Transcript: A Novel Way to Invest in Movies

Published in Investing on 22 November 2010

Nicola Horlick talks movies with David Kuo.

You can listen to or download this podcast here.

 

David:

This is Money Talk, the weekly investing podcast from the Motley Fool. I am David Kuo, and we are going to the movies today, because we have invited into the studio Nicola Horlick, Chief Executive of Derby Street Films. Welcome to the Motley Fool, Nicola.

Nicola:

Thank you very much.

David:

Now, most of our listeners will probably know you better as being the boss of Bramdean Investments. So Derby Street Films, on the other hand, is something they may not be too familiar with. So can you tell us a little bit about this company called Derby Street Films?

Nicola:

Yep, well Derby Street Films is a vehicle that we've set up to invest in movies, but in a rather novel and different way, because the thing is, a movie, of course, is a story. It's all about taking a book and making that into a script, or just an original idea and creating a script, or it might be a TV series and someone decides, like Sex and the City, for example, to make that into a movie, and somebody, somewhere needs to finance that bit which is called development. So you've got an idea – it could have come from a book, could have come from anywhere, and you've got to make it into a script, and that costs quite a lot of money. 

The thing is that there isn't any money available for that at the moment. It's partly because of the credit crunch, partly because just generally the world is a difficult place currently. There were lots of banks that were pouring huge amounts of money into the movie industry during the boom times, and of course now they're not in a position to do that. So it's really difficult for the movie makers to actually get the ideas developed, and what we're going to do is help them.

David:

So where did the name come from – Derby Street Films?

Nicola:

That's where our office is, in Mayfair. So Bramdean's offices are at Derby Street, and Derby Street Films will be based in our offices. So it's not very original, but it's very difficult – all the cool names have been taken.

David:

It could have been Elm Street, couldn't it, or something? Now the thing is, you have used an enterprise investment scheme as a vehicle for this project of yours. Why have you used that? Why didn't you use a traditional fund?

Nicola:

Because it's very tax efficient for the investor. So a private investor, you have to be a tax payer in the UK to benefit from this, but if you are a UK tax payer, then when you invest in an EIS, you put in a pound, and you get 20p back from the government. As long as you hold onto that investment for three years, you keep that 20p forever. So you've got a pound's worth of value for 80p, so that's a good start in itself. That means you've got a ready-made return of 25%. 

In addition to that, if you hold the investment for three years and you make a gain at the end of it, that gain is completely tax free. So it's very tax efficient to use an EIS. Now, the only thing is, you have to get approval from the Inland Revenue, or HMRC, as they now like to be called, and we've got that approval. So this is an "approved trade", we're allowed to do this, and it's very tax efficient for a UK tax payer to invest in this way.

David:

But as you know, we're in this period of austerity at the moment. What are the risks that the government may, in the next budget, decide that it's going to do away with these tax efficient schemes? I mean, there was a danger that they might have done that in the last budget, when Alistair Darling was in charge. So what are the dangers of that, then?

Nicola:

I think it's highly unlikely, because as you've heard, they say that the private sector is going to create the jobs and mop up the surplus of the people who are made unemployed as a result of the public sector cuts, and indeed there are going to be people in the private sector who initially suffer as a result of those cuts. So the estimate is there are going to be between one and one-and-a-half million people without jobs as a result of what's happening with all the austerity measures, and they're expecting the private sector to take up the slack. Therefore they are not going to remove these sorts of tax reliefs, because they're aimed at new enterprises creating jobs.

David:

So are you saying that, without the tax breaks, the project wouldn't work at all? You need the tax breaks in order for the whole Derby Street Films to ...

Nicola:

No no – Derby Street Films works whether you have the tax breaks or not, it's just you get a much higher return with the tax breaks. I don't want to say that we're definitely going to achieve this, but our projections show that, if you put in a pound, you get 20p back from the government, and we're projecting that you'll get 135p back from us in three years' time, so we're projecting a 70% return. Now, if you didn't get the 20p back from the government, if you were just investing – you can invest, you don't have to be a UK tax payer to invest in Derby Street Films – but you'll be putting in a pound, you don't get anything back from the government, you get back 135p. So your return, instead of being 70% is only 35%, so it's obviously rather less attractive if you're not a UK tax payer.

David:

Yeah, OK – so how does the mechanics of this actually work, then? How do people actually go around investing in these film scripts?

Nicola:

Well, you have to be a high net worth investor to invest in this in the first place. Once you've done that, you fill in a form and you give us a cheque and you've got your money in, and then we have an investment committee. Our investment committee, which is made up of three Bramdean people, so people with a financial background, and three Hollywood people (and believe me it's a good thing to have some financial people involved, because it stops people getting carried away and being too emotional about the whole thing), those six people sit down and look at all the scripts, all the ideas that are given to us, and decide which ones to run with.

This is all about being involved with the right producers, because the problem is, if I went and stood outside Bournemouth Film School and said to some guy, "You look like a nice boy – would you like to produce a movie? – I'll help you and I'll help you do the script", obviously our investors aren't going to make any money. This is all about people who have a track record of making outstandingly good movies and indeed, more importantly, getting movies made in the first place, because that's when we get paid. We only get paid if the movie gets made. The risk we're taking is that the movie doesn't get made, and we don't get paid.

David:

So how much money do you need to kick start this project, then? How much are you after?

Nicola:

We're looking to raise two million, but it's still viable if we raise half a million – it just means we'll do fewer projects. So if we get half a million, we'd do six movies. If we get the full two million, we're going to do 25, and out of the 25 we would expect 15 to get made, because of the people that we're working with and their previous track records. That means that we can achieve the returns that I suggested.

David:

Now the thing is, a minimum investment for an EIS is £500, and the maximum, I think, is £500,000. So you will either be looking for 4,000 small investors, each one putting in £500, or four big investors, each one putting in half a million?

Nicola:

Well, no – except that we've got a minimum of £25,000, because it is film, it is relatively high risk, and I don't want people with relatively low means to put all their savings into something that could be quite high risk. So we've set a minimum of £25,000 to make sure that we get people who understand and are more sophisticated. So it's not aimed at the man on the street.

David:

Right – that's a bit of a pity, really, because I wouldn't mind putting £500 into something like this, just to dabble in the film industry and say to people – I sit in a director's chair, I can actually be in the movies.

Nicola:

Yeah, and there probably are things that we can do further down the road to democratise it a bit, but at the moment it remains the province of the more wealthy, investing in movies, for a reason – it's high risk.

David:

Now the thing is, you mention high risk, and I think recently the UK Film Council said that for every £15 million it invests in the movies, in the film, it recouped only £5 million. In other words, it lost £10 million worth of tax payers' money. Now, how are you going to try and reverse that in some way, and to make your projects more profitable than somebody like the UK Film Council?

Nicola:

Well, we're going to be out before the film even gets made. Obviously I want to be associated with successful films rather than unsuccessful films, so there is a judgement to be made about the different projects that we're looking at, but it's not crucial to the model that the film is successful at the box office. There is an element in there of box office exposure in that we are going to negotiate to get some participation in the box office when we're giving money to producers to help them develop their projects, but we're only assuming that one out of our 25 projects pays out anything to be conservative. 

Now, looking at the statistics, one out of five films does pay something back. So therefore technically, if we're doing 15 films, we should get three that pay back, but we're only assuming that one does, to be conservative.

David:

So according to your own study, how popular is going to the movies these days? I haven't been to the movies for over 20 years.

Nicola:

Well, you're very unusual, David. In fact, well we were having a discussion before we started this, and I was telling you that last year, in the United States, 1.3 billion cinema tickets were sold, and to put that in context, there are only 100 million tickets sold for sporting events and 30 million tickets sold for theme parks. The cinema is hugely popular still, and indeed, through the recession, continues to grow – the box office grew on average by about 7.5% per annum, over the last three years.

David:

That's extraordinary, isn't it?

Nicola:

It is extraordinary, but it's relatively cheap to go to the cinema. So when times are tough, people who might have gone to watch their favourite football team or gone to the theatre will go to the cinema instead, because it's cheap, and you get a lot of children, as you know, going; plus 3D has been really helpful. This may turn out to be an aberration, but in 2009 the box office take for 3D movies rose from 2%, which it was in 2008, to 11%. Now, part of that was Avatar, which was clearly a huge phenomenon in itself, but there are many many movies being made at the moment in 3D. In fact, I've invested in one myself which is an animated film which is going to be in 3D. It won't be out till Christmas 2011 – it's called Little Santa, but that is the sort of movie which will end up being on the screen for a lot longer than it would have done in the old 2D format. 

In the old 2D format, it'd be on for three or four weeks, and then there'd be a gap and then it would go to DVD. Now you can leave these movies in 3D format in the movie houses for a lot longer. So Avatar – you can still go and see Avatar in 3D now, months and months after it was launched. So 3D is huge, and of course 3D is now coming to our sitting rooms as well, you're going to be able to watch 3D on Sky and so on. So there is a revolution going on in film, certainly at the children's end of the market. 

So I don't see this declining as an industry, it's a massive industry and it does have a reputation as being dangerous to invest in, and indeed it can be. But it's enormous – it's a multi multi-billion industry, and of course you can make money out of it, if you're in the right bit.

David:

I'm glad you're not relying on me going to the movies, because I think the last movie I saw, Nicola, was The Sound of Music, when Julie Andrews was just a young girl.

Nicola:

Well, that was 30 years ago.

David:

It probably was 30 years ago.

Nicola:

That was the first – actually more, that was the first movie I saw, that was when I was five, so that was 44 years ago.

David:

OK, now then – what was the problem with the film industry, well what is the problem with the film industry, such that they lose so much money? How can possibly something like the UK Film Council invest £50 million and only get back five? Where has all that money gone?

Nicola:

Yes, because that's not a commercial enterprise, and if you look at the accounts for Universal Studios or Warner Brothers, they're not losing money – they're making huge sums of money. So Time Warner is a massive, huge company making a lot of money. It's one of the biggest companies in the United States. Something like the Film Council was set up for the wrong reasons, really. It was the government trying to encourage an industry, and the truth is, there are lots of incredibly successful British people in the film industry, but they generally live in Los Angeles, and they work for the studios, or they are very successful make up people or wardrobe people or set designers, or creative people. 

Probably outside of America, we are the people who contribute most to the film industry, on an individual level, relative to any other nation. It's just that we're not very good at getting the movies made here. Setting something up and giving it government funding to try and make that happen isn't a commercial way of doing things, so that's why the Film Council didn't do very well. So in many ways it's a good thing it's been closed down, and really it's very important for people to do things properly and commercially, which is what we're trying to do.

David:

So are you going to concentrate primarily on Western-type movies, rather than stuff coming out from the East, like the Bollywoods?

Nicola:

Yes, we're not going to do Bollywood or anything like that. I mean Bollywood's fantastically successful, and in the past I have invested in a company that has exposure to Bollywood, but that's not what we're doing here. These are English-speaking movies.

David:

OK. The other thing you mentioned was that you would try in some ways to tap into the fact that some of these movies might become huge blockbusters in the future. So how are you going to do this, so that your investors are going to benefit if a movie were to become a huge, huge hit like Avatar?

Nicola:

Yeah, exactly – well, we're going to say we want 5% of the box office at the back end. Now, that's the riskiest position in a film financing structure, because everything else has to be paid out first before you get anything, and that's why it's only one in five that ever pays out. But I think it's worth having – it's like the icing on the cake, and we're forecasting that we might get half a million from that source, and this is a company where there's only two million in it in the first place, so that's actually quite significant.

David:

So are you saying that investing in the film script is actually a safer bet than investing in the movie itself?

Nicola:

Yes, it is, but I want some exposure the movie itself, just in case you get an Avatar.

David:

Now, what would you say was the best ever movie you've ever seen?

Nicola:

That's really subjective! Well, I loved The Sound of Music, by the way, when I was five, when I first went to see it – that was an amazing movie. The best movie I've ever seen? – actually I think Schindler's List is a very very good movie.

David:

Right. Now the reason I ask that is because you think it's a great movie, but how do you go around spotting a great movie? So you get lots of these people coming up with ideas for you, and say, you know, you can turn this into a movie. How do you go and select from that huge basket?

Nicola:

Well, it's not really like that. What we're trying to do is make sure these movies get made. So the key thing is to work with producers who have a record of getting movies made. So it's not really whether I think it's going to be a hit movie; it's, do I think this movie's going to be made? So my role is to question the producer intensively to find out how committed he or she is to this particular project, and to look at the source of financing that they've got lined up, and to make a judgement about whether or not it's going to happen. So it's not a creative thing; I'm a financial person, and I'm looking at the finances and trying to decide whether it's viable financially.

David:

But asking a producer whether or not a movie is good, he's bound to say yes, isn't he?

Nicola:

No, it's not whether it's good – it's whether it's going to be made.

David:

But they're still going to say it's going to be made, aren't they? But whether or not it becomes then a subsequent hit, that is the most difficult part.

Nicola:

Yeah, that is the most difficult part, and that's why I've assumed that only one out of 25 becomes a hit, to be conservative, because it's very difficult to predict.

David:

And that is going to allow you to make money for Derby Street Films?

Nicola:

Yeah, so even if it is only one out of 25, it should be three out of 25, because as I said, we're expecting ten of the projects to fall by the wayside.

David:

And what does that mean when you say, fall by the wayside?

Nicola:

Well, it means that the scripts won't get made into movies. They'll still possibly have some value, they might get made next time.

David:

Yes, OK.

Nicola:

So they'll be stuck in a drawer, and then we'll have 15 that did get made, and out of those 15 I've assumed only one is a hit. Now technically, looking at the statistics, it should be three, but I've assumed one, because I want to be conservative.

David:

And what is the outlook for the UK film industry, rather than the Hollywood film industry?

Nicola:

Well, it's a flea bite. It's a bit like Wimbledon, when we're always going on and on and on about the British participation, and actually the rest of the world's not very interested – it's the same thing. The hub of the movie industry is Los Angeles – you can't get away from that, English-speaking films. But we do have some very good British films that come out of the UK, like An Education is a fantastic movie.

David:

Yeah – I saw that, that was very good.

Nicola:

Yeah, that was very very good. So there's a niche market for good British films, but the problem is, people spent generally too much on them. So we need to spend less, we need to screw down the budgets and say, no – you're not going to spend $20 million, you're going to spend seven.

David:

Right – and you have a right to say that, do you?

Nicola:

Well, the producer needs to have a proper handle on the costs. I think this is an issue generally for the industry, that too much is spent on movies.

David:

OK. So how can people invest in Derby Street Films, then? How do you go about doing it, if we have people out there that are willing to put up £25,000 to get involved in this?

Nicola:

Right, well as long as they're high net worth individuals ...

David:

What does that mean?

Nicola:

Well, there are certain technical things which we can explain, if people call us up, but you basically have to have a certain amount of assets over and above your house and also an income in excess of £100,000 a year. So there are various definitions, but the basic one is, £100,000 of income minimum, and more than £250,000 of assets outside your family home.

David:

OK – and then provided they fulfil those kind of criteria, they can actually take part in the movie industry?

Nicola:

Yes, and we have a little website – it doesn't have much on it, just tells you the number to call if you're interested. Then you can call us up, and we will send you the documentation. You have to sign a letter saying that you definitely are a high net worth individual, and then we can give you the documentation, and that's how we do it.

David:

And are there any little perks as well? I mean, do they actually sort of get to watch the movie being made, or anything?

Nicola:

Well, it doesn't say that in the document, because I didn't want people investing for the wrong reason.

David:

What – just to meet Daniel Craig, or something!

Nicola:

Yes, exactly – it's all very technical in the document. But yes, I will organise for our investors to go along to film sets and have a look at what's going on, and to go to premiers and things like that. So I will do all those perks things, but I don't want people making the decision based on that.

David:

And the other thing is, do you think there is a greater future for bog standard movies or musicals? Which is going to be the bigger market for people?

Nicola:

Well, interestingly, we are involved in film music – that's how we got involved in this in the first place. What we do is, we finance the scores of Hollywood movies. Music is becoming a much bigger part of movies, and launching bands via film is becoming a big thing now, and making bands live on for longer through film is also becoming more popular. So I think you will see far more of a crossover between music, popular music, and film in the future than you saw in the past. So we've got lots of big name starts, pop stars, coming to us and saying, we'd like to write some songs for your next movie, we'd like to have a cameo role, we'd like to star in the movie, and I think there will be more and more of that. In fact, we're looking at one at the moment with a big name star, where they will write the songs, they will have a cameo role in it, they will have a share of the movie, the back end, and they will have a share of it in terms of the soundtrack proceeds and so on.

David:

It's not Benny and Björn from Abba, is it?

Nicola:

No, it's not – no, no, no. But that sort of thing, the whole Mamma Mia thing – there'll be far more of that.

David:

That's wonderful. Well, thank you very much for coming in today. Now, you may not know this, but I end each podcast with a quote, and I try and find a quote that I think will sum up what this podcast is all about. Maybe you can tell me from which movie does this quote come from? Are you ready for this, Nicola?

Nicola:

Uhum.

David:

It goes like this: "My mama always said, life was like a box of chocolates – you never know what you're going to get."

Nicola:

It sounds like The Color Purple, or something like that.

David:

No, it wasn't!

Nicola:

What is it?

David:

It was Tom Hanks, from Forrest Gump.

Nicola:

Oh, right, OK.

David:

There we go – clearly I'm not made out for the movies.

Nicola:

(She laughs).

David:

Thank you very much for coming in today, Nicola. I hope you can come back to do another podcast, once this project is off the ground, and tell us how it's doing?

Nicola:

Absolutely – that would be really good.

David:

Wonderful. This has been Money Talk, my guest today has been Nicola Horlick of Derby Street Films and also of Bramdean. If you have a comment about today's show, please post it on the Money Talk blog, which you can find at fool.co.uk/podcast. If you have a suggestion for future shows, please email me at moneytalk@fool.co.uk

I'm going to do another quote just before I go, and it'll be: "I'll be back" – that was Arnold Schwarzenegger by the way. Thank you very much, Nicola.

Nicola:

OK, thank you.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

MunroMan 22 Nov 2010 , 4:50pm

David, I can't believe you didn't ask her how she didn't spot the Madoff fraud before she put Bramdean money in. Since banks like GS refused to deal with him it would not have taken much due diligence to see if he was legit. Or asked him how he got such steady returns in a different markets.

Was she lazy or sloppy?

If her DD on Madoff was so bad it doesn't bode well for her next venture.

A great opportunity missed David.

namron101 24 Nov 2010 , 11:54am

LordEssex is quite right. The "elephant in the room" here is NH's complete loss of credibility over Madoff.

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