Sunday, June 5, 2011

Independent Film Finance Success Study - The King's Speech

If we want investors for our independent films then there is only question to consider: "What benefit will the investors get by putting money into this film?"

I've read plenty of indie film offer documents and prospectuses recently, and it's clear that they are doing their best to talk up the possibility of box office return.

But, sadly, we know that the reality for independent films is harsh.  Really harsh.  Even if the film gets international distribution and great box office returns we know most of that money won't filter back to the investors.

It is sobering to read the prospectus of a respected independent film fund only to find that 'You can be an extra!' and 'You get movie memorabilia!' are still being touted as serious benefits.  And this is a film fund which, by definition, is only open to high net worth individuals

So I thought I'd look at some reasonably recent film funding decisions to see what I can learn.  Why did investors put money into these independent films?

I'll start with a recent success story: "The King's Speech"

Investor 1: Prescience Film Finance/ Aegis

They funded the bulk of this - putting in almost $10 million.  So how do they make profit from their investment?

The answer is simple - they make profit by lending at 15% against the UK tax credit and against presale contracts.  They also loan against distribution in territories that aren't presold - at a higher rate of about 20%

This ensures that their return isn't really based on box office.  The investors can expect about 14% income from their investment based on fees ... and even the MASSIVE success of the King's Speech is only going to push this up to about 24% !  It is very telling that their business model is organised so that the difference in ROI between funding a failure and a hit is only 10%.

It's also interesting to see how Prescience Film Finance estimate the share they will get from box office return.  To quote one of the company directors:
"The U.S. is now worth exactly the same as the Philippines - but at least you know you’ll get a good deal out of the Philippines.  The U.S. market used to be worth 40%, but now it has to be discounted to zero."
So it seems that the key is that the 'investor' is simply loaning against presales.   That might be possible for $15 million productions - but how relevant is it to an indi film with a tenth of that budget?

It so happens that I recently chatted with a producer behind a direct to DVD title that fitted that description perfectly - it had a $1.5 million budget.  It even turns out that one of the presales was with Transmission - who was also one of the presales behind 'The Kings Speech'.

So I asked him, and his attitude was interesting:
"Presales are a tricky thing. We are producers with our own financing and presales are a must for us to internally green-light a project. 
As well, if a project can’t get acceptable presales based on cast, key crew and script, that would be an indicator that there is not a strong market for your film or it needs to be re-tooled.  
It is also a great check on whether the budget is realistic or not, examining the sales estimates vs. the actual sales numbers.  
Why is it expected [that investors have such a high risk of no return] in the film business?Financial discipline is the key."
The most curious outcome is that this seems to be in direct contradiction to everything I read - which talks about how presales have dried up completely in the last five years!

Investor 2: Molinare
They invested about $320k in the film.  The reason for this investment was one I hadn't considered before.

They invested the money as a post-production company to help get the work of post-production.

At first this seems to be the financial equivalent of a perpetual motion machine ... but if we think of it as a way of putting the post-production costs onto a deferred payment plan it makes more sense.

Mark Foligno started doing this to help his SFX company during the recession.  It was successful - which doesn't mean that they recovered their money in all the films they worked with, but they certainly recovered more than their total investment.  As well as this the company had enough post-production work for them to flourish during the lean times.



What I learned from this:
1. Post production companies can be a source of investment
2. Investors don't have to rely on box office returns for recoupment

For the second point to apply there is the problem of having sufficient pre-sales ... which is a major undertaking.  But it is possible for the right project.

There's more to come in later blog posts - I'll be looking at some smaller Australian films with a vastly different finance model.

However I'll leave you with an interesting interview with Paul Brett of Prescience Film Finance:

7 comments:

  1. I disagree when Mr. Brett says, "Lagging behind the U.S." for their flexibility in green-lighting projects that aren't already packaged and written for a formulated demographic. I believe that is a strong point for UK and Europe, and will hold true when push comes to shove.

    Look at another form of the Entertainment Industry; Music. The majority of what has taken hold in America has European roots and started out in someone's basement with a very limited audience.

    The only way I can define Europe as lagging in this area of, specifically, the film industry is only monetary. It makes perfect sense in a capitalist ideology of weighing what success is, ultimately. The US is certainly in the lead when it comes to our ability to use the medium of film as a glorified marketing campaign for secondary merchandise. Take Cars and Cars 2, for example. A great ROI!

    In the end, I just believe we should question that sort of mentality, even as investors who are simply aiming to make a return on their risky investment.

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  2. "Take Cars and Cars 2, for example. A great ROI!"

    I was surprised (but in a good way) that 'Happy Feet' was greenlit because of the lack of secondary merchandise. In a world were all penguins look pretty much the same, you've increased the market of stuffed toy penguins but most of it is going to go to very similar looking toys that aren't licensed - films like 'Cars' & 'Toy Story' don't have that problem.

    Product placement is also an option for smaller indie films - although it mainly helps with additional marketting push rather than a direct ROI.

    For example, 'Buried' was an extremely limited indie film .. with the entire film literally set in a box. Yet Cat Stone (of Stone Management) managed to fit in 3 items of product placement: the phone, the watch and the lighter.

    Those brands promoted the film in return, and the indie film-maker was the winner.

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  3. I read about film festival in the internet and reading your article, must say that you guys totally aced the independent films and talking about films shown was really impressive and watchful. When you going to organize independent film festival for small movie makers.

    independent films

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  4. I appreciate you posting the steps. They are definitely worth the read. Businesses should be careful with their advertising expenses. It is also important to know connections and use them wisely. But it is especially important to keep client relationships open.

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  5. This is a really interesting post and a fascinating insight into the somewhat mysterious world of film finance where little is what it seems. Or is that just me?

    Do you know if See-Saw films made any sort of financial contribution towards the film?

    What sort of an impact did the UK Film Council investment have? As you can probably guess, the involvement of the UK Film Council in what turned out to be the biggest box office success in which it was involved has generated a lot of column inches in the UK.

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  6. I believe, from memory, that they still had 11% Equity investment in the mix - but I don't have my notes in front of me.

    The role of the UK Film Council was a bit problematic - they insisted on a much higher proportion of equity in the project than their investment warranted .. and See-Saw felt that they didn't have much choice but to accept the bad deal. (eg: Put in 20% of the money but take 50% stakeholding)

    Both Ian Canning & Emile Sherman appear to be quite annoyed at having to accept the deal - I've heard them both lament it on several occasions.

    Mac

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