investors – investing in film remains the preserve of the wealthy. The minimum threshold on most EIS funds is £10,000, although those investing in film to make the most of tax reliefs typically invest up to £1 million.

“Film is a binary investment,” says Mr Coulson-Tabb. “Either you’ll make a lot of money or it may just about break even. You have to be prepared to lose. ”