In an era where market-beating returns from alternative assets is increasingly demanding, there’s a compelling investment opportunity hiding in plain sight, well, on our screens. It’s film production. While traditional private credit markets have become saturated, this specialty finance niche offers high-yield, short-duration returns with robust collateral protection.
“What makes film finance particularly attractive right now is its counter-cyclical nature combined with strong structural protections.” explains Greg Gigliotti, Head of Xtellus Advisors. “We’re seeing institutional investors achieve compelling returns, with recovery periods typically under 18 months.”
Recent data shows that within the specialty finance landscape, media production lending has emerged as a standout performer – delivering IRRs of 22.5% compared to the broader specialty finance sector’s 12.6% [View Our White Paper]. These loans typically offer 15-30% gross annual returns over 2-15 months periods, providing reliable income backed by film assets rather than box office performance.
It’s All About Collateral
Unlike equity stakes, which tie returns to a film’s box office success, private credit lending in film provides returns secured by tangible collateral. The modern film financing structure operates on a waterfall model, where debt investors recoup their capital before equity participants.
Three primary forms of collateral underpin film lending opportunities:
- Tax credits and rebates from filming jurisdictions
- Pre-sale agreements with distributors
- Unsold territory rights that can be monetized
This collateral framework allows lenders to structure investments across the risk spectrum. Low-risk opportunities include foreign presale loans and tax credit financing, while higher-yield options encompass more traditional gap financing and bridge loans. This flexibility enables investors to build diversified portfolios tailored to their risk appetite.
Navigating Challenges for Strong Returns
In fact, when it comes to film financing, well collateralized private credit can deliver consistent returns even when productions face unexpected obstacles. Take a recent investment:
In June 2023, Xtellus provided a $400,000 bridge loan to a film production, secured by a $1.4 million Mississippi state rebate tied to the production’s location. Despite the original two-week term targeting a 10% return, complications arose when the senior lender withdrew due to accounting issues and outstanding SAG payroll debts. This pushed our investment into default status, triggering the penalty interest rate of 2.65% compounding monthly.
Despite these challenges, we successfully exited the investment through a secondary sale after one month of default, achieving a 15% gross return (180% annualized). By maintaining exit optionality, we were able to deliver strong time-adjusted returns even in a potential downside scenario with delayed repayment.
Managing Risk
Successful film lending requires more than just understanding standard credit metrics. Effective risk management demands industry expertise, on-the-ground monitoring, and proactive oversight of production milestones. While emerging fintech platforms promise to democratize film financing, they cannot replace rigorous due diligence and real-time project management.
For institutional investors seeking to diversify their private credit allocation, film lending offers an opportunity to achieve differentiated returns in a growing asset class. The key is approaching these investments with the same disciplined framework used in traditional speciality finance, while acknowledging the unique aspects of film production.
For more information about financing the stages of film production, view or download our white paper – Film Finance Demystified.
Or visit the LX Film Credit Fund overview.