Creative industries perceived as risky business

"We want to see more engagement between creative industries and finance and government," said culture minister Ed Vaizey at a recent event exploring investment in entertainment and media.

The Department of Culture, Media and Sports defines the sector as "those industries which have their origin in individual creativity, skill and talent and which have a potential for wealth and job creation through the generation and exploitation of intellectual property".

Vaizey, minister for culture, communication and creative industries, drew attention to a misplaced "cultural nervousness in terms of the financial industry investing in creative industries".

But is this nervousness misplaced? When it comes to demand, the sector is reliable as it offers an attractive and affordable form of escapism, particularly important in the global downturn. While public frugality has seen a lesser spend on big-ticket entertainment options such as sporting events for example, an increase in small spend options such as gaming has occurred. Entertainment budget allocation has shifted according to the times and some smaller segments are reaping the benefits.

What's more, in the UK, creative industries contribute 6% to GDP, twice the European average according to a report published by think tank Demos. The global value of the sector is estimated to reach $1.4trn dollars by 2015, according to research carried out by Global Research Analysts. On the supply side then, creative industries play a significant role in the national and global economy.

Moreover, the lines demarcating different segments within the sector seem somewhat permeable; a character originating in a book is often adapted to screen, merchandise and video gaming, for example. Creative industries therefore seem to represent a stable and resilient sector for investment, with strong possibilities for scalability.

trueUnquote" data reveals that the number of deals in the entertainment sector reflected the general performance of the markets, suggesting a strong correlation. In terms of value though, the trend points upwards. unquote" data recorded deals worth €5.6bn in 2010, while the total 2011 value rose to €8.2bn, more than both 2004 and 2008 levels. Since its nadir in 2009, the value of investments in the sector has risen steadily.

Investors then are backing the sector less often, but with more capital. While they are less frequent, perhaps these investments are more considered. Moreover, the healthy increase of the value spent in the sector may be seen as indicator for a recovering venture capital culture.

Why though has the volume of deals recorded in the sector fallen? The creative industries are often associated with individuals more concerned with their art than the commercialisation of their idea. Moreover, the sector often attracts individuals from non-business backgrounds with very little experience, often due to their young age. It seems a risky business.

This perception is perhaps the reason for the falling volume of investments in the sector in times of economic downturn. With an elevated overall level of risk in the economy, some investors were repelled by the perception of risk, returning to more traditional areas such as technology or pharmaceuticals amidst economic volatility.

However, since banks are often unwilling to lend within the sector due to perception of risk, private funding is an important option. While banks are preoccupied with loan risk, investors focus more on the risk-to-reward ratio and scalability. The potential for reward is high in the sector; perhaps then venture capital and the creative industries are a well-suited pair.

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