Getting in the skin game

An entrepreneur tries to make it easier for everyone to profit from one of the economy’s dirty little secrets.

(Business 2.0 Magazine) — Wall Street is largely a boys club, a place packed with hypercompetitive tough guys proud to wear their machismo on their sleeves. Yet there’s still one investment the Street is generally wary of: porn.

That’s why Francis Koenig, a onetime Wall Street hedge fund executive now based in Los Angeles, believes there are riches to be made by matching investors with “adult entertainment” companies. He believes that plenty of people would back the industry if there were vehicles commonly available to do so.

His reasoning is simple: Porn is a lucrative part of the American economy, hovering around $12 billion a year. And there are hundreds of porn outfits hungry for financing to become more than bedroom operations.

“There just hasn’t been a good way to invest in this market,” says Koenig, 31.

Koenig has a good track record: The New World Partners hedge fund, where he was a managing director, posted double- and triple-digit returns through the late ’90s – and he thinks similar returns are possible with porn. His funds are set up like any venture capital fund and will invest in a range of businesses, with a portion of each earmarked for buying and running strip clubs.

Adding some Wall Street finesse

The overarching strategy is to take majority stakes in businesses that AdultVest will then help manage and consolidate. Koenig won’t say how close he is to raising the total $110 million, but to help the sell, he and his team won’t charge any performance fee until the funds return 100 percent.

“There’s never been big money from the outside,” says Paul Fishbein, president of the leading porn trade tracker, AVN Publications, about the industry. “It’s a logical next step.”

Koenig is also working with large investors who are looking to take direct stakes in companies. Part of the pitch is that he ensures all investors total anonymity. “They’re creating a market that’s never existed in an industry that’s highly private,” says one Miami-based investor who’s looking to back firms with $5 million to $30 million in revenue.

For all the skittishness about investing in adult entertainment, Koenig points out that the smart money is catching on.

Playboy, for example, recently acquired the far racier empire of porn star Jenna Jameson for $17.6 million. And in August, New Frontier Media, a pay-per-view video distributor, received a buyout offer from Warren Lichtenstein, a tough-as-nails New York hedge fund manager who’s been going after companies he sees as ripe for turbocharged growth.

To Koenig, such moves show the promise of bringing Wall Street sophistication to what is now a supremely inefficient market.

In fact, he’s had talks with several brokerages interested in syndicating deals to sell to their Main Street investors. “People just need to get less shy,” Koenig says, “and they’ll realize that there’s silly money to be made here.”