Sofica: invest in the next Palme d’or!

The support for the cinema and the tax carrot is for the moment the main interest of this very risky passion investment. But the strong growth in demand for audiovisual content could change the situation.

This Friday, May 20, the famous Cannes Croisette has regained its pre-Covid luster. For this fourth day of the Festival, the event highlights Brother and sister. This drama by Arnaud Desplechin is among the French contenders for the Palme d’Or of this 75e editing.

For the occasion, the entire galaxy of French cinema funding made the trip. It must be said that the new Desplechin, with a budget of 4.5 million euros, benefited from the support of the largest Soficas (Financing companies for the film and audiovisual industry), notably Cinémage, Cofinova, Indéfilms and Palatine Etoile.

“It’s one of our big favorites this year and a good hope for the Palme d’Or”, admits to the Revenue Thierry Wong, founder of Ciné Nominé, film producer and creator of the Banque Palatine Sofica.

71 million euros raised in 2021

If the producer-investor is confident, it’s because French cinema is on the rise. In particular, it receives support from a financing system that is almost unique in the world, set up in 1985 in order to attract private capital by allowing Sofica shareholders to benefit from a tax advantage.

In 2021, the Soficas participated in the financing of all the French films selected at the Cannes Film Festival (except one), including the Palme d’Or, Titanium, and the seven French films selected for Critics’ Week. They also helped fund The Event, Golden Lion in Venice.

And, good news for French cinema lovers, the Soficas invested a record sum in creation in 2022. The twelve cinema and audiovisual financing companies approved by Bercy in 2021 raised more than 71 million euros , to invest this year, ie 11 million more than the previous year.

Up to 48% tax reduction

It must be said that Sofica shares are selling like hot cakes. Taxpayers love these tax exemption products. To the point that banks reserve this investment for their best customers. Because if this investment is rather risky and not very liquid, it is the subject of an attractive tax rebate.

In return for holding Sofica shares for at least 5 years, and within the limit of a payment ceiling of 18,000 euros (and 25% of the overall net income), the subscriber may reduce his income tax up to 30 to 48% of the amount of net payments, made during the previous year. That is a maximum reduction of 8,640 euros (reduction rate of 48%) for an investor, single (or widowed or divorced) or a couple subject to joint taxation, with an overall net income of at least 72,000 euros.

The maximum tax reduction depends on the investment constraints on the Sofica. Thus, those offering a 48% reduction must devote at least 10% of their investments to the production of series or to the export of French works abroad.

“Virtually certain capital loss”

“I don’t understand the enthusiasm for this tax exemption product, which offers limited performance and very little visibility,” denounces Georges Nemes, president of Patrimmofi, a wealth management consulting firm.

“Early exit before full liquidation is not permitted by Sofica. The taxpayer must wait an average of six years to recover his investment, or even ten years (ie the maximum lifespan of the Sofica) in the event of a delay in the development, operation or resale of the catalog of projects. And during this time the costs accumulate, ”continues the manager.

Before bringing the blow: “The capital loss is almost certain. The return on an investment in the Sofica comes solely from the tax reduction acquired at the time of subscription.”

Low returns and high costs

A severe observation confirmed by a report written by the current director of the CNC (National Center for Cinema), the organization which accredits the Soficas each year. According to the Boutonnat report, between 2002 and 2011, the Soficas only financed projects at a loss. For those created between 2002 and 2009, the subscriber ultimately recovered less capital than the net amount invested: the shares were redeemed between 40 and 90% of their initial value.

Worse, the Soficas charge 19% in management fees, which further reduce the return. Results, the only interest of the product is its tax advantage. And again, tax benefit included, profitability is only 1.9%, or as much as a life insurance contract in euros which presents no risk.

The conclusion of this report was clear: the Soficas must be allowed to invest in “more profitable” films, that is to say more “commercial” and better distributed. Above all, we must support the evolution of cinema consumption and the explosion of new distribution channels.

The new outlet for streaming platforms

“Our Cinémage Soficas have been able to anticipate the exceptional growth of series and position themselves on the most popular French series in France and abroad. After The Office of Legends (the most exported French series in the world), myth (sold to Netflix) and Criminal Tropics, Cinémage is particularly associated with the production of In Therapy, broadcast on Arte”, recently explained to the New Economist Serge Hayat, the founder of the Cinemage Sofica.

“The streaming platforms [Netflix, Amazon Prime, Disney, Salto…] in hyper growth are looking for ever more numerous and diversified films to offer to their subscribers. Since 2021, they have the obligation, like Canal +, to finance the cinema”, rejoices Pierre Forette, co-founder of Ciné Nominé, film producer, who sees in it an obvious outlet for films financed by the Soficas.

A sign of the times, while most approved Soficas are offshoots of banks, a newcomer is trying to impose itself on the market. Launched by Entourage Gestion, Entourage Sofica has signed a backing partnership with Mediawan.

In the event of a film’s failure, the backing agreement enables the Sofica to recover 100% of its investment from its partner. But on condition that the partner is solid. Hence the interest in partnering with the giant of European film and audiovisual production, co-founded at the end of 2015 by Pierre-Antoine Capton, Xavier Niel and Matthieu Pigasse.

If the Soficas continue to fund films that moviegoers will dream of, they could also put “glitter” back in the eyes of taxpayers!

Pierre Forette and Thierry Wong, founder of Ciné Nominé

Pierre Foret Thierry Wong“We offer a 5% rate of return on investment, tax advantage included”

You have a dual role as an independent film producer and funder. How does it work ?
First and foremost, we have been a producer since 2000, the release date of La Squale, our first feature film. Since then, we have produced dozens of films. Simultaneously with our production activity, we founded in 2003, in partnership with the Palatine bank (ex-Sanpaolo) of the BPCE group, the Sofica Uni Etoile, which will become Palatine Etoile, as well as several companies dedicated to investment in cinema French and European.

To date, all of these companies have raised and invested more than 100 million euros, invested in nearly 340 feature films, including a Palme d’or and more than 42 films selected at the Cannes Film Festival. We were the first at the time to focus on independent producers. But, from the start, we made the choice not to invest in our own productions.

How do you select the films?
We have set up an independent committee made up of all the film professions to select about fifteen projects a year, on which we invest 4 million, firstly according to their artistic quality but also on their commercial potential. This is why we have always been sensitive to the distribution part.

From now on, the Soficas must devote 15% of their collection to investments with film distributors. This is also the reason why the envelope, generally limited to 63 million, was raised by the public authorities to 73 million. These additional funds must therefore strengthen this essential link in the film industry chain, hard hit by the health crisis.

How is the profitability of a film calculated?
The operating cycle of a film extends over 5 to 7 years, between shooting, theatrical release in France, then resales abroad, then on television according to the chronology of the media. The catalog value of the film is then determined. At each stage we collect the receipts from the film. On our Soficas, we offer a rate of return on investment of 5%, tax advantage included.

What performance to expect from a Sofica

The final profitability of a Sofica depends on the redemption value of the shares acquired, and therefore on the success or failure of the films financed. And especially the duration of the placement. The maximum closing term of a Sofica is 10 years. A gain of 20% over 6 years and a gain of 20% over 10 years do not offer the same performance.

When you invest in a Sofica, you rarely recover your entire investment on exit, but only 60 to 70%. In addition, management fees weigh on the final profitability. Count about 3% when subscribing, then nearly 2% per year for five to ten years. A study shows that, between 2013 and 2017, the average annual net profitability of Soficas was 2.82% (tax benefit included).

In detail, nearly half of the Soficas in the panel served less than 3% (at worst -4.57%) and twelve offered returns above this 3% mark (up to 7.2%). None of these Soficas has fully repaid the committed capital. Reimbursement rates range from 36% to just over 80%, with the average (and median) being around 63%.

How to find the best Soficas

It is generally only in October that the CNC publishes the list of approved Soficas for the year as well as the collection amounts allocated to each of them. Interested taxpayers then only have a few weeks, at the end of the year, to subscribe to shares.

While many Soficas originate from banking establishments (La Banque Postale, Palatine, Société Générale, etc.) and are marketed mainly within their respective networks, other Soficas have been set up at the initiative of production companies or Management.

The latest created, Entourage Sofica, is managed by the management company Entourage Ventures, which specializes in investment in distribution. “We have been co-investing since 2016 with Gaumont in all of its films with our Entourage Pictures fund,” explained Julien Delajoux, co-founder of Entourage Ventures, at the launch. This is available at Linxea for the digital channel, the group of wealth management advisers (CGP) La Financière d’Orion and the private bank Hottinguer.

Most non-bank Soficas are available for subscription through intermediary distributors such as CGPs. “Beware of CGPs who promise you Soficas to finally direct you to other products”, warns a Parisian professional.

With a high entry ticket (around 5,000 euros), these products are reserved for large estates. Especially since the shares of Sofica are subject to the social and tax treatment of securities, in the event of dividends or during the sale. The probable capital losses are then deducted from the capital gains realized on other transferable securities during the year of sale.

We would like to give thanks to the author of this short article for this outstanding material

Sofica: invest in the next Palme d’or!