HOLLYWOOD — HOLLYWOOD -- On paper, Evan Almighty looked like a sure thing.
A spinoff of Jim Carrey's smash hit Bruce Almighty, the film starred Morgan Freeman, reprising his role as God, and Steve Carrell, one of Hollywood's hottest comedians.
But Evan Almighty turned out to be a dud, with an estimated $250 million in production and marketing costs and $173 million in box office revenue.
The film's distributor, Universal Studios, is not the only one feeling the pain. So are a hedge fund in Milwaukee that put up millions of dollars to help bankroll the movie and more than a dozen others, investment bankers say.
Hedge funds have been a major source of capital for Hollywood studios over the past three years. Drawn by projections of double-digit returns with minimal risk, they pumped $13 billion into 150 major movies.
Typically, they helped finance "slates" consisting of as many as several dozen movies. Now, the glitter is gone. Many of those deals probably will lose money for equity investors, the investment bankers say, possibly hundreds of millions of dollars.
In some cases, studios have restructured deals to appease angry investors. Sony Pictures, whose investors backed flops including All the King's Men and Stranger Than Fiction, agreed last year to absorb some marketing costs originally charged to them, said three people knowledgeable about the matter.
Sony agreed to swallow $20 million in marketing expenses, one of the sources said. Another said the figure could reach $45 million.
Bob Osher, Sony's chief operating officer, confirmed the restructuring but declined to discuss the financial terms. He said the renegotiation "was never related to any specific cost element of the pictures."
New deals will carry more stringent terms so that the studios no longer can profit if their backers end up in the red, the investment bankers say.
"Many of the equity investors who have gotten into the industry in the last 24 months have woken up and smelled the coffee," said Eileen Burke, a managing director at investment company D.B. Zwirn & Co. "They're either going to say, 'I don't want to invest anymore because I don't like the misalignment of interests' or they're going to insist on better alignment."
The drama largely has played out behind the closed doors of the secretive hedge funds, pools of private capital that almost never disclose profits or losses.
In late 2004, hedge funds got involved in Hollywood in a big way. The funds had record inflows of capital and were looking for new investments. The movie business was raking in huge profits stemming largely from sales and rentals of DVDs.
Studios were looking to mitigate the financial risks of producing movies. Traditionally, they had relied on bonds and bank loans that produced dependable profits for lenders. But the studios bore all the risks of failure.
When the idea of offering backers a piece of the action rather than merely fixed interest payments emerged, it looked as if the studios and the backers would win. Although the studios would have to share some of the profit from hit movies, they would shed some of the risk of losses.
The investors would collect their returns once all the films in a slate had opened and started to generate DVD and television revenue, usually five to seven years after their theatrical openings.
At meetings on studio back lots and Wall Street skyscrapers, hedge fund managers heard investment banks and promoters project annual returns of 18 percent or better. They were so enthusiastic that they agreed to forgo some of the protections that bank lenders had imposed on film companies, such as limits on marketing budgets. By the end of 2006, every major studio had lined up private equity backers for at least one package of films.
Paramount Pictures financed a slate with Merrill Lynch & Co. that included Mission: Impossible II and a second slate covering Flags of Our Fathers with Dresdner Kleinwort & Co. Walt Disney Co. turned to Credit Suisse First Boston to find investors for a package that included the Jodie Foster thriller Flightplan.
Ryan Kavanaugh's Relativity Media joined with Deutsche Bank to raise $620 million for the co-financing of movies at Sony Pictures and Universal Studios. The German investment bank also underwrote a $740 million follow-up fund.
Investment bankers say the studios have started to see the need to appease investors in slate deals. They are beginning to sweeten the terms, sometimes under the threat that investors might demand to audit their spending or sue.
"There are a variety of strategies to improve investor returns by engaging the studios," said Stephen Prough, founder of Salem Partners, a Los Angeles investment bank. "You can get their attention."
Michael A. Hiltzik and Josh Friedman write for the Los Angeles Times.