Coming Soon: A Hollywood Ending?

"There's no mystery that Nancy Drew can't solve," says the trailer for the eponymous movie, starring Emma Roberts, which opens today. But what about this mystery: How much longer will Stark Investments, the Wisconsin hedge fund that put up half the money to make the teen detective flick, keep investing in Hollywood?

Nancy Drew is one of seven Warner Bros. films Stark co-financed through an entity called Virtual Studios. Of the five released so far, there's been one winner -- the action blockbuster 300 -- but Stark only owns one-third of that picture.

By contrast, it's a 50/50 player in four losers: V for Vendetta, Blood Diamond, Poseidon and The Good German.

The final movie in the Virtual slate, the awkwardly titled The Assassination of Jesse James by the Coward Robert Ford, is finally due in September, after several delays. But even with Brad Pitt in the starring role, and despite being recut more than once, the Western has tested poorly with advance audiences.

Even after 300, Stark has lost money on the Virtual slate -- anywhere from $25 million to $75 million, depending on who you talk to. Officials at Stark, where a policy prohibits speaking publicly about its investments, declined to comment. But some people with knowledge of the fund's doings suspect its ardor for Hollywood is cooling.

Through an entity called Verite Capital Onshore Loan Fund, the hedge fund put up much of the financing for Mr. Brooks, a recent thriller that cast Kevin Costner against type as a serial killer. The movie, which opened with a thump on June 1, cost under $20 million to produce (which is about what it's made at the box office). But marketing and distribution costs will be deducted from those revenues before Stark sees a penny.

Another setback may be looming in the form of Stark's investment in a $700 million fund with Universal Pictures and Sony Pictures brokered last year by Ryan Kavanaugh of Relativity Media. As Conde Nast Portfolio reported in its May 2007 profile of Kavanaugh, the 32-year-old middleman convinced Stark to buy into the riskiest slice -- the so-called equity layer -- of this 19-picture deal, which is known as Gun Hill Road II. That essentially means Stark is last in line to collect on each movie's revenues, though it stands to profit handsomely on runaway hits.

But Gun Hill II is under fire. As reported on Portfolio.com on April 25, Deutsche Bank AG -- the bank that underwrote Gun Hill II -- has been struggling to syndicate that debt to investors, even after raising the promised rate of return.

More recently, the bank has put out the word that it is selling the $85 million in so-called mezzanine debt that remains on its books at a loss -- accepting less than 80 cents on the dollar, according to one source.

"It's a distressed piece of paper now," said another person with knowledge of the deal.

Deutsche Bank declined to comment.

That has led potential buyers to scrutinize the movies in the Gun Hill II slate. It's first release, Marie Antoinette, was a money loser. Its second, a horror film called The Messengers, made money, but not enough to offset Marie. Looking to the future, some say they see little to get excited about.

The Steve Carell comedy Evan Almighty, which opens June 22, will likely do solid business, but its big budget -- more than $200 million -- will make it slow to turn a profit for investors (especially since the computer model that Kavanaugh used to determine it was a good bet presumed a budget of less than $180 million).

Gun Hill Road II's other upcoming films include more than one expensive drama burdened with several A-list profit participants (such as director Ridley Scott's American Gangster, starring Russell Crowe and Denzel Washington, due out in November). There's also A Serious Man, coming in 2009 from the filmmaking brothers Joel and Ethan Coen, who despite critical acclaim are not known for their blockbusters.

"I don't see a 300," said one analyst, referring to the $68 million adaptation of the Frank Miller graphic novel that has pulled in $446 million in worldwide ticket sales since March.

Of course, picture-picking is the ultimate subjective exercise. Some look at the July comedy I Now Pronounce You Chuck and Larry, starring Adam Sandler and Kevin James as straight Brooklyn firefighters who pretend to be gay to get domestic partner benefits, and see one of the most promising-sounding performers of this summer.

Others look at the picture's $100 million budget and worry, especially given that wordy comedies don't tend to do well internationally. Some see next year's Tonight, He Comes -- a post-modern action picture about a hard-living superhero (Will Smith) down on his luck -- as Sony's next best shot at a franchise after Spider-Man. Others wonder if audiences will buy into the premise.

According to two people familiar with the terms of the Gun Hill II deal, Stark stands to lose more than $60 million if these movies don't perform.

Kavanaugh, who has served as Stark's conduit to Hollywood, brokering not just Gun Hill II, but also the Virtual Studios deal and the investment in Mr. Brooks, declined to comment.

Stark does have a couple of proven bright spots in its entertainment portfolio: It has a joint venture with Graham King's Initial Entertainment Group, which has had success with several films including The Departed, winner of this year's Academy Award for Best Picture. Stark also has a stake in Wild Bunch, a thriving French film sales and distribution company.

Nancy Drew, meanwhile, isn't expected to move the needle for Stark either way. Made for about $25 million, the film's tracking indicates it will lag in theaters, though the tendency of family films to sell well on DVD could help it break even.

by Amy Wallace