Corporate Entities making investments in their own right
Managing corporate clients from a financial advice view point can be very complex and is a process that would seem to fall between the intermediary and the company’s professional advisers. My experience with financial intermediaries and the advice given to corporations primarily focuses on delivering remuneration benefits efficiently to directors and employees, while professional advisers are retained for audit, taxation and company law matters.
But in this relationship there is one other entity that needs to be considered when financial and risk planning is involved, which is often overlooked, and that is the ‘corporate’ entity itself. After all it is the person, which is fundamentally exposed to the economic risks and rewards associated with the actions of the business and yields the benefits for all stakeholders. The corporate, as a separate legal entity, has important needs of its own such as in the form of working capital requirements, profitability and financial risk management. These are all important considerations, especially in terms of maintaining shareholder value, delivering against budgeted objectives and being responsible to all stakeholders. Why then is the corporate often not included within the general financial planning that is undertaken elsewhere within the business? This is a missed opportunity.
With this in mind we turn to the question of how one could helpfully incorporate the corporate entity in the financial planning process, and how the process can efficiently lead to risk diversification, balance sheet enhancement and cash flow benefits.
Trading film partnerships involving corporates investors potentially offer significant commercial and economic rewards for profitable, owner managed businesses. These investment opportunities are often innovatively structured and provide for a company to gain exposure to the returns from high successful franchise assets film industry, while at the same time limiting the downside risk to capital invested.
The key benefits can be broadly segmented into two areas, economic and commercial. Economic rewards flow through in the form of increased working capital , a reduction in effective corporation tax rate, enhancement of distributable reserves and the potentially lifting of a large tax payor out of the quarterly payment regime. From a commercial standpoint, the corporate diversifies its revenue exposure through investment into an uncorrelated asset class on a limited liability basis and with the opportunity to derived uncapped returns over a significant timeframe.
The mechanics of a trading film partnership are fairly simple. The corporate member contributes capital to a UK limited liability partnership and becomes a member, in conjunction with a specialist film producer who subscribes monies into the partnership. The partnership is then commissioned by a Film Studio to procure production services in connection with a specific film project and in consideration for a share of contingent proceeds calculated by reference to the actual performance of the relevant the film. The services are sub contracted out to specialist film production companies and the funding obligations are discharged in full by the partnership using the capital proceeds subscribed by members. Because there are significant risks attaching to the performance of films, the partnership is required under UK accounting rules to recognize the expenditure incurred in its first accounting period and this trading loss is the allocated out to the members of the partnership. This trading loss can then offset against any profits chargeable to corporation tax of the investing corporate for the relevant period.
The immediate economic benefit of the loss allocation is to enhance cash flow of the corporate by up to 45%.
Thereafter, the longer term benefit to the business is the potential for an ongoing income stream based on the financial performance of the Film, giving an investment in an asset uncorrelated to the existing business.
Piers Denne
Head of Sales and Marketing
Future Capital Partners