7 January 2021 EIS FUND REPORT SOVEREIGN EIS FUND Sovereign Media Group/Thompson Taraz Positives Issues ► Strategy: exposure to a portfolio of ► Track record: Sovereign has a Why Invest media companies developing IP, limited track record, but has so far including film production, television reached target returns with no production and music publishing. capital losses. ► Team: the directors have a great ► Company size: the Sovereign team The Investment track record in the film, television is small and dependent on key and music industries, and an individuals, although capacity has Consultant extensive network of contacts. been grown over the past 12-18 months. Nuts & Bolts ► Duration: the Fund close date is 26 March 2021, with earlier tranche closings. ► Diversification: the aim is to invest in five companies, three being film distribution companies, one television production company and a music publishing company. ► Valuation: Thompson Taraz will issue valuations every six months. Fees ► Fees: all charged directly to the investee companies. ► Performance fee: subject to a threshold of £1.20 for each £1 invested. Above this, Sovereign receives 25% of the investor share of the return. Risks ► Target returns: the target return of £1.40 for each £1 invested suggests a medium- risk profile within the EIS sector. ► Companies: revenue share with the Talent reduces upside prospects on each individual film or television production, but reduces costs. Overall, Sovereign has created a structure that should give a smaller-than-usual budget for its expected production quality, improving the prospects of the production companies. Music publishing has low upfront costs and industry-standard revenue-sharing arrangements. Consultant information Consultant contact details Analyst ► Fund assets £22.5m Sovereign Media group ► Fund target £15m [email protected] Brian Moretta ► EIS assets £30.8m 0203 940 7600 020 3693 7075 sovereign-group.com [email protected] ► Total FUM £52.8m ► Launch date 2018 Disclaimer: Attention of readers is drawn to important disclaimers printed at the end of this document Sovereign EIS Fund Table of contents Factsheet ................................................................................................................................3 Fund aims................................................................................................................................4 Summary of risk areas ........................................................................................................... 4 Risk analysis/commentary .................................................................................................... 5 Investment process ..............................................................................................................6 Governance and monitoring ............................................................................................. 13 Track record .......................................................................................................................... 13 Fees ......................................................................................................................................... 14 Investment Manager and Consultant ............................................................................ 15 Appendix 1 – due diligence summary ................................................................................ 17 Appendix 2 – example fee calculations .............................................................................. 18 Appendix 3 – completed films ......................................................................................... 19 Disclaimer ............................................................................................................................ 20 7 January 2021 2 Sovereign EIS Fund Factsheet Sovereign EIS Fund Product name Sovereign EIS Fund Product manager Thompson Taraz Managers Limited Product consultant Sovereign Media Group Limited Tax eligibility EIS Target return £1.40 for each £1 invested Target income None Type of product Discretionary portfolio service Term Evergreen fund; holding time 4-5 years Sectors Media Diversification: Number of companies 5 (Expected) Gini coefficient 0.2 Fees Amount Paid by Initial fees Establishment fee 2.00% (excl. VAT) Investee company Annual fees Administration & Monitoring fee 1.0% (excl. VAT) Investee company Exit fees Performance fee 25% (excl. VAT) Investor share of proceeds over £1.20 Advisor fee facilitation Yes Advisor fee amounts As agreed with investor HMRC Approved fund No Advance Assurance from Yes HMRC Reporting 6 monthly Expected exit method Mostly share buyback or sale Fundraising: Minimum investment £10,000 Current funds raised £22.5m Fundraising target Maximum of £25m, with £15m as target Closing date(s) 26 March 2021 (or as required) Source: Sovereign Media Group, Hardman & Co research 7 January 2021 3 Sovereign EIS Fund Fund aims The Sovereign EIS Fund is a discretionary portfolio service that will invest in a minimum of five media companies, including film production, television production and music publishing. The target return is £1.40 for every £1 invested, excluding tax relief and after fees. Returns will be focused on capital gains, and investors are unlikely to receive any dividends. The Fund is aimed at the current tax year. Management of the Fund There are two groups involved in the Fund: ► Fund Manager: Thompson Taraz, responsible for administration and compliance. ► Investment Consultant: Sovereign Media Group, which sources and supports the companies. Summary of risk areas Note: There are generic risks from investing in EIS or unquoted companies, in addition to the specific ones commented on below. Comments on relative risk refer to other EIS investments and not to wider investments. Investments Portfolio risk Investors are expected to receive shares in four to five companies, with a minimum of two. The current roster of companies is three film production, one television production and one music publishing company. Although the number of companies is limited, each will make several productions a year, and Sovereign estimates investors could get exposure to 40-50 films and 400-500 songs. The target return of £1.40 for each £1 invested suggests medium risk, although the business model for the television production and music publishing companies is probably lower-risk than for the film companies. Sourcing and external oversight Sovereign currently has around 35 film projects in its pipeline, which is more than adequate for its expected production rate of 10-15 a year. These are being added to steadily. Projects are sourced only by the Sovereign directors or from their network. The team’s contacts seem strong enough to source enough songwriters, film and television projects. The Fund Manager provides oversight to ensure that investments satisfy the required conditions. Each company has two independent directors. Ongoing support and monitoring The process is very hands-on, with the Sovereign directors being heavily involved in each film and television production, and the selection of songwriters. The producers in the investee companies are chosen on the basis of longstanding relationships. The process of putting together teams for each film project is a well-established one, and there is only a little operational risk. 7 January 2021 4 Sovereign EIS Fund Exits There is no fixed plan for exits from the companies, with the usual variety of options available. With steady demand for successful production companies, there is demand if the companies can progress as planned. The projects within the music publishing company are also naturally cash-generative. Manager/Consultant Team The Sovereign team brings a huge amount of experience in film, television and music. Although it has grown recently, the team remains relatively small. It has adapted to running the current number of productions in a year, which should be sufficient to meet its targets. Track record The three film production companies from earlier EIS funds have made progress in line with plans, with great progress on the production side. The average (unrealised) return is 5%. The returns of nine earlier films have been in the £1.05-£2.32 range. The team and company producers bring substantial individual track records. Regulation Product Advance Assurance is sought from HMRC for each investment. It has been received for five companies, with two others in progress. Manager The manager of the Fund is Thompson Taraz. It is FCA-registered (number 226978), with fund management permissions. Submissions to Companies House appear to be up to date. Sovereign Media Group is not FCA-registered. Risk analysis/commentary The Fund is now well established in the EIS space. Sovereign has pioneered a new company structure that satisfies the risk to capital criteria and has been adopted elsewhere. The directors of Sovereign bring a deep experience of the film, television and music publishing industries, and a growing track record with Sovereign itself. The nine individual films they have produced to date have shown decent returns, with none losing capital. The structure of the individual film projects has some commercial advantages for the production companies. The approach of getting “the Talent” (the term Sovereign uses to describe the best actors and directors in the industry) to take a reduced fee in return for a majority share of the upside above £1.20 allows films to be made for