Luxembourg fund vehicles are increasingly being used to finance international independent film production. Among them, the Take Two Fund, managed by Los Angeles-based Align Group, is utilizing Luxembourg’s fund ecosystem to support a diverse portfolio of film projects. But Cyprus also is leveraging its Raifs as film funding vehicles.
Align manages the closed-end debt fund with Adrian Politowski (photo) as executive chairman & co-founder. Take Two, according to an Align presentation, currently has 32 million euros in its portfolio. Fundraising is ongoing, with a 50 million euro target.
Take Two is one of several film financing companies structured as a Luxembourg fund. It was first registered in March 2022 and will run as a closed-end fund for four years, followed by two years of distribution. The film fund was registered under the umbrella of Take One Fund SCA Sicav-Raif, with Funds Avenue, previously Fuchs, as the firm subject to Luxembourg supervision. So far it has been paid back for loans of over 4 million euros and has a diversified loan portfolio.
“When we look at the landscape, structuring it in Luxembourg as a Raif became quite obvious,” Politowski told Investment Officer. “One of the advantages of Luxembourg is that there is an expertise and understanding of alternative asset classes, allowing our film financing operations to easily be conducted from there.”
Rapid growth
“The reasoning behind that… is that firstly, when a sector that is growing fast and that’s been catalysed even more with the streamers (ie Netflix) that have appeared and accelerated the growth,” said Politowski.
Take Two’s predecessor fund, Take One, was a Swiss-controlled film fund which raised 42 million euros between 2018 and 2020 using the Luxembourg Raif structure. In 2023, Take One released films including 10 Lives, an animation about a pampered and selfish cat named Beckett and the Canterville Ghost, a “spooktacular” animation story.
The fund provided “strong downside protection despite the worst period in the sector’s history.” Some 70% of the Take One investors now are invested in Take Two.
Still distributing
Take One is still in the distribution phase, so it’s still operational, explained Politowski, despite the launch of Take Two. “Despite having gone through the worst period in the industry’s history,” he said, “we have a positive NAV and have a positive expected return to investors.”
The firm, in a presentation sent to Investment Officer, said that they have a 51% “distributed to paid-in capital (DPI)”. This ratio shows how much money a private equity fund has returned to its investors compared to how much they have put in. It’s also called the realisation multiple.
Take One was one of the Raifs formerly managed by Fuchs Asset Management, which went into liquidation in 2023. The funds for which this firm acted as AIFM, the party subject to supervision, now are under Funds Avenue’s umbrella.
Subsidies & tax incentives
“Projects are sourced from US, EU, UK and Australia but can be shot/made and financed in numerous countries (often where there are subsidies and tax incentives)”, he added. “Such is the case of Luxembourg that offers subsidised financing on projects,” referring to Film Fund Luxembourg, a government film financing agency.
Other film finance players in Luxembourg include France’s BAC Films, which is linked to the Cinema S.C.A, Sicav-Raif, another open-ended reserved alternative investment fund created in 2022. Investment Officer’s efforts to reach several of the people in charge of these entities have been unsuccessful.
Digital and classic
In its 2022 annual report, the fund explained that “BAC finances films that are suitable for both cinema and the platforms. Many of our films are exploited in a classic way or are directly exploited digitally, and most of them are exploited both in cinema, pay TV and on the platforms.”
The firm reported a “film result” of 1,054,688 euros, up 116 percent from its 2021 result of 487,817. Turnover for 2022 was 8.5 million euros, up from 3.4 million in. The firm noted that their turnover remained below the 9.4 million in 2019, before Covid.
Using financing from its Raif vehicle, in 2022 BAC Films financed the production of among others Triangle of Sadness, which became a Palme d’Or winner.
Very structured way
Politowski explained that Take Two was his firm’s second vintage. The firm’s “Take One Fund” had a performance that was diminished by the Covid pandemic. It “was really borne from opportunities that we saw to provide loans and investments in a very structured way in the industry,” he said.
Politowski has been active in the film financing space for two decades, raising – with his colleagues – some 650 million euros and putting out over 450 films.
Oscar-winning films
These include films such as The Artist, which won 5 Oscars, The Belier Family, which won three Oscars, and John Wick, My Brilliant Friend, Mandy and The Meg.
Major studios finance their productions, the 100 million US dollar-plus “superhero and franchise movies.” According to Align, most film projects are independent, requiring third-party financing. Some 80 percent of Best Picture winners at the Oscars are independent.
Politowski described the independent film and TV business as “quite niche.”
Hard to industrialise
“It’s harder to industrialise the process in the same way that a bank would in other industries,” he explained. “This creates a very interesting environment – where you have high demand and not a lot of other financing available – for a media fund such as ourselves.”
While film-making is uncorrelated to traditional markets, it’s clear that film-making is an inherently risky investment. “We … focus on the more senior trends, the financing that is on the much less risky spectrum.”
Take Two aims to deliver 12 percent IRR (internal rate of return) to its investors, Politowski said. For safer investments, the rate is 11-13 percent, he said, but more risky ones pay around 20 percent per year.
No bet on the outcome
“What is core to our strategy is not to take a risk on the ultimate performance of the film,” he explained. He illustrated this by referring to two recent productions.
The first feature film that Take Two Fund did after the pandemic was called Good Luck to You, Leo Grande, starring Emma Thompson.
Politowski described it as a small project, featuring a very good risk-return and a successful production team.
Minor success
Another recent Align project was an animated film called Paws of Fury. It was a large project featuring well-known personalities such as Samuel Jackson and Ricky Gervais. However, it was only a minor success.
Politowski pointed to the films’ return to Align, “if we look at . .. the return we got from the debt component, we got just over 15 percent.” The much less successful Paws of Fury, a huge success, returned about 16 percent IRR. “So a very similar performance,” he explained.
Ecosystem advantages
“It offers advantages of having an ecosystem … that makes it very easy to structure a plan, to have the right partners around it,” he added.
Align Group managing director Edouard Nouvellon explained that, following Covid, with strong demand, the firm negotiated an “equity kicker”. This is defined as an equity incentive where the lender provides credit at a lower rate in exchange for an equity position in the borrowers’ company.
This is the only way for a family office to invest in this kind of product, Nouvellon explained, by which he meant in a very structured way, with a common investment structure for each film.
Cyprus also leverages Raifs for film finance
The interest in using fund structures like the Luxembourg Raif has parallels elsewhere in Europe. For example, a Cyprus-based AIFM has deployed a local Raif for film production financing. Finance centre leaders there hope lower costs will attract more business.
Eleon Capital Management has set up the Cordelia Cinema Fund, under Cyprus’ version of European fund regulation, as a Raif sub-fund of its local OneWorld Raif. The Cyprus Securities and Exchange Commission supervises the fund. Cyprus’ status as an EU member state means the fund can market itself funds across the EU under its cross-border fund distribution legislation.
Attractive discount
According to Kassianides, the Cyprus fund centre offers an attractive discount to Luxembourg’s higher fees.
The Cordelia fund was set up after Eleon was approached by Varcale Entertainment, according to Marina Kassianides, the managing director of Eleon Capital. Varcale’s proprietors have a background in cinema and cinema production funding.
Not yet mainstream
Kassianides sees the fund structures as a way to protect alternative industries such as film finance but added that this approach isn’t yet mainstream.
“You’re almost herding an industry that wasn’t regulated into a herded structure, which offers the perfect environment for these to be fully regulated and full observed and monitored by a structure that has got to be bullet proof,” she explained.
Further reading on Investment Officer Luxembourg:
- ‘Raif structures now surpass specialised investment funds’
- WTW already secured €500 mln for new Luxembourg Raif
- LGIM uses Lux Raif umbrella fund to sell unlisted debt