💰 Film is an asset class that many have heard of but few truly understand. Let’s explore its intricacies.
Ever wonder where film distributors acquire their films? They do so at film markets such as Cannes, Berlin, and the American Film Market (AFM). These markets, not to be confused with the film festivals that often run alongside them (except AFM), are where distributors purchase the rights to films that are either in pre-production, production, or ready for distribution, aiming to showcase them to a wide audience.
✔️ What makes film an asset class? Distributors typically pay for film rights before they are produced. These advances and contractual commitments are cash flowed by film financiers and used to make the film. However, presales alone are generally insufficient to finance an entire movie. This is where additional funding sources come into play.
✔️ The first financing sources producers usually explore are tax incentives and grants, available in certain territories based on qualifying expenditures. These soft monies can be cash flowed and added to the finance plan of the film project. Yet, this still might not cover the total production costs.
✔️ What about the unsold territories? Producers can borrow against the value of these remaining territories, known as the gap. However, the risk against this collateral is slightly higher, which translates into a lower loan-to-value (LTV) ratio against the unsold potential. On the upside, the selling price is usually higher since the film does not have to be co-financed by the distributor. However, this advantage doesn’t apply to every genre.
✔️ Equity also plays a crucial role in film financing. It is necessary when there is potential for significant financial upside by choosing not to pre-sell too many territories, instead opting to deliver the final product when it is complete. In this strategy, it is important to understand the film’s value upon delivery. That value is mainly based on the cast level and can be estimated by a sales agent, using the low estimates as a reference. The equity strategy can yield substantial profits but also potential losses if the film doesn't sell well.
✔️ But this is not everything. There is also bridge financing, which may be needed to finance pay-or-play offers to lock in the cast, triggering the above financing options. Bridge lending comes at very high interest rates and is recouped at financial closing. If not recouped on time, it may foreclose the film project.
These are the main finance sources and strategic choices made by film producers and financiers. Balancing risk against collateral (territories) and potential upside (shown in the sales estimates) is what can make film an attractive asset class. However, poorly considered or emotionally driven decisions can lead to substantial losses. Film is a business, and as in any business, money is made and lost. While its potential for success has never been greater, it always demands careful consideration.
CEO & Producer at Bad Blood Films | Dolby Sound Consultant | BAFTA | Ironman & Ultra-swimmer
4moI completely agree Harry Brandrick more should be done to support independent films here in the U.K. I mean, where else is the next generation of talent going to come from?