Film Investment: Blockbusting Profits or Bank Busting Flops?
In an age of celebrity and fame, Hollywood might seem like a great place to make money fast, but while the payoffs in major film production can be massive, so can the losses.
In an industry as unpredictable as the movie stars themselves, is putting your money into films a sensible option, or does the very real possibility for loss take the shine off the silver screen?
Avatar, X-Men and Planet of the Apes are all major big screen hits in which film investment company Ingenious Investments have a stake; but the company’s CEO James Clayton told CNBC that these sorts of ventures should be balanced with lower cost independent productions.
"It is certainly true that the hit-rate is thin. It is very much a hit driven business, you need to diversify your investments and hold a portfolio of films if this is an area that interests you," Clayton said.
Even a film such as Avatar, with its estimated $300 million cost, presented a huge risk that needed to be balanced with other productions and a consideration of what the film represented and who was involved in its creation.
"It was a big risk. For us it was part of a portfolio of 22 films. James Cameron’s track record is second to none and he was setting out—and he succeeded—in making something that was completely pioneering and like no other experience you could enjoy in a cinema," Clayton said.
He was optimistic about the future of the industry: "It is a perfect storm for alternative assets like this. The volatility in capital markets over the past 12 months and interest [rates] running way behind inflation means that investors are re-focusing their attentions in this area."
But it isn’t a fairytale ending every time—films like Avatar do not come along all the time and even when they do, investors are not the only ones who need to be paid.
"About 100 British films are made a year and about five of those will make any money," warned Christine Corner of UK-based accountancy firm Grant Thornton. "People always say that films make a huge amount at the box office. Actually the investors do not see very much of that money."
In the UK, 70 percent of box office takings go to the cinema group, while the remaining 30 percent goes to the distributor. In America, it is about 50-50.
Some movies, like the King’s Speech, may make millions after a relatively small initial investment, but getting your money back is not so simple. The Oscar-winning British film cost just $15 million to make and went on to make over $200 million globally—clearly a huge return.
But investors at Prescience, who bankrolled 70 percent of the film through its Aegis fund, had to wait two and a half years to see their money—the initial loan had to be repaid and DVD and box office receipts counted before they saw their profits — and even these had to be shared with cast members, film crew and other financiers.
Nevertheless, it was still a good year. "2010 was about 12-13 percent [return] depending on the share class and the projection for 2012 would probably be somewhere in the same ballpark," said Prescience’s James Swarbrick. But with a $150,000 minimum fee to enter the fund, a passion for the movies is highly recommended. "80 percent of our investors have a real affinity for film," he said.
Tinsel Town may be the obvious choice for the prospective film investor, but the fast-growing Mumbai-based Bollywood film industry could be an alternative worth considering. While booming ticket sales and merchandising are contributing to its $2 billion annual turnover, it is still dwarfed by Hollywood’s $60 billion market. So, should you go east or west for award-winning money-spinners?
"India’s middle class is growing by 40 million a year. India’s entertainment and media is growing by at least 14-15 percent a year," said Jamie Kirkwood of leading Bollywood studio Eros International. Despite ticket price and inflation in India keeping the industry back, Kirkwood said Eros had seen a 20 percent rise in the last year.
"While the Hollywood market is still substantially bigger because of the ticket price, I can foresee Bollywood catching up very quickly," he said.
Like in any good thriller, the risks are stacked against you—returns may not materialize and capital may be tied up. But with a good strategy, investing across a wide range of films to build a varied portfolio—and a bit of luck—you might just get that happy ending you only see at the movies.