Relativity factor

Fund raises more cash for Sony, U pix

Hedge funds are continuing to pour money into Hollywood slates.

Just four months after Relativity Media raised $600 million for a hedge fund-backed deal to co-finance 18 Sony and Universal pics, it’s raised another $700 million that will co-finance another 19 films at the two studios. Structured almost identically to the earlier deal, fund is dubbed Gun Hill Road II.

Neither studio would identify the pics, though fund is designed to finance films skedded for release in the second half of 2007.

Fund will operate discretely from the studios’ perspectives, though investors put their money into a single pool. After the fund pays out capitalized interest, Sony will see just under $350 million of that money for 11 films, while $315 million will be available to U for eight titles.

In recent years, hedge funds and other private equity sources have become a major source of financing for film studio slates, inking pacts worth billions in production funding. So far, the performance of such funds has only whetted investor appetite.

Relativity CEO Ryan Kavanaugh said perf from the batch of pics in the first fund — which included Sony’s “RV” and Universal’s “Nanny McPhee” and “Doom” — helped him raise money for the sequel. Those pics, he said, “went far in proving our model, and we decided to continue and take the second step.”

It remains to be seen, though, how the hedge funds will stomach a major money loser.

Warner Bros., for example, split the $150 million-plus budget on “Poseidon” with hedge fund-backed Virtual Studios, and a poor opening on the pic is widely expected this weekend.

But Kavanaugh said he doesn’t expect the spigot of Wall Street money to be turned off by one money-loser.

“The investors we work with understand the film-slate methodology,” he said. “That’s why we are in the business of diversification. No one’s going to bat a thousand, and there are going to be some films that lose money and some that lose significant money. But all in all, money will be made.”

He added, “I’m not saying anybody is going to be happy if a film loses money, but I don’t think it will cause investors to go running for the hills.”

Both deals were assisted by Deutsche Bank, which underwrote senior debt.

Sony and Universal will retain worldwide distrib rights as well as creative control of their projects. In addition to freeing up money, deals are a way for both studios to hedge their financial risks.

Films were selected by Relativity from a group of pics offered by the studios.

Kavanaugh said the decision to strike another deal was based on the successful performance of pics released under the original Gun Hill Road deal. Those films include Universal’s “Nanny McPhee,” a $25 million pic that grossed $47 million at the domestic box office, and U’s “Inside Man,” a $45 million pic that grossed $86 million Stateside. (Sony declined to name the pics financed in the first deal, so it’s unclear how their films factored in.)

Movies that have fared less well include U’s “Doom,” a $60 million pic that made $28 million at the domestic box office.

The Gun Hill Road II deal is the latest in the ongoing spate of hedge fund-fueled pacts at studios, which are drawn to Wall Street financiers to help hedge their increasingly costly bets. Earlier this year, Dune Capital sealed a $350 million deal with 20th Century Fox. Paramount has its $230 million Melrose Fund, and similar deals exist at Disney and Warner Bros.

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