The number of films produced per year in North America has nearly doubled from 478 in 2000 to 871 in 2018. With the number of independent films looking for financing, there are plenty of opportunities to invest.
Your current portfolio may have a variety of tangible and intangible assets, from stocks to real estate to comic books. But when it comes to investing in film, Hollywood can bring as much unpredictability and risk to an experienced investor as it does glamour. Investors must dig deep to determine the commercial value of the final film, essentially predicting its box office value.
With the right knowledge, accredited investors can avoid the riskier aspects of investing in Hollywood and play an active role in the entertainment industry. To do so, movie geeks and Hollywood outsiders must find answers to a number of questions before greenlighting an investment.
Most films are financed in a number of ways, such as pre-sale licensing and distribution in a foreign country, grants, tax rebates, family, friends and private equity investors.
As a private equity investor, your investment in a film is similar to an investment in a company. The goal is to make a return on investment once the film gets distribution and turns a profit, much like when an investor makes a return on a company that sells. Film investors often get producer credits, and depending on the type of agreement, the investor may have some say in the production itself. This requires the investor to clarify their role in the production, and whether they will actively or passively invest.
The most important question to answer before investing is this: who is your audience? Knowing your audience is generally overlooked when nascent producers and investors delve into a film project. Whatever level of experience you may have in investing in entertainment, focusing on highly underserved or insatiable appetite markets as a starting point is far more important to an entertainment investment than a compelling story. Why? Because one of the most important questions investors and filmmakers fail to ask prior to committing capital, is that when the product is complete (and, yes, this is a product), who will care?
If you are interested in passive investing, then you should be offered a private placement memorandum (PPM) to legally and safely purchase a percentage in the production. Even investments from family and friends are considered a security sale, so this is necessary for financiers and filmmakers. In addition, these memorandums should provide important information to influence your decision.
So, what should you ask before signing the dotted line?
Ultimately, what is learned shines a light on what should be an acceptable level of total funding for the production and its subsequent distribution. It can also tell the filmmakers and investors if the production is worth embarking upon at all.
These are in addition to the most critical questions:
There are seemingly popular blockbusters that fail, and there are small indie films that soar beyond expectation. Investing in film is risky, and there is no full-proof way to predict a film’s success. So, is investing in Hollywood even worth the trouble? And how do investors currently approach the risk? investments.
A lack of understanding about the film industry can impact investment behavior. Dr. M Franklin of the Institute for Creative and Cultural Entrepreneurship explains:
“There is a lack of clear, detailed, high-quality information about the film industry. This refers not only to the oft-cited lack of revenue and profitability data, but also to information about the way in which film project characteristics are evaluated, projects accessed, and financial involvement in films structured. How the industry is perceived impacts how it operates. This knowledge gap likely contributes to a lack of investor confidence and therefore contributes to difficulties in accessing finance.”
Franklin also cites financial crises and digital disruption as reasons that investors avoid the film industry. To mitigate risk, Franklin states:
“Financiers are more likely to back a film if they believe it can be sold to distributors around the world, or to video-on-demand (VOD) service providers. Thus, in making decisions, investors and fund managers are not solely considering audience demand, but rather derived demand – the demand from broadcasters, theatrical distributors, VOD services and other business-to-business buyers of content.”
Investors consider diversifying their investments within the entertainment industry itself, or invest in slates of films rather than individual projects, to further manage risks. However, with great risks come great rewards, and the stable demand for entertainment remains an appealing reason for investors to enter the game.
This is worth repeating: The film industry should only be considered by those investors who are comfortable with significantly high risk. That being said, if you are comfortable with that degree of risk, here are some of the reasons why investing in the industry is a good idea:
Utilizing a managed risk strategy can make this alternative asset an opportunity for any investor. The industry is growing rapidly in international markets, especially China and the UK, and it continues to grow in the home entertainment market as well.
Smart, risk-taking investors can really dazzle their portfolios by investing in film. They can participate in the movie industry with a real potential to beat the odds, create a long lasting revenue stream and participate in an asset class that has shown to be recession-proof. The fact of the matter is that the industry, while continuing to experience long periods of growth, has the potential to deliver massive returns. Just remember that the second feature here is that even great, well-made films sometimes flop. There’s an element of risk with the outcome of any artistic endeavor, and not recouping your investment from a failed film is very possibly what will happen in ‘The End.’
[Editor’s Note: Check out these related webinars, which can be taken for Continuing Legal Education (CLE) credit, or simply for practical and entertaining education for business owners, Accredited Investors, and their legal and financial advisors: Alternative Assets Part 1 and Alternative Assets Part 2. [Editor’s Note: This is an updated version of an article published August 26, 2015 by Wade Bradley.]
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