Review – Silver Lining Screen EIS fund
British adults on average spend a third of their 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
- Sector opportunity: high demand/short supply
- Proven team with track-record of delivering profitable productions
- 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
- EIS advance assurance received
- Exit to cash targeted for 3.5 – 4.5 years
- Minimum investment £10,000
A 2015 independent report published by the British Film Institute claims the high-end television and film sector generated approximately £1.4 billion for the UK economy, employing just under 40,000 people.
The government supports the industry by providing film production tax credits to make the UK an attractive location for international rights owners. It is estimated every £1 given in film tax relief generates additional gross value of over £12 for the economy.
The demand for content is very high – estimated to be over 6,000 new films every year – and supply is short.
An established route for investors to tap into this opportunity is through an EIS fund. Last year two of the most popular EIS were in the film and TV sector, where two providers raised more than £163 million in total. The Silver Lining Screen EIS is a new fund that aims to tap into the same opportunity.
As is usually the case in media and TV production investments, the EIS will invest in individual companies, each producing one or two projects.
The objective is to use a balanced, commercial approach to maximise returns and achieve an attractive risk/return profile. Rather than investing in glamorous, high profile cinematic film projects, the fund will target higher-margin, lower-budget projects designed for movie channels, TV broadcasters, DVD and digital download platforms such as Netflix. This end of the market tends to be lower risk, more predictable and with higher success rates as it is not as reliant on box office sales.
All projects will typically be in their last stage of production. In simple terms, the EIS fund will usually provide the last money needed to bring the project to the screen. Distribution contracts will normally already be in place. For the project to be successful, the production needs to be completed on time and on budget (completion bonds may be used to protect against overruns). Any additional sales provide the potential for an upside.
For every £1 invested, between 75p and 85p is typically supported by contractual revenues that have been agreed pre-filming from advanced licensing (from pre-sales with broadcasters or distributers) and pre-approved government tax incentive schemes. The remaining 15-25p will be at higher risk, reliant on additional sales made after the production completes. The advance licensing will have demonstrated international market demand and support the likelihood of additional sales. With conservative sales forecast, the manager is confident about a return of at least £1.05, although there are no guarantees.
Once you add tax relief to the equation, the investment case becomes yet more compelling. With up to 30% EIS income tax relief, the net cost of a £1 investment is just 70p. So a £1.05 return would equate to 1.5x your money. Even if there were no sales after the delivery of the completed project, an EIS investor could still receive 75p-85p back on 70p at risk; an effective positive return.
Remember, tax rules can change and the value of tax benefits depends on circumstances. Capital is at risk and this is a long-term commitment: as with all EIS investments, you should not invest money you cannot afford to lose.
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 has collectively years of experience in content production. Each of the executive directors has been individually involved in 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.
Grant Bradley, one of the directors, has over 30 years’ experience. He has raised more than $200 million to produce 40 films all over the world including the UK, Europe, Australia, New Zealand, Russia, India, and the USA.
Steve Hodges has over 20 years’ experience in the industry. He was Head of Production at Sony Music London. He later moved to Los Angeles becoming part of the management team that raised $25 million for New York based Winter Films. Steve has held senior roles at Fox, Sony, and TNT.
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 due diligence.
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 fund is expected to have five EIS qualifying investee companies each investing in two projects. The diversity of the fund and the number of projects funded will depend on how much capital is raised out of the £5 million target.
The manager is confident about a return of at least £1.05 equivalent to 1.5x after tax relief. This is based on delivering the projects on time and on budget, and conservative sales after the delivery of the completed project. Should the project secure additional sales, the manager believes a return of £1.35 per £1 invested might be achieved, equivalent to a return of 2x after tax relief. Please note: returns are variable and not guaranteed. Capital is at risk.
Each project has a predefined life span – typically three to four years. The investee companies return cash following the sale of the project allowing a reasonably predictable and timely exit for shareholders.
- 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 approximately 80% to investors only on one occasion in their career. 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.
- Management – the success of the fund is down to the team. They need 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 £5 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.
- 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.
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 110%
Film and media is one of the most popular EIS sectors. We believe the Silver Lining Screen EIS Fund is a refreshing addition to the scene applying a commercial approach to funding profitable projects and charging investors lower fees. 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.
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.