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Beating the crowd to secure investment for new theatre

American Psycho at London’s Almeida Theatre, starring Matt Smith, right, was partly financed through crowdfunding platform Kickstarter. Tristram Kenton
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The performing arts contribute enormously to the UK in many ways. The manner in which government seeks to promote this sector, both directly and indirectly, is changing more than at any time in recent memory – both in the commercial and not-for-profit sectors. Producers and those running theatres need to understand these developments and develop new skills to make the best of new opportunities.

EIS and SEIS schemes

For commercial theatre, more projects than ever before are being structured as Enterprise Investment Schemes and Seed Enterprise Investment Schemes, which enable investors to access tax breaks when investing in company shares, and apply to a wide variety of sectors, not just theatre. The major reason in practice why EIS and SEIS schemes are not used in preference to the traditional angel loan model is that the investment must be left in for three years.

Angel investors, in contrast, can realise their returns within a few months. There is also a more fundamental difference in that the types of investors who traditionally invest in shows accept the risk and love the journey.

SEIS and EIS schemes need to be set up and planned carefully, are more complicated to deliver and are used where it is important for the investor that risk is offset by a reduction in their tax bills.

Theatre Tax Relief

Theatre Tax Relief was originally conceived by the government as a measure to promote investment in commercial theatre in the way that Film Tax Relief works in film, but it has been adapted to deliver benefits to both the commercial and subsidised sectors. Government, as well as providing support, can also seek to impose extra restrictions or taxes as has been seen in HM Revenue & Customs’ new approach requiring producers to deduct tax at source from angel-investor profits, which is not so welcome and is likely to deter non-UK investors.

Chimerica at the Almeida Theatre benefited from a limited recourse loan. Photo: Tristram Kenton
Chimerica at the Almeida Theatre benefited from a limited recourse loan. Photo: Tristram Kenton

Crowdfunding

Crowdfunding offers an opportunity for the right project, though to date only a few productions have used it to a significant extent. Currently the most popular model is donation and reward crowdfunding, as typically found on the Kickstarter and Indiegogo platforms. This may provide finance for some projects but it is unlikely to be a reliable source of funding. Equity crowdfunding – offering shares in companies or participation in projects – is more promising but there is no major arts-focused platform, so producers need to set up their own crowdfunding sites or have their projects mixed in with other types of project on an established platform. The legal and regulatory issues applying to offering investments have limited the potential of this approach, particularly for arts projects. So far these offers typically use an EIS structure, as in the case of the Crowdcube and Seedrs platforms, where the three-year rule remains an issue.

Social investment

There is a much wider set of new opportunities for funding open to the not-for-profit sector that can leave organi- sations unclear as to which applies to them or could be best for a particular project. The rise of social investment funding for social enterprises has great potential to provide finance for particular projects or productions, and fits in with the government’s Big Society agenda.

The importance of social investment was signalled in 2005 by the introduction of a new legal form, the Community Interest Company, intended as a hybrid entity to bridge the gap between highly regulated charities and the more laissez-faire regime for companies.

CICs cannot be charities and have no tax breaks attached to them, and as a result have had only a modest impact and almost none in the arts.

Social enterprise is nothing new in the arts. All subsidised arts organisations are social enterprises – set up to be businesses as well as to benefit society; those which are charities must satisfy the ‘public benefit’ requirements brought in under the Charities Act 2006.

The concept of social investment is not particularly widely appreciated within the subsidised sector, and organisations may be missing opportunities by not looking at funders such as Big Society Capital (part of whose funding can be seen as coming from government through the Big Lottery Fund).

This type of funding has had little impact on the arts as it tends to require social impact and is not project-based, but still can be worthwhile for the right project – most likely a capital scheme such as a new bar or cafe refurbishment. Generally loans must be repaid with interest; equity investments involve selling a percentage of the whole company. The downside is that if a project performs badly, the arts organisation can end up with a repayment commitment it cannot meet or a shareholder with no track record with arts organisations.

Golem at London’s Young Vic was backed by the Esmee Fairbairn Foundation. Photo: Tristram Kenton
Golem at London’s Young Vic was backed by the Esmee Fairbairn Foundation. Photo: Tristram Kenton

Trusts and foundations

A number of trusts and foundations have led the way in providing loans to social enterprises and have a developed understanding of how arts organisations work and their needs. The Esmee Fairbairn Foundation offers limited recourse loans through its Arts Transfer Facility, which is aimed at increasing the financial sustainability of the subsidised sector and has helped transfers such as Chimerica and Golem. This type of support is project-specific and does not load the producer with debt. As a result, it is particularly effective for the right project or organisation.

SITR

At the same time as it introduced Theatre Tax Relief, the government also introduced Social Investment Tax Relief. This is significant as it offers the same types of benefits as for SEIS/EIS but can be made through loans as well as equity (ie, issuing shares). This is open to all not-for-profit entities and especially charities and CICs. The advantage of SITR is that a not-for-profit organisation can raise investment of around £250,000 (the precise figure depends upon the euro exchange rate) and offer investors tax breaks, and the loan route is much simpler to administrate than for an EIS.

Many arts organisations are finding a shift in the types of philanthropic support – some successful entrepreneurs tend to prefer to invest in projects or organisations (albeit on favourable terms) rather than donate. Though not specifically designed for arts organisations, SITR could be a valuable means of tapping into these supporters. It too has a three-year rule, which will tend to draw its use away from productions to capital projects. Like EIS and SEIS investments, SITR investments cannot be secured or guaranteed, which helps ensure that the company does not become saddled with unrealistic debt.

Arts Impact Fund

The Arts Impact Fund is backed by Arts Council England and the Cabinet Office. A few years ago I was involved in discussions for an arts fund aimed at supporting arts projects. It has evolved into this fund, which now focuses on achieving social outcomes rather than helping organisations create work. This means that the right arts projects can benefit but the fund will have only a limited effect on the arts sector.

Overview

Though this is a patchwork picture where some forms of finance work better than others, for most types of projects and organisations, producers will need to know about the main alternatives to offer investors the best deals.

This necessarily involves ‘tooling up’ and understanding which types of finance work best and for which projects. For the subsidised sector, against a background of diminishing government grants in aid, with the Department for Culture, Media and Sport like other government departments being asked to model 25% and 40% cuts in funding over the Parliament for the next Spending Review, the emphasis appears to be moving towards the offer of loan finance rather than grants.

The recent announcement that the government will publish a white paper setting out a vision for the arts is all the more relevant, as one of the four themes will be funding models and how they can contribute to resilience in the sector. Rather than relying on measures that are borrowed from other sectors, which can be beneficial but tend to have limited impact, it would be better if initiatives are specifically designed to address need within the arts. Against a background of potentially deep cuts, this is a key opportunity and challenge.

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