Private credit investors are turning their attention to opportunities in film financing as they look to move away from direct lending as it faces rising defaults and artificial intelligence-related concerns around software borrowers.

Despite increased demand for film financing, which offers higher returns and has a shorter duration than traditional direct lending, competition remains limited, two groups that focus on the sector suggest.

“Allocators are wary of crowding in direct lending and sponsor finance, and are looking for exposures that do not move with the credit cycle,” said Adrian Politowski, executive chairman and co-founder of Align, the Brussels and Luxembourg-based group founded in 2018. “Film and TV lending fits that brief: repayment depends on contracted receivables and sovereign tax credits, not on economic conditions or box office performance.”

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Align, which lends to productions themselves, structures its investments so that each loan is inside a single purpose vehicle set up for a film or series, that’s secured against contracted receivables. Banks have largely stepped away from production lending since 2008, Politowski said, a €10bn+ (£8.5bn+) market has been left without financing.

“Senior secured, self-liquidating loans with defined exits and equity like yields are increasingly rare in today’s credit landscape,” he said. “That is the inefficiency we harvest.”

Politowski expects the space to remain structurally underserved despite the growing interest from investors, because the barriers to entry are significant.

“Origination networks with producers, sales agents, and studios take years to build; underwriting demands a specialist team; and collateral structures require experienced legal counsel,” he explained. “It is a market where capital alone does not buy you a seat at the table.”

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Some big managers have turned their attention to the sector, but they rarely fund individual productions and typically have provided loans to companies. For example, Carlyle provided a $175m (£130m) asset-backed term loan to New Regency, which produced the likes of The Revenant and 12 Years A Slave.

Andrew Greenough, director of investment at the International Film Fund, which provides senior secured debt across the film and media industry, said he also sees growing interest from investors and other asset managers in the sector.

“We’re seeing capital move toward the top of the recoupment waterfall, the senior secured, first-lien positions, rather than the higher-risk equity positions,” he said. “That shift is bringing more participants into the space, as contractually defined receivables offer predictability that public markets can’t match.”

However, expertise is one of the biggest challenges in funding the film industry and the second challenge is timing, in Politowski’s view.

Greenough added that he has seen a growing volume of enquiries for full senior debt facilities, where productions are seeking funding for their whole budget without committing any capital of their own.

“A producer’s own conviction in a project must be demonstrated through capital commitment; if they won’t invest in their own production, then neither will we,” he said.

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