How does theatre investment work? A nerd’s guide to the financial instruments that got your favourite West End show funded
I’ve recently worked with and investor and advisors who come from the more traditional business world and have enquired about how a commercial theatre show is funded. I figured this is information that isn’t widely known and lack of access to this information means that the world of investing in theatre can seem secret and closed to those outside it. I think there are a lot more people who would be interested in investing in a theatre show — as so many are theatre fans — if this knowledge was more widely known.
Anyone who has watched Dragon’s Den will understand the basics of company valuation and equity. An entrepreneur will pitch to the Dragons their business idea and ask the Dragons for a certain amount of money for a % of equity in their company. The Dragons, and the viewer, figure out how much the entrepreneur is are valuing their company at by taking the amount of money they are asking for and then extracting what that looks like as a percentage of 100. For example, if the entrepreneur is asking for £50,000 for 8% of the business, they are valuing their business at £625,000. (50,000 / 8 is £6250, the value of 1% of the business. £6250 (1%) x 100 = £625,000). Great. You’ve got that. Now put that aside. Theatre is different. We’re not dealing with valuation and equity; we’re looking at total capitalisation and units.
The total capitalisation of a show is the total amount of money the producer needs to get the show to opening night. This could be £60,000 for a small scale Off West End show or $12 million for an ambitious Broadway musical. The producer will calculate this figure, based on the vision for the show and their current knowledge of the market rates of talent and material goods. How big and complicated will the set be? Are we working with a celebrity star cast member? Is the director a new up and coming talent or someone with an established reputation? Does the production need to pay royalties to underlying rights holders, if the production is based on a book or a film? How much does the producer require in management fees?
The total capitalisation is roughly fixed before the producer starts to raise money, just like how in the start-up world, founders will set their valuation before raising money from venture capitalists. The total capitalisation will then be divided up into units of capital, and these units are the offer the producers take out to the market of prospective investors. For example, let’s say The World’s Greatest Play will cost £500,000 to produce. The producer will then divide this £500,000 up into units of £20,000. The producer will then sell units in multiples of £20,000 to prospective investors. It’s up to the producer how big or small they set the units, although if the producer is raising in New York there are some rules about how many investors they can have — but that’s a topic for an Advanced Theatre Investing blog later down the line.
Now, repeat after me. Units are not equity. Units are not equity. And a third time for luck: units are not equity! Unlike equity in a company, when, depending on the nature of the shares offered, shareholders get a greater or lesser say in how the business is run, purchasers of units get no say in how a show is produced and it’s the discretion of the producer how much they consult their investors. Also, unlike equity on the public stock markets which can be bought and sold, units are non-transferrable and non-resalable without the express written consent of the producer. So don’t worry — if you’re thinking about buying a spouse a unit in a show for their birthday instead of another piece of artwork you don’t have enough wall space for, don’t worry. Under those circumstances I’m more than happy to give my consent for units to be transferred between people! This, alongside my fun investor updates and high quality of projects is why you should invest with me and not another producer…
So, if a unit isn’t equity, exactly is it, financially? A unit is technically a debt instrument. On paper, the investor loans the money to the producer, on repayment terms which are proportionate to the amount of money the show generates generated in ticket sales relative units the investor put in. To simplify. Units of investment are repayable to the investors to the extent that the show makes back that amount in ticket sales. If the show makes no money at all, the loan is written off and the investor has no claim for repayment.
When a show generates money in sales, the producer nets off from the gross sales the amount it costs to run the show weekly before distributing any return of capital to the investors. This is called the weekly running costs. The weekly running costs of the show include weekly actors’ salaries (yes, actors are paid weekly, and a theatre production company needs to run payroll every week), stage management and technical staff salaries, and any consumables that the show gets through every performance, such as a firework that goes off at the end of the show and therefore needs replacing every performance. Also included in the weekly running costs are royalties to the key creative team such as the author, director, and producer. Sales that exceed the weekly running costs is called the weekly operating profit. The weekly operating profit is distributed back to investors, in proportion to the amount they invested.
So, let’s imagine The World’s Greatest Play runs for a long time and is a hot ticket. When the total capitalisation has been repaid back to the investors from the weekly operating profit — and theatre is a risky business, so this doesn’t often happen — the show goes into profit. Profit above and beyond the investor’s initial investment is split between the investor and producer, usually on 60 / 40 or 50 / 50 terms, although theatre isn’t a regulated market, so anything is possible. When I say unregulated, theatre investment contracts literally carry warnings that say, ‘not approved by the Financial Conduct Authority’. The proportion of profit an investor will get is proportional to the percentage of the total capitalisation they invested in the first place. So, in our example of a The World’s Greatest Play that costs £500,000 to get to opening night. Let’s say an investor put in £20,000, or 4% of the total capitalisation, and The World’s Greatest Play makes £750,000 in ticket sales. Therefore, an overall profit of £250,000 has been made, a 150% return on investment. The investor who put in one unit of £20,000, will make £5,000, after profit has been split 50/50. In total, the investor will be returned £25,000– the £20,000 unit of capital they fronted in the first place, and then £5,000 profit.
If a show runs for many years, or even decades, investors can make enormous returns on their money. Just think the original investors in The Phantom Of The Opera will only now stop getting their investment return cheques from the Broadway show when it closes in February 2023, after running since 1988. However, theatre is a risky business and it’s a probability a show will close without making any money, just as it’s a statistical probability that a start-up will fail. As with angel investing in start-ups, it’s wise for investor to only invest money they can afford to lose because a theatre show is a high-risk, high-reward venture. However, investing in a theatre can be very rewarding and a lot more interesting than other types of investments. There are many other glamorous perks for investors including behind the scenes updates, tickets to opening night parties and exclusive access to rehearsals.
This blog is an overview on theatre investing, there are many nuts and bolts I’ve left unexplored and could write about in an advanced theatre investing piece. Don’t forget that theatre investment paperwork is a legal document like any other contract, and I always advise investors to talk to their accountants on how to present the investment on their tax returns, like any other asset or liability.
If you have any questions please put them down in the comments section below, as I’d love to know all your questions about theatre investing! Would you like to read a blog on advanced theatre investing?