New Trends in Global Film Financing

Author: Alan Harris - Head of Production, Atlantic Film Group

(transcript from address to the International Chamber of Commerce at the Cannes Film Festival 2007)

With the demise of tax specific legislation Section 42 and 48 in the UK, the abolition of “sideways loss relief”, the restriction on EIS (Enterprise Investment Scheme) rules and the introduction of the new Tax Credit scheme the United Kingdom has been operating under a constant state of flux and regeneration over the past year.

In searching for the new trends (outside that of the Tax Credit) we have to look at the situation forming during the past few years in the United States and draw an conclusions as to how this system and model could be replicated under the European influence.

In the last two years alone, the US film industry has been awash with institutional funding worth over $9bn.

Recent announcements in the press and industry papers have seen US Studio financing deals between major players such as Legend Pictures, The Weinstein Company, Goldman Sachs, Virtual Studios, Warner Bros, Sony and Universal.

Whereas most interest has focused on these huge Studio based financing deals there has also been much movement in US Independent financing with Michael London’s Groundswell Productions deal with TPG-Axon Capital. Montecito Picture Company and Regent Entertainment’s respective deals with Merrill Lynch

The fires of these US investment has been fanned by:

An increasingly sophisticated approach by Wall Street in finding suitable models, structures and financial vehicles to attract and house the vast amount of money currently available

And also designing a risk-spreading portfolio approach toward the investment in feature film production and distribution

The shift to Europe?

So how can we learn from the approach undertaken in the US. Of course we have to realise that the US model (especially the Studio based deals) has been developed for the specific conditions of the US market to an industry with significantly different traditions, therefore we need to ask the question:

Just how realistic is it that this type of investment can make the leap across to Europe and sit within a structure that has traditionally and increasingly relied on generous government and regional backed subsidies and life-saving tax breaks and credits?

Or to quote Screen International in April… Can the highly engineered, slate-based, equity-fuelled system of Hollywood be shipped across to the subsidy-riddled, multilingual, culturally-sensitive film makers of Europe?

Subsidy Reliant

Let’s firstly look at the question of whether the two systems can live side by side. On the face of it, there seems no reason why the European subsidies and Tax credits and tax breaks cannot be compatible with these US type investments. In fact the intelligent use of such subsidies and incentives could appear to reduce risk to the Fund without subsequently impacting on the aggressive recoupment that most of these investments require.

Further, in some cases these incentives can be used to “back fill” the production budget to reduce the Funds exposure on a film or slate of films. If the Fund would prefer to finance the whole budget itself these credits and subsidies could be categorised as first income thus accelerating the Funds recoupment.

Slate Gap

One of the key aspects of this “portfolio approach” enjoyed by the Hedge Funds in the US with the major studios is the ability to “cross collatorolise” the films against each other in a slate. This is fine in the studio system where the volume of films is significant, however, here in Europe there are precious few independent production companies that are in a position to supply the continuity of output that such slate funding requires.

There could well be an argument for say, several mid sized European production companies pooling their resources to overcome this issue of volume of supply and indeed German bank Dresdner Klienwort is considering just such an investment.

Of course there are many issues surrounding this type of pooling such as differences in language and currency, production financing cultures (for example the use of completion bonders is required in the UK but not always necessary in France), there can be significant idiosyncrasies in legal documentation and legislation, there is the issue of requirement of official co-production agreements, the European Convention and many assorted National and regional governmental regulatory issues.

Lack of Track record

We also need to understand the approach that Hedge funds take to assess their investments. They need to fully understand and assess their risk by running probability analysis, profit assessment and return on investment indicies and therefore need to review the production companies track record and the performance of similar products in the international marketplace.

Again, there are very few independent production companies in Europe that can ably demonstrate this type of track record.

Distribution Gap

In part under the Studio system the US Hedge funds are buying into the stable distribution model. They can assess rates and monitor income directly with one source. European distribution systems, especially those from a multi-sourced Euro-slate would demonstrate a much more difficult beast to work with. Distribution rates and approaches would prove to be far more fragmented and as a result much less transparent this requiring more fundamental knowledge by the Fund managers on behalf of the investor.

In Conclusion

It isn’t all bad news however and notwithstanding the issues outlined above, I see that there is no compleling argument why, given the right environment, application and approach that European production companies (either individually or collectively) could not structure its own derivation of the US hedge fund model to suit its own means.

The over-riding key, in my opinion is to consider the requirements of Fund Managers and the underlying motivations of Fund participants (be they tax, capital gain or asset orientated) and build a suitably risk adverse portfolio of projects to suit this group.

In the future there is no doubt that private financing of this nature will become a significant participant in European film financing - maybe not at the huge levels seen in the US - but it will require European producers and production companies to consider another audience from that of the cinema goer, that of the investor.