Like James Packer’s Ratpac, the original ‘Rat Pack’ dabbled in films too, including the 1959 ensemble piece Ocean’s Eleven.
The Packer family has long had a reputation for getting more investment decisions right than wrong, so James Packer’s $450 million foray into the movie business begs the question of how ordinary investors can chase their own celluloid dreams.
Part of the investment case for Packer is the benefits that will flow to his casinos. Some of the 75 films his RatPac joint venture with Hollywood producer Brett Ratner will finance over the next four years, under a deal with Warner Brothers, will be set at his ‘integrated resorts’. For example the upcoming Rush Hour 4 will be set in Macau, and feature a new flagship property developed by Packer’s Melco Crown division.
However investors without access to such synergies may still find something to suit them in the film asset class, which ranges from high risk equity-style participation to surprisingly stable debt vehicles. An added bonus is that you’ll almost certainly enjoy the experience.
“Film is the ultimate mix of art and commerce or – to put it in more vulgar terms – it’s the whore and the madonna in the same bet,” says Nicholas Cole, a Digby Law lawyer and the producer of 2009’s Last Ride, starring Hugo Weaving.
“It’s not a rational investment – it’s an emotive investment and there’s no denying that [providing equity for] films rarely provide a good return. But in some respects it’s no different from buying a horse: it’s going to cost you a lot and there’s no guaranteed return but that doesn’t stop people buying horses because they get a lot of enjoyment out of them.”
Investors must join the queue
The film industry has changed dramatically since the heady days of the 1980s, when it was largely underpinned by a tax-driven incentive known as 10BA. There are now a growing number of strategies that can deliver private investors both the excitement of the screen industry while defraying some of the risk.
In 2007, the government replaced 10BA with the Producer Offset tax rebate, which returns 40 per cent of an Australian film’s qualifying budget – and an attached equity position – to producers. For example, a $10 million local film would typically include $8 million of qualifying expenditure, making it eligible for a $3.2 million cash rebate from the Taxation Office.
And yet few Australian films return private investors’ capital, let alone deliver a tidy profit. How can that be? It comes down to both the structure of the industry – investors rank among the last to share in a film’s box office and sales revenue, behind sales agents, distributors and exhibitors – and the small market for local film. Australian films typically make up just 4-5 per cent of the blockbuster-dominated $1 billion-plus local box office.
Capturing wider markets
Nonetheless, breakout hits such as feel-good outback drama Red Dog, which grossed more than $21 million at the Australian box office in 2011, still fly the flag for local production.
“We look for really strong concepts that have the ability to break out and capture markets beyond just regular cinema attendees,” producer Nelson Woss says. “So in the case of Red Dog, I wasn’t going for the cinema audience – I was going for dog lovers.”
The $8.5 million film included private investment from individuals and a range of companies such as Rio Tinto, Woodside and WesTrac. While Woss declined to state returns, he says investors are “very happy”.
However, such success continues to be the exception rather than the rule. Producers Gregory Read and Antony Waddington raised approximately $4 million of an estimated $15 million budget from private investors for their 2011 drama The Eye of the Storm, based on Patrick White’s respected novel. Investors were given an equity position in the film well above their level of investment and a higher recoupment position.
“We like to say to the investors: you will recoup in a very strong position on this before I even see a dollar in regard to the return on the film,” Read says.
(Cole says private investors should make it known that they want a recoupment position ahead of government investors such as Screen Australia.)
The Eye of the Storm was directed by Fred Schepisi (Roxanne), had a star line-up including Geoffrey Rush and Judy Davis, and grossed almost $2 million in Australia. However, the producers say their private investors’ journey to recoupment is more akin to “the tortoise as opposed to the hare” with overseas sales and theatrical releases still under way.
“So fingers crossed – we might be getting there,” Waddington says.
A film’s economic life can unfold over several years although it usually becomes clear if it will make a profit within the first three, according to Cole. One way to minimise such single-project risk is to invest directly in screen production companies, which can act as a proxy exposure for a slate of films or TV programs.
While there are a few listed entities in the sector (such as Village Roadshow and Beyond International), Screen Australia has backed several smaller, privately held companies through its enterprise program.
“Once we have stronger private investment involvement in the production industry, then I think we’ll be able to grow investment in features as a second string to that because we’ll have investors who are experienced in the sector and understand it,” Screen Australia boss Ruth Harley says.
According to Screen Australia’s 2010 business survey, there were almost 400 active production companies in Australia although 91 per cent produced revenue of less than $2 million. Private investors held equity in just 10 per cent of those companies although higher-profile ones such as Screentime (Underbelly) and Matchbox Pictures (The Slap) are beginning to attract offshore investment.
Sophisticated investors such as former Austar executive Deanne Weir and former Southern Star Group boss Hugh Marks have put money in a number of media companies (including multimedia production company Hoodlum and factual specialists Wild Fury, respectively).
Marks says investors can use their own skill set – for example, business or marketing – to support their investment in production businesses.
“It’s a different world,” he says. “It’s not so much about [tax-driven] project investment – it’s about how do you work with creative people to build a business out of their skills and talents?”
Marks also supports another film investment strategy that may offer the lowest risk of all: “cashflowing” the Producer Offset. Most productions use the rebate as part of their production budget. However, it can only be claimed by lodging a tax return after the film is completed, leaving lenders to plug the short-term funding gap.
“I can help them with my capital and make a return, which is effectively government-guaranteed,” Marks says, noting that such returns can still be in “double-digit” territory.
Cole says competition in the sector is rising but opportunities remain for sophisticated investors and private consortiums to provide short-term debt finance against the offset. “Rather than doing one-off loans for each film, they could do a revolving facility for say three or four years of production, and that way they could amortise the cost of setting up the facility and cross-collateralise the loan against a whole range of different films and products,” he says.
Few banks play in the sector, although the $3 billion superannuation fund Media Super has a $12.2 million lending facility (via Fulcrum Media Finance), which has cashflowed several local films, including local cricketing comedy Save Your Legs! It bombed at the box office, but the film still provided a strong return for the fund, just by being completed and released.
But screenwriter William Goldman’s famous maxim for the film industry still applies: ”nobody knows anything”.
The script for investors
- 1. Investing in individual films remains a high-risk, speculative venture.
- 2. Private investment in the Australian film industry has averaged $23.4 million a year since the Producer Offset began in 2007-08 and $12.3 million in 2011-12.
- 3. Buying a stake in a production company can act as a proxy for investment across a number of screen projects.
4. Screen Australia (www.screenaustralia.gov.au) lists a number of production companies, including several it has supported.
- 5. Cashflowing the producer offset can provide low-risk short-term returns. Lawyers and accountants in the field can provide advice.
With Michael Bailey