Nigerian Music and Film Asset Financing
Local financial institutions are having their key officers trained in assessing risk and developing valuations on Nigerian music and film assets
Having been involved in the legal, business and financial side of the Nigerian entertainment sector for a while, I have been able to observe a number of its trends and developments. One that I am particularly happy with is the financial sector’s growing desire to understand the business mechanics and underlying assets of these creative industries.
For years we have seen headlines about Federal Government policy initiatives to fund the Nigerian creative industries. These initiatives have seen some success, particularly in the distribution and retail end of the film sector resulting in the growth of cinema screens - a key film sector revenue driver - around the country. Unfortunately, similar successes have not yet been replicated upstream in the film industry (i.e. production) - though I have previously written on mechanisms and structures to increase production financing - and has barely touched the music industry.
Moreover, these laudable initiatives are intended to be a catalyst, to stimulate greater funding from the Nigerian finance sector. Like any business, creative sector businesses (in absence of profits to reinvest) require access to both equity and debt capital to grow. Equity investment (mostly from foreign investors) is growing, but debt investment is not. Asides the earlier-mentioned cinema distribution related investments, the Nigerian financial sector - despite making the right noises - has yet to deploy any significant financing for the sector in aggregate.
This is largely due to the fact that the business of building and operating cinemas is one that is familiar to the financial sector, as it fits comfortably within traditional models and their existing understanding of risk in that context. However, the business of the production/acquisition and commercial exploitation of films and music has, till date, been more alien. Revenue sources in the cinema business (ie ticket sales/food and drink sales) are equally simple to understand as they are akin to any hospitality business. Additionally, the underlying assets in the cinema business are tangible assets such as real estate, technical equipment and inventory.
Licences (to exhibit movies) are also part of the business model but simply as a cost, rather than revenue source. This is in contrast to the exploitation side of the entertainment business where the licences are the source of revenues - and as such are the key assets. On this side of the business, income streams are tied to the various rights in the underlying IP assets which the licences represent. These are the crucial differences that have made it difficult for the financial sector to invest more in the creative industries.
Educating the local financial community on what these underlying assets are (legally and commercially speaking), their cash flow sources and drivers, how to value these cash flows (adjusted for appropriate risk) and, most importantly, how to place the foregoing info in their existing risk and credit frameworks is key if we are to see the Nigerian financial sector increase its investment in entertainment businesses. The good news is that there is now evidence that the local banking sector is beginning to take this challenge seriously.
I and my colleague Justin Ige have just completed training 20+ staff of a leading Nigerian retail bank (across their legal, risk, credit and finance departments) on these very topics; and developed a checklist to aid them in their assessment of music and film assets. Another bank has now also expressed interest in undergoing a similar up-skilling of its key loan assessment staff.
It’s one thing for the banks to talk about wanting to support and invest in the Nigerian entertainment industry. It’s another thing for them to have the key officers involved in their loan assessment and offer processes to acquire the necessary skill sets and exposure for them to achieve this. Having the requisite understanding of the underlying assets and business value chain in the entertainment industry enables these staff to better understand the value and risks associated with these assets. This, I believe, will directly contribute to a greater amount of loans to this sector with the banks having greater comfort in knowing how to diligence, value, and (where necessary) liquidate the underlying IP assets used to collateralise such loans.
One very much hopes that the remaining retail financial institutions show a similar desire to “level-up” :) key staff - if indeed they genuinely do wish to engage in more investments in these sectors. It’s fine to know the theory and the basics, but it’s more important to be able to apply them in real life scenarios - particularly in an undeveloped market such as Nigeria. The aim, after all, is for more investment; and for said investment to provide returns commensurate with risk.
Understanding the risks associated with the entertainment business and its underlying assets only comes from experience in engaging in transactions with those assets. Hopefully, my colleague and I have gone some way in aiding this cause; and that the results will begin to be seen in the not too distant future.