EIS takes recovery position

“It seems the expected EIS bonanza came to nothing,” one industry observer scoffs as he contemplates the UK film-financing landscape.

This time last year, the revamped Enterprise Investment Scheme (EIS) was seen as one of the most promising sources of finance for the UK’s independent producers. Rules governing EIS had been revised to allow $7.7m (£5m) to be raised through an EIS fund, up from the previous limit of $3.1m (£2m). In the wake of the changes, leading producers announced they would be looking to EIS to fund films.

The funds were not only to back UK movies - EIS money can be spent anywhere, although investors can only get the tax benefits if they are UK taxpayers.

Among the funds launched in the last 12 months were: Ridley Scott Presents, hatched together with Orchard Media with the aim of raising $7.7m (£5m) for six low-budget films that Focus Features would sell worldwide; Argentum Films (a combined offering from See-Saw Films and Ruby Films); and Trademark’s Juno Pictures. Some of these high-profile companies conspicuously failed to hit their investment targets.

‘EIS is a fanastic scheme, very well constructed - a really useful tool in the film-maker’s arsenal’

Ivan Mactaggart, Trademark Films

“Everybody in the film business seems to think EIS is a tax relief for film and whenever the government does something to EIS, investors will flood to put their money into film. The reality is EIS is a tax relief for investing in companies. There’s a whole world of opportunity investors are presented with and film is a tricky asset class,” one leading UK film financier observes of the continuing naivety of the UK film sector toward EIS.

As has been well chronicled, some investors are reluctant to invest in film. Their confidence has been battered by negative headlines about film tax scams and tax avoidance. Call it the Jimmy Carr effect - the UK comedian was one of a number of high-profile individuals who invested in a scheme that was later investigated for tax-avoidance.

The fact EIS has been given UK government approval is not enough to allay these investors’ fears if they have had their fingers burned in the past. There is also a risk element to EIS investment that was not always there for those who invested in film in the sale-and-leaseback era. Nonetheless, just as some may have been too quick last year to talk in terms of an EIS boom for the UK film industry, others are being equally hasty in dismissing EIS.

Nik Bower, director of Ingenious Investments and Ingenious’s head of media, suggests there is continuing appetite for EIS if the scheme is targeted properly. “We continue to see strong demand for well thought out investment opportunities in low correlated alternative asset classes like film and television. EIS is a generous and well targeted tax relief that appeals to investors.”

Paul Brett of production and financing outfit Prescience makes a similar point. He accepts that the “single EIS raising money for a first-time film-maker” is a tough sell to investors. However, the flip side is that film in general is regarded “as an established, sensible investment when approached in a portfolio fashion”.

“I have been saying for years that EIS is a fantastic scheme, very well constructed, difficult to abuse - a really useful tool in the film-maker’s arsenal,” agrees Ivan Mactaggart of Trademark Films. Although Trademark’s EIS Fund, Juno Pictures, narrowly missed its investment target last year, he says Trademark will “definitely use” EIS in the future. The company is in the early stages of putting together a new fund that will encompass film, television and theatre.

One example of an EIS fund that has comfortably hit its targets is the Ingenious Pathé EIS Film Fund. The fund raised close to $20.1m (£13m) - having set out to raise between $15.5m (£10m) and $18.6m (£12m) - for its EIS companies and will announce its first production investments shortly.

Those setting up EIS film funds need to address perceived risks, experts insist. In the case of the Ingenious Pathé fund, investors realise risk will be spread across several films. An added reassurance is a confirmed route to market through Pathé’s distribution infrastructure.

‘As a veteran of the Section 48 madness years, it is really good to be working in an environment where everything is stable and understood’

Nigel Thomas, Matador Pictures

Ingenious’s sister fund, Shelley Media EIS, looks to mitigate investor risk by investing in films that have been widely pre-sold and that also have access to tax credits. Through Shelley Media, which has been in existence for three years, Ingenious has backed films such as Sally Potter’s Ginger & Rosa [pictured], Mike Leigh’s untitled JMW Turner project and IM Global’s Revenge Of The Green Dragons, executive produced by Martin Scorsese.

Generally, equity investors are - as one insider puts it - “bottom of the pile” for return on investment, whereas distributors and sales companies take their fees early on. That is why those who are putting together EIS offerings are trying hard to tweak their models to ensure that when films are profitable, investors can see returns more quickly.

EIS expert Dave Morrison of London-based accountancy firm Nyman Libson Paul warns the naysayers that it is far too early to write off EIS. “Remember that many EIS raises will not have yet materialised into films,” Morrison points out. “Indeed, some films may be EIS films but it is not public knowledge. There can be quite a lot of incubation for many films.”

Stable environment

Producer-financier Matador Pictures, which last year launched a separate financing arm, Gloucester Place Films, has been working successfully in the EIS arena for six years. Its latest fund, Total Film, successfully raised $7.7m (£5m). The company has backed UK and international films, with recent projects including Stranded starring Christian Slater and Mariah Mundi And The Midas Box.

“What drew us to EIS first of all was that we’d been involved in various Section 48 arrangements, which was extremely unsatisfactory. The attraction of EIS was that you got pre-approval from the Inland Revenue. You knew you were doing something that was fairly safe,” says Matador CEO Nigel Thomas. “As a veteran of the Section 48 madness years, when it was just the Wild West, it is really good to be working in an environment where everything is stable and understood.”

Thomas welcomes the lifting of the cap to $7.7m (£5m). “As producers, it gives us the opportunity to think about doing bigger films,” he says.

Many believe the attitude toward EIS has changed over the last year, with the gold-rush mentality now gone. People realise that just because you can raise $7.7m does not mean you will manage to. There is a new realism about what EIS funds can achieve and an appreciation of their stability and predictability. They will not provide an instant bonanza for either producers or investors but with the cap raised to $7.7m, EIS financing will - as one analyst puts it -  “be more useful for a wider range of films.”

Bigger investors may prefer the portfolio approach but Neil Thompson of Formosa Films, which has used EIS backing for films including Clubbed and Twenty8k, suggests that even with “the single film model” producers are starting to see “the money moving again”.

For the smaller Seed Enterprise Investment Scheme (SEIS), investment is limited to $232,000 (£150,000) per company so its use in film was expected to be limited to development. In fact, entire low-budget films are being financed through it.

Whatever the struggles producers have had in raising finance through the scheme, it looks as if EIS will be around for the foreseeable future.

“I would be surprised if EIS is switched off in the short to medium-term,” comments lawyer Charles Leveque, partner at Harbottle & Lewis. “To remove it would seem to fly in the face of stated government policy of encouraging investment in growth companies generally, particularly in an environment where other sources of finance are difficult to access.”

EIS - advice from the experts

“When I get a new client or a potential sitting in the office, before they even ask technical questions I just say to them, ‘If you’ve got access to people with money, you can do this. If you haven’t, you just won’t.’”
Dave Morrison, Nyman Libson Paul

“Putting together an EIS offering takes an enormous amount of hard work on the part of the film-maker and the person raising the finance. Some film producers are in the fortunate position of having access to a small pool of high net worth investors ready to invest large amounts, but the more common model involves making an offering to a large number of investors investing small amounts. You need to devote a lot of resources to managing that aspect of things which - if you’re also the person writing and directing - is an enormous undertaking.”
Charles Leveque, Harbottle & Lewis