Profiting from the economy's dirty little secret

First, you have to have faith. You have to believe Business 2.0’s Wall Street snapshot: largely a men’s 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: adult entertainment.

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.

Francis Koenig's funds provide myriad ways for investors to cash in on the lucrative adult entertainment business. His reasoning? Simple: adult entertainment 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.

He launched AdultVest late last year to change that. He's been courting investors and combing the country for small and medium-size adult businesses, some of which boast profit margins upwards of 60 percent. The response has been strong: Koenig says he's signed up well over 1,000 potential investors since January.

For now, he's catering to investors with big money, although he says his approach will eventually evolve to serve the investing masses. He's raising money for two funds: a $100 million fund that requires a minimum investment of $1 million, and a $10 million fund with a $100,000 minimum.

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.

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.

http://money.cnn.com/magazines/business2/business2_archive/2006/11/01/8392016/index.htm