Investors hope to cruise but sometimes sink

The grim “Poseidon” opening of just $22.1 million claimed any number of victims, including director Wolfgang Petersen, the disaster film genre and distributor Warner Bros. But the film’s single greatest casualty may be an obscure Wisconsin investment fund on the hook for half of “Poseidon’s” $160-million budget and tens of millions more in marketing costs.

In the latest twist in the hunt for production funds, a number of studios have turned to private equity funds such as Virtual Studios to share the cost of making expensive “tent pole” films. When the movies turn out as badly as “Poseidon,” though, these outside investors can lose more money than the studios.

One person who worked on “Poseidon” is already out of a job. Just days before the film opened Friday with audience surveys showing scant interest, Benjamin Waisbren lost his position running Virtual. Waisbren, who also served as a “Poseidon” executive producer, did not return telephone messages Monday seeking comment. Stark Investments, the primary hedge fund behind Virtual, declined to comment on the film’s performance but said Waisbren’s leaving had nothing to do with the film.

Under Waisbren, Virtual signed a deal to invest $528 million in six Warners films. Returns so far have been unimpressive. The first co-production, March’s “V for Vendetta,” collected good reviews and grossed $85.6 million domestically but less than that in overseas theaters. “Vendetta” cost more than $50 million to produce.

“Poseidon” opened in only a handful of international markets last weekend, so the overseas returns are inconclusive, although Warners expects foreign receipts to be strong. The film -- about the scramble to escape from a luxury liner after a rogue wave topples the cruise ship -- faces steep competition in coming weeks not only from “The Da Vinci Code,” “Over the Hedge” and “X-Men: The Last Stand” but also, in international markets, from the World Cup soccer tournament.

The “Poseidon” premiere should not be seen as a referendum on private equity investing, said one prominent person in the field. Ryan Kavanaugh, chief executive of Relativity Media, among the biggest suppliers of private equity film financing, said that “while no one is jumping for joy over the domestic performance of this one film, its future is yet untold as the international markets have yet to open. There are also other ancillary platforms where revenues will be made that will help to define this picture’s outcome.”

The Warners business plan is anchored by big-budget films, including the upcoming “Superman Returns,” director Roland Emmerich’s “10,000 B.C.” and Will Smith’s “I Am Legend.” The studio hopes to make more such movies, as many as eight a year, almost double the current pace. And it’s relying on outside investors to co-finance those movies.

For its part, companies such as Virtual see Hollywood as a potentially lucrative place to diversify investment portfolios. And Virtual is pursing that strategy in a significant way, investing in Leonardo DiCaprio’s “Blood Diamond,” Brad Pitt’s “The Assassination of Jesse James,” and George Clooney’s “The Good German.”

In the case of “Poseidon,” Warners and Virtual split production and marketing costs. But Warners will recoup prints and advertising costs, collect interest and pocket a distribution fee of 12.5% before it shares any revenue with Virtual, according to people familiar with the deal. The film’s gross-profit participants are also paid first.

As a result, Virtual covered about $125 million, or half of the $250 million it should cost to make and market “Poseidon” around the world. At the current rate of ticket sales, Virtual could end up with $75 million or so from “Poseidon” -- meaning it could lose more than $50 million on the movie, said two people familiar with the film’s finances. A Stark executive disputed that worst-case scenario and also said its Hollywood investments should not be judged on the domestic box office of one movie.

Warners is hardly the only studio relying on private equity financing. Last week, Relativity Media said it had raised $700 million to co-finance 19 films at Sony and Universal. Dune Capital Management has a $350-million investment at 20th Century Fox. Legendary Pictures, founded by private equity manager Thomas Tull, is backing Warners’ “Superman Returns,” “The Lady in the Water” and “The Ant Bully.”

Hollywood also has attracted high net worth individuals, including EBay’s Jeff Skoll and real estate’s Bob Yari. Those and other financiers were behind four of the five best-picture nominees in this year’s Oscars.

In addition to yielding the prestige of an Oscar, these outside investment deals can sometimes deliver a blockbuster. Legendary partnered with Warners on last year’s “Batman Begins,” which grossed more than $200 million in domestic theaters.

But for every “Batman Begins” there’s at least one “Poseidon.” These investments shouldn’t be made naively, says Amir Malin, the former head of Artisan Entertainment and a managing principal of Qualia Capital, a private investment fund that has made a number of Hollywood deals. “Those promoters who argue that this business can be reduced to a ‘widget type’ business are not dealing with reality,” Malin says. “It’s important to look at all the up-to-date data with respect to filmed entertainment on a worldwide basis. It’s important to understand the marketplace both on a macro and micro level. It’s important to have had operational experience. But, at the end of the day, it is a wonderful business of vagaries. Investors have to understand that.”