Risky Business -- Running to where the money is

Tom Cruise Latest to Tap Hedge Financing
Original story appeared in the Wall Street Journal on Aug 24, 2006

Hollywood megastar Tom Cruise's announcement that he will finance future films with backing from two unnamed hedge funds is just the latest in a trend of firms trying to get into the film-making business. So reports The Wall Street Journal.

Sumner Redstone, chairman of Viacom, the parent company of Paramount Pictures, has announced that his company will no longer be working with Cruise following some controversial behavior by the star. In response, Cruise and production partner Paula Wagner said they will be working with hedge fund backing from now on and that they've raised $100 million.

Although hedge funds and institutional investors have recently put more than $4 billion into film projects, some see such financing diminishing. For example, Stark Investments has backed away from its film foray after helping to make the movies "Poseidon" and "V for Vendetta," neither of which performed as hoped. And Legendary Pictures, a new entity backed by private equity money, has had an up-and-down experience, backing a winner in "Batman Begins", but also investing in movies such as "Lady in the Water" and the "Ant Bully", which proved disappointing.

One firm that seems to have done well is Melrose Investors, a partnership between Merrill Lynch and Paramount Pictures. That partnership has lined up two dozen films to invest in, the most recent of which was Cruise's "Mission Impossible III". Two sources say the Melrose partnership looks likely to produce annual returns of 10% or more.

James Stern, CEO with Endgame Entertainment, says that hedge funds likely will change how they approach these deals when they see that the returns they expected are difficult to attain.