Support for the creative economy

Written evidence submitted by Ingenious Media [SCE 003]


1.1 Ingenious is an investment and advisory firm based in London. We are the largest independent investors in media and creative content in Europe having raised more than £8 billion to invest in creative assets since 1998. We have more than 5,000 investors including institutions, corporates and high net worth individuals. We recently extended the scope of our investment activities into leisure, sport and clean energy.

1.2 To date our partnerships have financed 100 feature films, including such successful commercial films as Avatar, 127 Hours, Australia, Hotel Rwanda, Notes on a Scandal, Water For Elephants, X Men: First Class, Alien Vs Predator, The Best Exotic Hotel Marigold, The Descendants, Die Hard 5, Girl with a Pearl Earring, Fantastic Four 2, Hairspray, Hot Fuzz, Night at the Museum, Shaun of the Dead, Stardust, Streetdance 3D, Vera Drake and Rise of Planet of the Apes.

1.3 In television we have worked with all the major broadcasters and produced more than 400 hours of prime-time TV drama, including shows such as Foyle’s War, Rev, Kingdom, Scott & Bailey, The Reckoning, Law and Order: UK, Monroe, Doc Martin, Primeval, Case Histories, Injustice, The Suspicions of Mr Whicher, Man to Manta, Zen, Neverland and Young Leonardo.

1.4 Elsewhere in the creative economy our experience of producing children’s animation includes Fleabag Monkeyface and Pajanimals. Through Ingenious Games we have invested both in consol based video games (for example Colin Macrae: DiRT and Fuel) and mobile games (like My Puzzler). We have previously invested in recorded music, including albums by Peter Gabriel and The Prodigy (a number one hit album), but we now focus on music festivals and other live events.

1.5 We also invest in early to mid-stage content businesses through our quoted vehicle Ingenious Media Active Capital (IMAC) and our new Media Opportunities Fund. IMAC investee companies include Digital Rights Group, Whizz Kid Entertainment and BrandRapport Group. Previous investments include 19 Management (creator of Pop Idol), and Cream (operator of the Creamfields Festival).

1.6 In this submission we focus primarily on business and financial issues. Investors are rarely in the room when policy-makers and politicians talk about the creative economy: investor perspectives are almost universally ignored in the policy literature. Policy and regulatory issues, for example in relation to the role of fiscal reliefs and, less obviously, the role of arts subsidy, are therefore discussed here only insofar as they directly impact on the investment climate. Our submission is not exhaustive. For example we do not discuss copyright issues, although effective copyright protection remains critical both to sector prospects and investor confidence. Finally we call for a more strategic approach to the management of the creative economy, in support of which we advance seven policy propositions for the Committee’s consideration.


2.1 The most intractable problem facing the UK’s creative business sector is its inability to grow companies to a scale at which they are capable of competing globally by retaining for re investment the commercial returns generated by their creative successes. Most UK creative businesses, of which there are more than 180,000 according to BIS figures, are tiny-not big enough even to be described as SMEs-and sub-scale, that is to say they live from hand to mouth subsisting on serial projects. We have very few large and medium sized companies in the audio-visual and entertainment fields. Whereas in the 1950s and 1960s the UK could boast two world class media and entertainment companies in EMI and the Rank Organisation, fifty years later we cannot boast a single player to rival Disney, Bertelsman or Vivendi in the global market (apart from the BBC, which is funded by the licence fee and is in public ownership). Control of large swathes of creative business has migrated out of the UK. Whereas creatively we punch well above our weight, commercially-and leaving aside the BBC-we punch well below it.

2.2 In content production specifically, the UK’s creative economy mainly comprises an eco-system of interlocking micro-businesses, freelancers and the self-employed. More than 90% of the UK’s creative businesses employ four people or less according to the government’s own statistics. Some of these companies are small because their founder-managers like it that way, but others are small because their owners do not know how to scale them up to grow and become commercially sustainable.

2.3 There will always be a large number of micro-businesses in the sector. From a purely creative point of view, small is both beautiful and productive. Creative talent flourishes best in relatively small and highly flexible units. However creative excellence does not guarantee commercial success. In a competitive global market small, weak, project-based business units are vulnerable to the effects of under-capitalisation, loss of clients, adverse currency fluctuations and the withdrawal of inward investment. Such companies are often only viable because they pay their staff so badly, and sometimes not at all.

2.4 The biggest challenge is to find ways of helping significant numbers of these very small businesses to "scale up" (in investment-speak). We need to develop a solid core of sustainable content-creating businesses at the heart of our economy if we are to be commercially competitive on a global basis. This means taking a much longer term investment horizon than is customary. A second challenge is to provide sufficient incentives to successful entrepreneurs to persuade them not to sell up once they have tasted success and made some money. Too often these businesses end up in the hands of the US and other international "majors": this is a recurring pattern in the UK. The solution is to devise a tax structure that allows capital to be released without a total sale.

2.5 Higher levels of creative business capacity should be the means by which we exploit the commercial opportunities generated by our abundance of creative talent. Without this business capacity the UK will fail, as it now fails, to get a fair return from the skills of our producers and technicians and the box office successes of our writers, directors, actors, composers, musicians, photographers, designers and software developers.


3.1 The idea of an "equity gap" has been debated endlessly by policy-makers with some arguing that there is a shortage of risk capital across all business sectors in the UK and others, to the contrary, that the equity gap is a myth and that the real problem is the lack of "investibility" of almost all small businesses, irrespective of sector. The issue for them is an "investment readiness gap".

3.2 The truth is somewhere in the middle. Creative businesses require access to finance like all businesses, but they also need access to the right finance at each stage of their development. We believe that a funding gap does exist, that it is especially acute for creative content businesses because of their high risk profiles, and that it is especially acute outside London. At the same time there is unquestionably an investibility problem, about which we need to know more. That is why we have teamed up with Creative England and Pembridge to support the Collider 12 programme, recently launched, which aims to take early stage businesses and help convert them into investible propositions.

3.3 Unfortunately the debate on that old chestnut "access to finance" has been waged in somewhat sterile terms in the UK, as in Brussels, because of a failure to distinguish between apples and oranges. Considered from the point of view of investor risk the creative business sector is not homogeneous. It exhibits many different business models, old and new, with correspondingly different risk characteristics. There is one fundamental point of differentiation however-the difference between "demand-led" and "non demand-led" models. This is the key to understanding the access to finance question.

3.4 At one end of the risk spectrum are businesses engaged in the high risk production of content, like records, films, theatrical shows and games. The activities of these companies are based on a complex and unpredictable relationship to the market. There may be high public demand for their products across an enormous range of genres and tastes but, critically, these activities are non demand-led in the sense that no associated market research or pre-testing has any useful predictive value. In the immortal words of the American screenwriter William Goldman (Butch Cassidy and the Sundance Kid, All the Presidents’ Men), "NOBODY KNOWS ANYTHING", by which he means that the market response to any given song, show, film or book cannot be anticipated with any degree of dependability. The content developer/producer has to commit significant funds to the creation of a product before he has any idea of whether the public will pay for it or not. In practice much of the financing therefore comes from large distributors, who because of the terms on which finance is offered end up controlling the intellectual property (IP) and thus owning most of the economic value created.

3.5 This business model stands in sharp contrast to other forms of demand-led creative business activity, like composing music for a TV commercial, or delivering new marketing software in response to a commission from an advertising agency. Both these activities demand the application of creative skills, and may well draw on the skills of the same people, but they exhibit fundamentally different commercial profiles and have different financing needs. In short they are relatively low risk services businesses. [1]

3.6 Somewhere in the middle of the risk spectrum one can identify a third category of business comprising a handful of (usually) larger content distribution and licensing businesses. In this space the distributor can acquire and manage completed creative properties with greater visibility over the critical response and, within limits, box-office demand. He can thus factor in at least the possibility of recovering his acquisition and marketing costs. These businesses are subject to technology risk and especially the impact of the rise of the aggregators, like Google, but they generally do not take on production or content risk.

3.7 The hardest challenges in attracting finance are faced by businesses in the first category-content creation businesses. The problem is common to the entire creative business universe and not confined to any one genre, although the film and games industries experience the greatest difficulties because of the scale of the irrecoverable sunk costs that typify their financing models. Like all content-creating businesses many of these companies face the problem of breaking the vicious cycle of having to pre-sell their content to fund production costs, thereby losing some or all of the rights to intellectual property (IP) which might otherwise generate the profits that would attract further investment and thus help build sustainable growth. A business which loses control of these rights is likely to remain commercially vulnerable, a project fee-based operation, unable to develop a portfolio of content or diversify its product range, and therefore unable to grow sustainably.

3.8 Control of IP determines ease of access to finance. The Hollywood studios have always understood this. It is in this precise commercial context that the issue of IP is so important to the creative economy. It follows that it is vital for content companies to think creatively about financing solutions, above all to help them retain some value in the IP they create. This often involves entrepreneurs having to make difficult choices in deciding whether to accept some form of project financing, and if so on what terms.

3.9 Against this background the private financing options available to most creative businesses, and especially to entrepreneurs in content-producing businesses, are limited. Informal networks of "friends and family" are a significant source, particularly in the early stages. Debt finance has been much harder to obtain since the beginning of the credit crunch, and the supply has now almost completely dried up with the banks having largely withdrawn from the market. Many businesses are started by mortgaging personal property, or on credit cards.

3.10 The availability of venture capital funding, never plentiful in the UK in the media space and always much more difficult to access for content businesses than for technology or service companies, has declined sharply in recent years. Project finance is always an option and frequently a necessity in order to get anything made, but can be expensive and is hard to find. Meanwhile financing from within "the trade", meaning the largely US-owned "majors", usually comes at a big price in terms of loss of control.

3.11 In the public financial markets sentiment towards the media and entertainment sector as a whole has remained negative since the bursting of the dot-com bubble in 2001. Very few investors in the financial community understand creative businesses. This is in itself a significant obstacle to the growth of the creative economy. For content producers the shortage of what we call "knowledgeable investors" is, similarly, a considerable barrier to entrepreneurs being able to access the right kind of finance to fund the growth of their businesses. There is no simple or obvious solution to this problem, but government must surely be concerned to help identify one. The best place to start is to get the analysis right.


4.1 The role of tax reliefs in supporting the UK’s creative businesses is often misunderstood and is sometimes misrepresented by trade associations-though for understandable reasons. This misunderstanding is reflected in HM Treasury’s recent consultation document Creative Sector Tax Reliefs. In his Foreword to this document the Exchequer Secretary, Mr. Gauke, states that

"Like the film tax relief, the aim of the reliefs for animation, high-end television and video games is to provide tax reliefs that encourage investment into production in a way that ensures the sustainability of these industries….." (emphasis added).

Later, in paragraph 1.6, the consultation document develops this proposition by noting that "In 2010-11 the film tax relief provided £200 million of support to the British film industry, supporting over £1 billion of investment into 190 films."

4.2 The initial statement, though true up to a point, indicates a degree of confusion about the notion of "sustainability" in the film industry, and by extension other creative content sectors. It is true that the UK film industry would be far less "sustainable" without the film tax credit: the tax relief is crucial to attracting inward investment from the Hollywood studios. In 2011 some 80% of aggregate industry spending in the UK rested on inward investment from the USA. Take away this American money and what remains, apart from some £350 million of government "soft" funding, is negligible in terms of domestic investment.

4.3 In an economic sense therefore the film tax credit undoubtedly does help to ensure the "sustainability" of the sector-indeed, other things being equal, the sector might well collapse without it. Other things may not always be equal however: for example, a sharply rising dollar exchange rate of the kind experienced in the early 1980s would soon make the UK a less competitive place to produce films. Risk capital in the global film industry is extraordinarily mobile: in this scenario the extreme frailty of the UK’s under-capitalised and fragmented film industry would be brutally exposed, tax credit or not.

4.4 This is the point. Though it is universally supported within the industry (essentially it is free money), the film tax credit has done nothing to enhance the underlying sustainability of British film businesses. Nor, as currently structured, is it likely to make any future impact on business sustainability unless it is buttressed by a package of other, industry-focused measures designed to address the sector’s chronic structural and financial weaknesses (see section 5 below). Government has consistently intervened on the supply side to promote the quality of the UK’s technical and creative skills through the work of Creative Skillset and others, but has largely ignored the issues of competitiveness, business capacity and business sustainability.

4.5 Against this background tax reliefs are all too easily deflected from their ostensible strategic purpose, serving primarily to provide cheap project finance to big entertainment conglomerates largely controlled from outside the UK. This logic applies equally, though to varying degrees, to all content sectors and sub-sectors-including the games and animation sectors and the high-end TV drama sub-sector. Tax reliefs will help to level the playing field as regards international fiscal competition, for example competition with Ireland in the animation sector, and will certainly help to increase levels of inward investment. To that extent they are very welcome, but they will not transform unsustainable UK businesses into sustainable businesses: they will not of themselves succeed in addressing the structural problem.

4.6 The danger is that the proposed new reliefs will divert attention from this problem by providing a false sense of security. These reliefs offer a short term palliative. Our support for them is therefore qualified. Such credits are necessary, because of what is offered elsewhere internationally, but not sufficient to ensure the development of sustainable businesses. They will not on their own be effective in improving the competitiveness of the sectors to which they relate. However they could form a vital ingredient in the package of initiatives required to achieve the broader objective.

4.7 Industry attention has naturally focused on the three new proposed reliefs for the games, animation and high-end TV drama sectors. Behind the scenes, however, something very worrying is happening on the fiscal relief front. In recent years the Enterprise Investment Scheme (EIS) has, alongside Venture Capital Trusts (VCTs), brought much needed new investment into creative enterprises, especially in TV and film. Following a meeting between sector business leaders and the Chancellor in February 2011 a number of changes were made to the fiscal regime in the Finance Act of that year, including the raising of EIS tax relief to 30%. Although these changes were intended to promote investment into all business sectors, in private communications it was made clear by officials at HMT at the time of the 2011 Budget that the Chancellor had listened to the representations made by creative sector business leaders and had responded to them positively. Not surprisingly, there was an enthusiastic welcome from Mr Vaizey, who proceeded to trumpet the wonders of the EIS to the wider creative sector, as well as from the sector itself.

4.8 Several consultations and eighteen months later the situation is much less cheerful. This is not the place to go into the detail of these consultations, or to explore the complexities of the "targeting" regime being implemented by HMRC, or to highlight the capacity constraints now holding up HMRC responses to applications for clearances. Suffice it to say that confusion and delay is epidemic and that the EIS market is currently gummed up. This will lead to significantly less funds being raised from investors in 2012-2013 with consequential adverse effects on the audiovisual and media sectors, amongst others. Not for the first time we observe an apparent disconnect between Treasury intentions and the will of Parliament on one hand, and the day to day practice of HMRC on the other, apparently aggravated by internal bottlenecks. This is a major concern for the sector.


5.1 Ministers are entitled to draw attention to the fact that the UK enjoys great competitive strengths in the global creative economy. Our creative and technical skills are second to none. However, justified celebration can easily lapse into complacency and hubris. This is a clear and present danger for UK public policy. The rest of the world is not standing still. It is time to reassess the basis on which the state intervenes to support our creative economy. At public policy level a number of barriers to growth can be identified. These include a now out-of-date conceptual framework ("the DCMS 13"), high ministerial turnover, poor data and lack of sponsoring departmental "clout" in Whitehall. More specifically, we urge the Select Committee to address the following seven broad propositions.

5.2 First, the public policy framework governing the analysis of, and the basis for intervention in, the creative industries should be updated to take fuller account of business and investment challenges, rapidly changing business models and intensifying global competition.

5.3 Second, we need to take a long-term strategic view of our competitive strengths and weaknesses so as to be able to capitalise on the former and address the latter. The term "industrial policy" is politically sensitive in the UK. Whatever we call it, we need a plan to help us take a larger share of the growing world market for cultural goods and services, which must surely be the policy goal.

5.4 Third, hardly any original thinking about the future of the UK’s creative economy now takes place within government. The conditions which gave rise to the growth of the UK’s world-beating independent TV sector were the result of specific regulatory interventions over a 25 year period beginning with the creation of Channel 4. Given that the British market is always vulnerable to the superior firepower of American corporations by virtue of its small scale relative to the USA, much more thought should be given to ways of promoting British distribution capacity by means of regulatory intervention. No such thought appears to have been given to these issues since the previous government’s Creative Economy Programme fizzled out in 2008. This apparent inability to lead any process of creative and critical policy-making should be rectified as a matter of urgency whether in DCMS or BIS or some combination of the two departments.

5.5 Fourth, across the whole of the creative content sector we rely too much on inward investment. This is always welcome but it is vital to raise overall levels of domestic investment. Amongst other things, we need to:

· address the gap in understanding between creative business sectors and the City;

· use the tax system to generate higher levels of investor confidence and sustained investment in creative enterprise, thereby increasing domestic creative business capacity; and

· use the tax system, and specifically Entrepreneurs’ Relief, to incentivise successful creative entrepreneurs to remain engaged and not to sell up to well capitalised (usually overseas) players at the first whiff of serious profitability.

5.6 Fifth, there should be a systematic effort to identify and train more creative industry producers and entrepreneurs. We need more business talented individuals to team up with our creative and technical talent. At Ingenious we are playing our part by sponsoring two important new initiatives, partnering respectively with the National Film and Television School (NFTS) and Arts Council England (MeWe360).

5.7 Sixth, we must recognise that public subsidy of the arts is a key element in overall public support for the creative economy. From an investor perspective this means acknowledging that the subsidised sector plays an essential role in enabling creative risk-taking. The private sector generally steers clear of this kind of risk in the UK, as in continental Europe. This is a classic case of market failure to which the UK’s system of arts subsidy provides a successful and well-tested remedy.

5.8 Finally, the role of the private sector in much of the creative economy is to back successful creative risk-taking. This is perhaps demonstrated most clearly in the film industry where the role played by BBC Films and Film 4 is critical to project development. Private investors will undoubtedly have to do more in future. However what we currently have is a delicately balanced funding ecology with public and private funding combining on many levels and in many different configurations to deliver both social and economic benefits. [2] There is a considerable risk that further cuts to arts subsidy, additional to those already planned, will result in significantly fewer "hits" being created leading in turn to the attraction of lower levels of private investment and thus a reduction in overall creative capacity. This would be to the long term detriment of our ability to compete internationally and would make it almost impossible for us to hold on to market share in the global market for cultural goods and services.


This agenda presents some serious challenges for policy-makers. The government is right to celebrate great British talent and great British success stories and to highlight the economic opportunities available to us. However it must also will the means by which such creative successes can be turned into better business for UK plc. That means placing increased investment at the heart of the policy agenda. If government is serious about backing the "creative industries" as one of the growth sectors of the economy, it must acknowledge the high risk nature of certain parts of the sector. Increasing levels of domestic investment will be crucial. To this end it is necessary to analyse the sector by reference to business models, rather than cultural genres, as in the past, and to take a long term view of the global market. Future economic interventions should focus on specified categories of creative business and their potential to generate taxable revenues, and the need to ramp up domestic business capacity.

October 2012

[1] In Risky Business , a tract published by Demos in October 2011, the authors Helen Burrows and Kitty Ussher claim (on the cover of the publication indeed) that “the lazy assumption that the creative industries are inherently risky is harming Britain’s path to growth”. However it is Burrows and Ussher who make a fundamental conceptual error, partly by failing to distinguish between demand-led and non demand-led business models with their vital consequences for access to finance, and partly by failing to acknowledge or locate the huge amounts of capital at risk in the creative ecosystem. On their very limited analysis many creative businesses do not appear to be especially “risky”, but this is true only if you ignore the projects with which they are associated and which they exist to manage . The risk lies in connected entities – in the off-balance sheet financing of specific creative projects , most of which are both inherently risky and very costly. This associated risk capital is principally to be found on the balance sheets of large international entertainment companies (most of them not headquartered in the UK), groups of angels and limited partnerships. The point is that this associated capital, which is always at risk, is not captured anywhere in the Burrows/Ussher analysis.


[2] See Martin Smith, Arts Funding in a Cooler Climate: Subsidy, Commerce and the Mixed Economy of Culture in the UK , Arts & Business, 2010, especially pages 6-13.

Prepared 17th November 2012