Profiting from adult entertainment

As private equity firms and hedge funds pour money into Hollywood, at least one activist investor is looking to capitalize on nearby San Fernando Valley. By Paul Fruchbom.

In recent years, private equity firms and hedge funds have increasingly become enamored with Hollywood. Investors have poured millions of dollars into individual movies such as Superman Returns or Poseidon or partnered with production companies including The Weinstein Company, run by Miramax founders Harvey and Bob Weinstein.

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Hedge funds were even reported to be backing Tom Cruise’s production company following the actor’s recent split from Paramount Pictures. Though how much Cruise and Co. will raise remains to be seen, it doesn’t take much to understand the draw of the Hollywood lights: potentially lucrative returns, free tickets to Mission Impossible VII and maybe even a coveted invitation to Vanity Fair’s post-Oscar bash.

Earlier this week, however, one hedge fund decided that while Hollywood is fine and good, there may be more money to be made in nearby San Fernando Valley, otherwise known as the pornography capital of the world.

New Frontier Media, a Colorado-based producer and electronic distributor of adult entertainment, disclosed on Tuesday that hedge fund investor and board member Warren Lichtenstein wanted to lead a management buyout of the company, according to a statement filed with the Securities and Exchange Commission.

According to the filing, Lichtenstein, who runs New York-based Steel Partners, a hedge fund with approximately $6 billion under management, “expressed a willingness to pay a premium over the market price but declined to state the price per share or the amount or range of premium over market price that he is prepared to offer.”

Lichtenstein, 41 years old, is no stranger to controversy. He recently teamed up with Carl Icahn in a high-profile effort to shake up Korean tobacco company KT&G, which met with resistance from locals. Lichtenstein also inflamed passions when, two years ago, he formed a joint venture that launched hostile takeover bids for two Japanese companies. Nevertheless, his fund’s aggressiveness has paid off. According to The Wall Street Journal, Steel Partners has generated an annual return of approximately 24 percent since 1993.

Though Lichtenstein may be stepping up his involvement in the adult entertainment industry, it seems unlikely that private equity firms will follow in his footsteps. Though New Frontier Media is primarily a distributor, not a creator, of pornography, public pension funds would perhaps look unfavorably on such an investment by one of their blue chip private equity managers. (It is unclear what public pension money, if any, is invested in Steel Partners).

That’s not to say, of course, that private equity firms will turn down an offer to make money. Two years ago, for example, Marc Bell Capital Partners, a Boca Raton-based private equity firm, acquired Penthouse out of bankruptcy. The turnaround plan was not to put more money into glossy photo spreads or international marketing, but rather to turn the magazine into a young men’s publication akin to Maxim.