Review – Silver Lining Screen EIS fund
British adults on average spend three hours 42 minutes a day watching TV on different devices, fuelling demand for new content. It is estimated 6,000 new films are needed by the likes of ITV and Netflix each year. Yet supply is short. This fund will invest in a cautiously run portfolio of EIS-qualifying companies that will produce TV content to help meet that demand. At least 75% of the investment will be supported by contractual revenues.
- Invests in lower-budget/lower-risk TV production projects
- For every £1 invested, 75p to 85p typically supported by contractual revenues and film production tax credits
- Target returns of 105% to 135% (not guaranteed)
- Invests in the 2016/17 tax year allowing carry back to 2015/16, advance assurance received
- EIS3 certificates expected summer 2017 (not guaranteed)
- Exit to cash targeted for 3.5 – 4.5 years
- Minimum investment £10,000
These days there is huge demand for film content. Netflix, Amazon, Disney, Sky and the hundreds, perhaps thousands of digital channels are all desperate for it. So much so they don’t just buy box office hits, they’ll often buy the rights to lower-budget films before they’re even made.
At the other end of the supply chain, there are content producers with everything in place to meet that demand: the script, the actors, the sales rights agreed, often also tax credits.
There is only one problem: as pre-sales and tax credits are normally paid only once the production is completed, one vital ingredient is missing: cash to start the production.
This is where the Silver Lining Screen Fund comes in.
It provides the money as equity to complete the production, effectively making available in advance the cash expected from pre-sales and film credits.
Up to 85% downside protection
Before investing Silver Lining Screen Fund will ensure that between 75% and 85% of the EIS investment is covered by pre-agreed sales contracts (with the likes of Disney, Netflix etc.) and by film tax credits given by various governments for filming in their country.
So providing the film is completed – and insurance is usually in place to ensure this happens – the Silver Lining management team knows it should get at least 75% to 85% of its investment back.
To make back the remaining 15% to 25% (known as “risk equity”) as well as to generate a profit, Silver Lining Screen Fund needs to sell the film to additional networks and territories.
This shouldn’t be a big gamble. The pre-sale agreement of a big percentage of the film – perhaps to three or four networks – shows there is demand and a proven price the market is willing to pay.
In other words, Silver Lining isn’t just “pressing go” on a project based on hopes it will be sold to lots of other territories. The decision to invest is based on the reassurance provided by the tax credits and presales. Likewise Silver Lining will have a good idea of the minimum it could make from after sales.
To add to this belt and braces approach, the amount of risk equity will never exceed half the value of the minimum expected from post production sales.
Assuming the expected after-sales materialise and exceed the conservative estimates, predicted returns could be considerably higher. Silver Lining Screen Fund is targeting a return of between a £1.05 and £1.35 on each pound invested although please note this is not guaranteed.
When you add EIS tax relief of up to 30% the opportunity becomes yet more compelling.
Even if the investment does nothing, i.e. there are no after sales, the tax relief means you should at the very least effectively break even or perhaps make a small profit.
After reading this you might be wondering if this is too good to be true. If it doesn’t seem like a hugely risky transaction, why is there such attractive tax relief available?
The answer is simple, film making without tax reliefs is a risky business, however it is one the government is very keen to support. It is estimated that for every pound in tax relief given to the film industry the economy benefits to the tune of £12 hence the generous tax breaks available.
How many films might you invest in?
Silver Lining Screen Fund is looking to raise £10 million to invest across two to five EIS companies, each investing in two projects. The production cycle is usually 18 months so the money would normally be deployed twice in the life of the EIS. If Silver Lining Screen Fund raises a lower amount, investors will be invested in fewer projects. The minimum amount needed for the investment to proceed is £500,000.
There are no initial fees charged direct to the investor, so the full subscription should benefit from tax relief. Instead, fees will be charged by the manager to the investee company.
The fees will be subject to VAT and include:
- Initial fee – 4.25%
- Compliance and management fee – 0.5% per annum
- Monitoring fee – 1% per annum
- Custodian fee – 0.35% per annum
- Performance fee – a fee of 20% will be charged on realised cash amounts in excess of £1.10.
The fees are attractive compared with other offers on the market.
This type of EIS has a choice of exit routes. At the end of the period (anticipated to be 3.5 to 4.5 years) , most of the funds in the EIS will be in the form of cash returned by the TV channels. So the companies used to set up the EIS could be liquidated and this cash returned to investors.
Alternatively, they could be sold to a media library who will benefit from all future royalties.
The investment adviser is Creative Media Investments, which will select, monitor, and manage the performance of all the projects, whilst the fund manager is Kin Capital.
The Creative Media team collectively has years of experience in content production. Each of the executive directors has been individually involved in over 70 TV and film projects such as multi-award winning The Kings Speech and animated children's television series The Hive, first broadcast by Playhouse Disney (now Disney Junior) in 2011. Established relationships with sales agents and distributors include the likes of Netflix, Amazon, Lotus Entertainment, Lionsgate, Disney, BBC and ITV and the fund will only work with quality counterparties.
The team is supported by Pacific Mercantile Bank, one of the global premier lenders to independent film and TV producers. The bank has agreed to introduce to the Fund any credible projects too small for it to invest in directly. Pacific Mercantile will also help the team with the due diligence on any counterparties.
The fund manager is Kin Capital Partners LLP. The partners have individually helped raise more than £500 million over the last decade for a variety of different companies and investment funds. Kin will provide investment management services and invest in projects recommended by the investment adviser.
The usual risks with unquoted companies apply to this EIS offer. For instance, EIS investments are illiquid and capital is at risk. Investors should only invest money they can afford to lose. The value of tax relief depends on circumstances and tax rules could change. In addition risks associated with this particular EIS include:
- Operating risk – projects may not be as successful as the team expects. The investments should be covered at least 75%-85% as this is collateralised. The remaining 15%-25% is at commercial risk. However even if every project returned only 75% investors should still make a small positive return due to the EIS tax relief. The directors consider this highly unlikely. They claim to have returned less than 100% back to investors on only one occasion and that still returned 80% to their investor. In all other cases they’ve delivered returns in line with their targets for this fund. Past performance is not a guide to the future.
- Counterparty risk – if the presales counterparties went out of business the fund would need to find replacements to maintain collateral and security of pre-agreed sales. The team will only work with blue chip counterparties, which should mitigate this risk. As well as their own knowledge they will also be using credit information from their strategic partner, pacific Mercantile Bank.
- Management – the success of the fund is down to the team. It needs to commit enough time and focus to ensuring the investment strategy is executed. While they as individuals are well proven, this is a new fund with no track record.
- Diversification – if the full £10 million target fund raise is not met the fund will have less capital to deploy and will be less diversified.
- Tax risk – a change to EIS tax rules could make this investment less attractive, although it is set up to still be commercially viable.
Film and media is one of the most popular EIS sectors. We believe the Silver Lining Screen EIS is a welcome new edition worthy of consideration. It offers investors the potential of good returns whilst protecting the downside although you should note no EIS investment is risk free. The investment time frame of three to four years and a very clear exit strategy will be appealing to many investors.
The fund is new so has no track record, however the individuals involved are well proven and would appear to have the commercial know-how to make this a success although past performance is not a guide to the future. The charges compare favourably to other similar funds.
This review is not intended to be advice or a personal recommendation to buy the investment mentioned, nor is it a research recommendation. Wealth Club aims to highlight investments we believe have merit, but investors should form their own view on any proposed investment and read the provider’s documents carefully.