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
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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
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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.
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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 a lower cost than they would normally. This reduces risk by making it easier to break even, but the trade-off is giving away the majority of the upside to the external Talent. The absence of sales agent costs, which Sovereign believes is unique in EIS funds, is also a significant saving and improves the prospects of achieving decent returns.
The expected diversification is good for products in this area. The prospects for each production are independent of the others, and the diversification may enhance the upside prospects as much as protect the downside. The addition of television production and music publishing improves the diversification, and should add to the Fund’s attractiveness to investors.
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Investment process
The patient capital EIS rule changes have had significant effects on film and media investments. While the underlying principles on which Sovereign operates have remained unchanged, there are some significant changes to the investments that its EIS Fund now makes. These mainly affect the corporate structures and when films are sold in the market. This report reflects those changes.
Deeper dig into process Investors in the Fund will get exposure to a range of companies, with film production and distribution, television production and music publishing all within the mandate. At the time of writing, investors will receive shares in five companies: three film production, one television production and one music publishing. A film distribution company is not currently included, although one has previously been included and another may be introduced in the future.
Although the market for each is different, there is a common theme, as they will all establish or enhance IP, exploiting that through various media. There are some small potential synergies between the strategies, although each can be successful on a standalone basis.
Film production Each film production company will produce an ongoing roster of films, each sourced or created by Sovereign. Unlike some other EIS film investments, these companies will have a range of rights attached to each project, in addition to the film rights, such as theatre. Following common industry practice, each production will take place in a wholly-owned subsidiary.
For each film, there is some development work needed prior to production, such as obtaining film rights and producing budgets, which will be funded by Sovereign or a prior SEIS company. This will be repaid by the production company, usually at a 20% premium (lower than some in the industry use). Sovereign estimates that this is around 2.5% of the production budget.
Production process While the film production process will be known to many investors, it is worth articulating, as it brings out some of Sovereign’s differences compared with others in the market.
After some pre-production work, which usually takes around a month, the majority of the expense is in the making of the film. While the production company will have some permanent staff, the vast majority of those who work on the project are hired, as required, on a temporary basis. Some of these, such as accountants, will work over most of the company’s life, but the majority, such as directors and actors, are employed for much shorter periods.
The production (filming) time is intensive – typically taking less than two months – and the crew will peak at 150 to 200 people. Post-production work, such as editing and adding scores, takes longer, but the film is usually ready about nine months after the start of pre-production.
Managing production costs is an important part of the Sovereign process. The aim is to fund each film from the production company, although there may be some additional financing from tax reliefs. The budgets for the first projects are likely to be up to £5m. This may increase as the production company generates profits from earlier projects, although there may also be lower-cost projects. While the
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production company is responsible for this, the Sovereign team provides ongoing monitoring and support.
Sovereign works with some of the best actors and directors in the industry – it calls these ‘the Talent’. The arrangement with the Talent is that they are paid a nominal fee (relative to the usual – it can still be $50,000-$100,000), but they take the majority of the upside once a target return on the film of 20% is achieved.
If the gross returns on any project exceed this threshold, then the Talent usually receive a 60%-65% share of the profits above this level, with the production company receiving ca.35%-40%. So, for example, if a film gives a gross return of 2x, then the production company’s share of the surplus is about 28% (=35% of 80%).
Using this approach to incentivising the Talent, and other savings (especially avoiding sales agents) mentioned below, Sovereign believes it can make films within a £5m budget, which could cost £20m under other structures. So this arrangement is a trade-off: the production company can make films on a lower budget, which makes breakeven easier, but it has to pay away the majority of the upside. The net effect should be to reduce risk compared with the larger-budget projects, but also to reduce the upside to returns.
Investors should note that this arrangement works only if the quality of the productions is high. Productions need to be unique, and the Talent needs to be interested for its own sake. Sovereign believes its productions will offer the Talent the opportunity to work with their peers in the creation of cultural and iconic films, and so will be attractive to them. There is some evidence this is working: for example, the cast list for Effie Gray (the second EIS-funded project) and Tree of Life, and the names involved in Voyage of Time, suggest Sovereign can attract high-profile names.
Production revenues Films have several sources of revenues:
► domestic (US) distribution rights;
► international distribution rights;
► tax credits;
► box office receipts; and
► residual rights.
The distribution rights include sales to airlines, DVD and video sales, video-on- demand services, and broadcasters.
For films produced within the Fund’s companies, the first three sources are likely to provide most of the returns. Often producers pre-sell the domestic or other distribution rights, which then get used as security for additional finance. Sovereign believes that deferring the sale should, on average, produce better revenues, although it does reduce the security on any individual project. This would seem reasonable for a couple of reasons: firstly, being able to demonstrate a quality product should remove some uncertainty, which would be discounted; secondly, if positive PR can be generated, then that should help to give better deals. This strategy has been followed in the private equity-funded projects to date (see Track record below).
Tax credits are available for filming in many countries, although the exact amount varies from place to place. Sovereign estimates tax credits will cover about 25% of
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the production costs. While there are no guarantees, the process of claiming these is well established, and tax credits should be a relatively secure revenue source.
The most unpredictable source is the box-office receipts. For most films, these will be small, but a hit could provide upside to investors. Predicting these is widely acknowledged to be impossible but, over a four- to five-year period, there is a reasonable chance that one or two could provide a gross return significantly above expectations. Sovereign believes that the target returns can be achieved independently of whether the films do well at the box office or not – something its results to date support.
A positive feature of Sovereign (it believes it is the only film fund in the EIS space that does this) is that it does not use sales agents when making these contracts; rather it uses its established connections to deal directly with distributors. Given that sales agents can take 20%-30% of gross revenues, plus expenses, and can effectively cap the upside too, this is a major cost saving and significantly improves the financial prospects of each film project.
In terms of timing, from roughly 12 to 18 months, companies will see the majority of receipts coming from box office, airline and DVD sales. Beyond that, payments will come from broadcasters, including pay TV and video-on-demand services.
For most films, the vast majority of the value is generated in the first three years. After this time, there will be some value to the residual rights, although the amount is variable. It depends on box office success, but is unlikely to be more than 15% of the production costs. The company can retain the rights, but there is also a ready market for residual rights. Several companies own and continue to build libraries of these, so selling them should be straightforward.
COVID-19 Like all industries, film and television production has been affected by COVID-19. While there was a hiatus in the spring of 2020, protocols were put in place and filming recommenced in most places in the summer. These protocols, such as separation of people and use of PPE, have an additional cost and, in some places, have slowed down productions. However, the protocols work most effectively with a reduced crew. While there have been some delays, the effect on costs has, mostly, not been significant.
Film production companies The plan for each production company is to progressively invest in new projects as revenues from the previous ones are received. While some cash may accumulate, this will be to build up resources for the filming period of the next productions and cover the central overheads.
With each company being able to produce several films in parallel, investors should expect to get a good spread of films. The three current production companies started in 2019, and Sovereign estimates that, by summer 2021, they will have completed a total of 20-25 films. A list of those currently completed or in post- production is given in Appendix 3. Some of the completed films have already won awards. While this does not guarantee commercial success, it suggests that Sovereign is delivering on its promise of high-quality productions.
Over the planned investment period of four to five years, investors should expect to have exposure to ca.40-50 films.
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Television production Investors will get exposure to a television production company, which is currently Grand River Productions. The types of productions will have much in common with the films, with the focus on high-quality drama series.
This company will have a slightly different business model from the film production companies. As stated above, Sovereign believes that the value of films will be maximised by producing them before arranging distribution. For television, each series will be pre-sold before production to a broadcaster. This will greatly reduce the risk on any individual production.
This allows greater use of alternative funding arrangements for individual productions, which can be secured on the broadcaster contract, as well as any tax reliefs. Depending on the broadcaster, there may be potential additional upside for a series from international distribution. While the company will lean towards similar Talent arrangements as for films, the different funding arrangements mean this will make less of a difference, and it will not play a big role.
While a single series should be profitable, the most meaningful value creation usually comes from follow-on series. Once a show has had some success and established an audience, the margin that broadcasters will pay can rise significantly. This can generate IP that extends well beyond the value of any single production.
Music publishing Investors will get exposure to a music publishing company, which is currently 235 Music Publishing (235). The founder of this, Howie Payne, formed The Stands in 2002. They had several Top 40 hits, and he went solo in 2009.
The core of music publishing is a relationship between the publisher and songwriter. The latter signs with a publisher for a fixed term, usually around three years initially. Under this contract, the songwriter supplies songs, which the publisher promotes or of which it facilitates performances.
Every time a recording is sold, or a song is played or performed, whether on the radio, in a film or live by any artist, a fee is payable. This fee is small for each, but can aggregate to significant revenues over time. Usually, these fees, after costs of collection, are split equally between the publisher and writer.
Music publishing is a well-established industry, which has been revolutionised over the last decade by technology. In particular, tracking plays of music and collecting of payments has been made much easier. 235 has contracted for Kobalt, an industry leader, to collect the payments. We understand that Sovereign has used its media industry position to help get terms that are better than usual.
The focus has evolved a little and will be on established writers, although there may be some new talent as well. The former are expected to bring some existing material that can demonstrate something of a track record, although the company will have to pay for these rights. It is harder to judge new talent, but the initial investment will be smaller, and future payments will only be made if they are successful. If a writer is not successful, then he/she can be dropped and 235 will have incurred little cost.
The company may invest in more established writers in the future, but this requires more funding and is likely to require funding beyond EIS to do so.
Sovereign believes that 235 has two main attractions for writers over the existing, large, publishing houses. The first is more active promotion – with a small roster of writers, the company can put effort into promoting all its writers in a way that large companies cannot. Secondly, Sovereign brings contacts in the film and theatre world
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that provide additional opportunities for synchronisation rights – as well as the financial returns, writers often value the additional profile that these areas bring.
The number of writers is, to some extent, contingent on the amount of money raised. The company recruited five writers in its first year and has more lined up for signing in year two. This number would be expected to grow in future years.
The company already has a portfolio from the founder and is generating some revenue. It will have a small number of employees, as well as the usual office costs and a small amount of legal costs.
It should be noted that this strategy is a little different from other EIS music publishing offers in the past, which have usually focused on film or TV scores. The Sovereign strategy is not focused on a single market; this should give more upside potential, albeit by working in markets that have greater competition.
Distribution company Sovereign does not have a distribution company on the investment roster at the time of writing. The Fund has previously invested in one, and may do so in the future. This section is included for completeness.
This company will take on the promotion and distribution of independent films in the UK and the US.
There are several potential parts to the company’s activities, although not all may be done for every film. These can include the production of materials, including trailers, posters and other promotional material, the film reels to be sent to the cinema, and DVDs/Blu-Ray disks. The company will also book space for the marketing materials, such as billboards, arrange for adverts to be shown, and arrange cinema bookings.
The company may also handle negotiations with TV broadcasters and the video-on- demand platforms. Classic PR tasks can also be handled, such as press releases or interview sessions.
Most of the work will be done directly by the company, although some tasks may be sub-contracted as required. Projects may also be done in conjunction with a studio, which may or may not involve using some of the latter’s resources.
The distribution company will be paid from the revenues that a film generates. The first part of the payment is the recovery of its expenses, plus a small premium. This is a priority return, in that it is the first payment from the revenues that the film makes. Above that, the company will receive a distribution fee. Where the company acts alone, it is usually around 30% of the revenues. However, if the work is done in conjunction with a studio, then the fee is split and the net rate may be half that.
This first recovery of expenses makes the projects lower-risk than the production companies, but with a lower share of the upside prospects.
Sovereign funded distribution within its first EIS Fund, but removed it from later versions for marketing reasons. It has continued to be engaged in distribution projects outside EIS. The aim is to fund distribution for projects within the portfolio production companies, and also for external films.
The latter will be chosen to be similar to projects that Sovereign itself might fund, with the aim of creating a consistent marketing profile. Sourcing will be done mostly through existing industry connections, with the focus on directors that are well- known to the Sovereign team, with relationships extending well over a decade.
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The estimate is that 20%-30% of projects will be generated within the Sovereign production companies, with the balance from elsewhere. Each project will typically be allocated 20%-30% of assets, with six to eight projects a year.
Sourcing deals The investee companies will be sourced and monitored by Sovereign.
Potential film projects will be sourced in one of two ways. The first is internally, where the Sovereign directors create the project themselves. Typically, this will start from taking an option on the film rights for a book. The directors will develop this further themselves or with SEIS funding, commissioning the screenplay and getting the project to the stage where the major funding is required.
The other source of projects is from Sovereign’s contacts within the industry, usually writers, directors or actors, as well as the producers in the investee companies. For example, Effie Gray was brought to Sovereign by the actress Emma Thompson. It is worth noting that Sovereign does not take submissions from external sources and does not source through festivals, relying only on its own initiatives and contacts within the industry. The intention behind this is to ensure that strict cost and quality control are applied to each film.
Currently, Sovereign has around 35 potential projects from which to select. Given that it needs 10-15 a year, this should be an ample pool. It is adding to this total on an ongoing basis: the figure is an increase of 15% from the number of projects in our previous report.
For music publishing, the primary sourcing of writers will be done by Howie Payne and Richard Manners. Given the existing contacts and pipeline, sourcing enough good songwriters appears to be straightforward.
Decision-making There are separate decision-making processes for the investee companies and the choice of films or television productions within the production companies. In both cases, Sovereign has a significant role, as outlined above.
For investing, Thompson Taraz ensures that each investee company satisfies the Fund’s criteria. These are listed in the prospectus and include many of the conditions outlined elsewhere in this report.
The assessment of how good a prospect a project may be sits with Sovereign’s directors, although the final decision will lie with the board of each investee company. Although the involvement of high-profile names of actors or directors may help, the decision is essentially a subjective one, and relies heavily on the experience of the Sovereign team. Although all the directors are important, Donald Rosenfeld has greater experience and should be considered the key man.
Projects are selected from the pool of possibilities largely by what is available to start when the money becomes available. Where specific Talent is involved, this will mean whether it fits with the Talent’s current schedules.
With the majority of the work being done after a project is set in motion, the advance due diligence requirements are more limited than for EIS companies outside the media area. These are listed in the Fund’s due diligence document, and include the rights to the production, screenplay, written agreements from key cast and crew, approved budget, distribution agreements and insurance. Thompson Taraz reviews the due diligence on each project.
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In practice, Sovereign makes recommendations to the investment committee of Thompson Taraz, which then makes the investment decision. Any rejection at that stage would most likely be for technical reasons, rather than whether the project is likely to be successful.
Music publishing follows a slightly different process. As for the film production companies, the suitability of 235 for investment has been assessed by Sovereign and Thompson Taraz. The decision on the writers to be contracted will be led by Howie Payne, with approval by the board of 235 (with Sovereign having board seats).
While the Information Memorandum (IM) states a minimum of two investments, investors will have exposure to five in the 2020/21 tax year.
Exits Each of the investee companies will be set up on an open-ended basis. For the production companies, there will be natural lifecycles within the company as a film or television show is produced, followed by revenue generation from that project. This means cash will be generated on a regular basis.
Sovereign’s modelling uses a 1.2x return for each film, which seems conservative, as it is lower than its average return on previous projects, albeit in line with standard industry assumptions. Over a four- to five-year period, this would give a gross return of 1.4x-1.7x the investment. Given the track record, this would seem a reasonable mean expectation.
The arrangement with the Talent has the effect of making it easier to break even (because of the lower costs) but makes breakout returns less likely, although the presence of the possibility is better than for some EIS products. The retention of IP for each film within the production company does enhance the long-term prospects. Before any exit, it will provide the company with a small ongoing revenue, but it could be attractive to a purchaser of such rights.
The music publishing company will have various options if successful. These could include the sale of some or all of its portfolio, or the sale of the whole company – there would appear to be a solid market for either. Sovereign’s modelling suggests it believes that this business can have a wider range of outcomes than the film production companies.
The distribution company projected a return of around 1.2x over four years. Sovereign’s modelling is based on the historical returns achieved in a similar company it has run, but it believes that it can improve on that. Although the projected return is lower than that of most EIS funds in the current universe (all funds, not just media), the overall risk profile does appear to be lower than for the production companies.
Sovereign suggests a full range of options for returning cash to shareholders, including trade sales, share buybacks, dividends or an IPO. We are aware of similar businesses that have been purchased in recent years. Share buybacks would require a minimum holding time of five years, but could fit naturally where some shareholders wished to exit. Dividends may be less attractive on a tax basis, but options are being kept open.
Overall, this gives a reasonably clear return profile for investors, with the target return being well justified, although the potential volatility is less clear. There is an option on further gains, although this is hard to value and should not be a core part of investor expectations.
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Governance and monitoring Advance Assurance is received from HMRC on all investments prior to committing funds. At the time of writing, Sovereign had received assurance for the three film production companies, the television production company and the music publishing company. Applications for two further companies are in progress.
All client assets, including cash and shares, are held by Thompson Taraz.
Each investee company will have at least one person from Sovereign on the board, alongside the existing directors.
Sovereign is very much hands-on during the film production process – this is a company that makes all its own films. This supports its aim of ensuring quality and cost control, but naturally limits the number of films that the team can handle. It has trusted producers within each investee company to which much is delegated, but still uses technology extensively to track day-to-day progress. COVID-19 seems to have accelerated the use of technology, and the team believes it has made communication and project monitoring more efficient.
For music publishing, Richard Rowe will be the key person for Sovereign, although other directors may also be involved in a governance role. He will have an active role in the selection of songwriters, as well as bringing his extensive contacts to the promotion side.
Investors will receive reports on their investments every six months. As these are unquoted investments, we would not expect there to be significant changes in values. However, the underlying distribution agreements should give reasonable visibility on revenues in individual projects. Track record In its 2016/17 and 2017/18 EIS funds, Sovereign invested in three film production companies: Sovereign Film Production 1 Limited, Sovereign Film Star Sailor Limited and Sovereign Film Ursa Major Limited. These have progressed in line with their business plans. To some extent, they remain immature, with the timescales outlined above making clear that they have had time to make greater progress on filming productions than gaining revenue. Nevertheless, the companies have increased in value by 10%, 3% and 2%, respectively, for an average unrealised return of 5%.
The earlier distribution company generated a return of 1.15x over three years and three months.
Prior to the production companies, Sovereign produced nine films, four of which were EIS-funded and the balance through private equity. These produced an average return of 1.34x investment, with results ranging from 1.05x to 2.32x. Several of these won awards. While some achieved box-office success, most did not but still managed to reach the target return.
Overall, Sovereign has a reasonable track record of delivering high-quality productions with financial returns in line with expectations. The existing production companies are showing sufficient progress to suggest that these can be done at the scale expected by new investors. We note that the individuals involved also have meaningful track records – see People section below and the links to their IMDB profiles.
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Fees The fees for the Fund are set out in the Factsheet on page 3. Compared with many other EIS funds, these are straightforward (other than as noted below), with no additional hidden fees being payable to Sovereign. Production fees within each film will be paid to the production company.
Third-party professional fees We understand that these relate predominantly to the running of the Fund, rather than the underlying companies. These include audit and depositary fees, and are likely to be around £11,000-£13,000 p.a. This is approximately 0.3% of a £4m fundraise or 0.08% of a £15m fundraise.
Performance fee This is calculated on the investor’s share of profits above £1.20 for each £1 invested.
Fundraising targets Sovereign has a maximum fundraise of £25m for the Fund. The Fund has set a closing date of 26 March 2021 and will have additional quarterly closes as required. Deployment takes place within 48 hours of a close.
The minimum subscription is £10,000, with higher amounts in multiples of £1,000.
The average time for EIS3 Certificates to be received is eight weeks.
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Investment Manager and Consultant
Although Sovereign has been established for 14 years, the team remains relatively small. However, the number of directors has grown in recent years, partially reflecting the expansion into music publishing. The directors bring a lot of experience, from roles at a senior level in the media industry, and have had significant success too.
With the Fund investing into production companies, the main focus of the team is supporting the individual productions, where they are able to bring their experience. With the additional producers in the investee companies, the team seems to be coping with the increased level of activity. The team size seems adequate for the current level of activity.
Thompson Taraz is a well-established provider of investment management services, currently administering over £2bn of assets and looking after more than 7,000 individual investors.
People – Sovereign Donald Rosenfeld – Director, Sovereign Media Group Has had a 29-year film career. Over 11 years as President of Merchant Ivory Productions, he produced several award-winning films, including Mr & Mrs Bridge, Howards End, The Remains of the Day and Jefferson in Paris. Since then, he has continued in film production, with more recent critical successes including The Tree of Life and Anton Chekov’s The Duel.
https://www.imdb.com/name/nm0742535/
Andreas Roald – Director, Sovereign Media Group Started his media career as a presenter on national Norwegian television. He has been producing and financing films, music and theatre productions with Sovereign since 2006. These include the award-winning musical Kinky Boots and the film Cradle of Champions. He is CEO of Sovereign Media Group.
https://www.imdb.com/name/nm2001875/
Richard Rowe – Director, Sovereign Media Group Has a strong background in music publishing, having spent more than 26 years with CBS Records/Sony. He founded the music publishing division and, for the past 15 years, he has been President. He negotiated the deal between Sony Music and ATV Music Publishing, which included The Beatles catalogue. Since 2010, he has been Vice Chairman at Roundhill Music.
Gary Telford – Director, Sovereign Media Group A Chartered Accountant, he was formerly a Tax Partner at both PwC and Ernst & Young, before setting out on his own in 2015. He has over 30 years of experience and has been a long-term adviser to Sovereign.
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David Rudge – Director, Sovereign Media Group; Managing Director, Vistra (UK) Having started in banking, he moved into the corporate services industry in 1990. He has worked in different parts of the Vistra Group since then, and has been Managing Director since 2007.
Paul Cooper – Director, Sovereign Media Group; Executive Director, Vistra (UK) A Chartered Accountant, he followed a spell at PwC by running his own consulting business. Since 2007, he has taken on the Finance Director role at several organisations, before joining Vistra in this role in 2011.
Simon Webber – Director, Thompson Taraz Since graduating, he has followed a career in professional services, with roles in compliance, and supporting entrepreneurs. He joined Thompson Taraz in 2013, and is responsible for its strategic direction and management.
Kelvin Gray – Partner, Thompson Taraz Started his career providing financial reporting services to SMEs in South Africa. Since 1998, he has been with Thompson Taraz, where he has managed accounting services for clients and is now Head of Funds.
The Investment Committee consists of the two Thompson Taraz directors.
People – investee companies The following are key people for the investee companies at the time of writing. These are all based on longstanding relationships, with each person bringing a meaningful track record of delivering quality output, as well as an ability to work with the Sovereign team.
Dan Wechsler – Prestige Films Has been an independent producer since 2003. He founded Bord Cadre films Sàrl in 2004 and Producers on the Move in Cannes 2011. His IMDb profile gives 50 credits, including Birds of Passage, The Whistlers, Foxtrot, Monos and The Untamed.
https://www.imdb.com/name/nm1602563
Jamie Brown – Grand River Productions Has over 20 years of film and television production experience, with the most notable recent series being the BBC’s War of the Worlds.
https://www.imdb.com/name/nm0007077/
Richard Manners – 235 Music Publishing His first music success was in A&R at Blue Mountain Music in the 1980s. He became MD at Island Music in 1990, keeping the same title when it merged with Polygram in 1994. He moved to Warner/Chappell UK in 1999, where he was MD for 17 years, and he has recently returned in a new role.
Howie Payne – 235 Music Publishing Formed The Stands in 2002. They had several Top 40 hits, and he went solo in 2009: https://en.wikipedia.org/wiki/Howie_Payne
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Appendix 1 – due diligence summary
Summary of core due diligence questions Manager Validated by Company Thompson Taraz Managers Limited Founded 2002 Hardman & Co Type Limited Company Hardman & Co Ownership Thompson Taraz Group plc – see below Hardman & Co FCA Registration Yes – 226978 Hardman & Co Solvency Confirmed Company EISA Member Yes Hardman & Co Consultant Company Sovereign Media Group Limited Information Memorandum Founded 2008 Hardman & Co Type Limited Company Hardman & Co Ownership Sovereign Group Holdings Hardman & Co FCA Registration No Hardman & Co Solvency NA EISA Member No Hardman & Co Fund Custodian Company Thompson Taraz Depository Limited Information Memorandum FCA Registration Yes – 465415 Hardman & Co Source: Hardman & Co Research
Regulation The manager of the Fund is Thompson Taraz Managers Limited. It is FCA-registered (number 226978) with fund management permissions. The balance sheet is healthy for a small firm. At the last accounts (31 March 2018), it had just over £600,000 of shareholders’ funds. It is categorised as an IFPRU €125k Limited Licence Firm by the FCA.
Thompson Taraz Managers Limited is wholly owned by Thompson Taraz Group plc (formerly Thompson Taraz Group Limited), which, in turn, is owned by Martin Heffernan, Afshin Taraz (40% each) and Kelvin Gray. The latter is a director of the subsidiary, together with Simon Webber.
The Consultant is not FCA-regulated. Sovereign Media Group Limited is a subsidiary of Sovereign Group Holdings Limited, which is ultimately owned by Andreas Roald. Until March 2018, it was named Sovereign Film Finance Limited.
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Appendix 2 – example fee calculations
This calculates the estimated total amount payable to the manager under certain assumptions.
Basic assumptions Term 5 years Investor amount £100,000 Scheme investment £15,000,000 VAT is reclaimable by investee companies. Source: Hardman & Co Research
Calculations Hardman & Co standard Target Gross return -50% 0% 50% 17% net IRR Amount (pre-tax relief) £100,000 £100,000 £100,000 £100,000 Initial fees Rate Establishment 2.00% (excl. VAT) £2,000 £2,000 £2,000 £2,000 Total £2,000 £2,000 £2,000 £2,000 Net investment £100,000 £100,000 £100,000 £100,000 Annual fees From company: Administration and monitoring fee 1.00% p.a. (excl. VAT) £5,000 £5,000 £5,000 £5,000 Professional fees £12,000 p.a. (pro-forma) £400 £400 £400 £400
Gross fund after investment return £50,000 £100,000 £150,000 £164,628 Exit fees Performance 25% + VAT £0 £0 £9,000 £13,388
Net amount to investor £50,000 £100,000 £141,000 £151,240 Gain (pre-tax relief) -£50,000 £0 £41,000 £51,240 Gain (post-tax relief) -£20,000 £30,000 £71,000 £81,240 Total fees paid £7,400 £7,400 £16,400 £20,788 Source: Hardman & Co research
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Appendix 3 – completed films
The following films have either been completed or are in post-production as of the date of this report.
► Triangle of Sadness – by Palme d’Or winner Ruben Ostlund, starring Woody Harrelson (set for Cannes in May 2021).
► Memoria – by Palme d’Or-winning director Apichatpong Weerasethakul, starring Tilda Swinton (set for Cannes in May 2021).
► Song Without a Name – Peruvian Oscar entry for 2021 Academy Awards, Cannes 2019 Golden Camera nominee, Palm Springs International winner.
► Cunningham – Hamptons International Film Festival winner.
► Verdict – Special Jury Prize winner at Venice Film Festival.
► A Common Crime – Main Competition Berlinale and BFI London Film Festival 2020.
► Malmkrog – Berlinale Encounters, Best Director winner.
► Treasure City – by Szabolcs Hajdu.
► The Offering – by Ventura Durall.
► Wicked Games – by Venice Grand Jury Prize-winning director Ulrich Seidl.
► The Middle Man – by award-winning Norwegian director Bent Hamer.
► Petrov’s Flu – by Kirill Serebrennikov.
► Underground – by Sophie Dupuis.
► The Man Who Returns – by Damien Odoul.
► Loba – by Kiro Russo.
In addition, there are two confirmed productions for 2021:
► Eureka – starring Viggo Mortensen.
► Inside – starring Willem Dafoe.
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