peHUB Wire: Friday, March 26, 2010

Is Elevation Partners “the worst run institutional fund of any size in the United States?” That was the assertion of a financial blog post earlier this week, and a bunch of readers have emailed for my reaction.

So I decided to take a dive into the media/tech-focused firm’s portfolio, from a financial perspective. What I found was hardly cause for celebration. At the same time, however, calling Elevation “the worst” is to give hyperbole a bad name.

The knock on Elevation is that three of its largest investments are major duds: Palm, and Forbes Digital Media. So let’s look at them one by one:


This is the most complicated Elevation investment, in that it actually is four separate investments. They look like this:

• 2007: $325m Series B convertible preferred shares ($8.50 conversion price)

• 2008: $51m Series C convertible preferred shares ($3.25 conversion price). This deal was originally $100m, but Palm exercised its right to buy back $49m. It also included 3.6m warrants at a $3.25 strike price.

• 3/09: $49m of common stock (8.2m shares at $6 per share). This was a rollover of the proceeds from Palm’s buyback of Series C convertible shares.

• 9/09: $35m of common stock (2.2m shares at $16.25 per share)

As you may have heard, Palm is getting battered by the public markets. Its stock was trading above $17 per share last October, but closed yesterday at just $3.70 per share. Lots of reasons for the spiral, including a paucity of available smartphone applications, a disastrous decision to use Sprint as the exclusive carrier for Pre devices and a subsequent addition of Verizon without adequately training Verizon employees on its proprietary operating system. Conventional wisdom is to expect a sale.

So let’s imagine that the company was indeed sold, at $3.70 per share. If you value the convertible shares at cost – which Elevation did as of its last quarterly LP report – and convert the warrants, you find that Elevation’s position is valued at just over $416 million. This is compared to a total investment of $460 million. As I said, bad but not disastrous.

You can certainly quibble with Elevation holding the convertible shares at cost, Palm’s enterprise value/de! bt levels are such that Elevation wouldn’t get washed out even were Palm to file Chapter 11. You also can argue that Elevation should never have invested $460 million of a $1.8 billion fund into a single portfolio company (and I wouldn’t disagree), but that’s a “pot committed” discussion for another day.

Elevation invested $100 million into back in 2005, when the company was still known as Homestead. This also was convertible preferred stock, at a $4.20 per share conversion price. There also is a 3.5% annual dividend that expires at the end of this year. appears to have been trading around $4.75 per share when the deal closed, but I assume the deal was struck just a few weeks earlier when it was trading below $3 per share. It closed yesterday at $2.04 per share.

Elevation never converted any of the shares (just like with Palm), which means it still carried the investment at cost. And also like with Palm, the financials indicate that Elevation has plenty of downside protection. Likely upside, of course, remains lacking.


In 2006, Elevation invested around $300 million into the online operations of Forbes Inc. This has, of course, been a disaster. We do not know how far the value of this minority-stake investment has fallen, but let’s conservatively put it at 75 percent.

I’ve learned that Elevation has a time-based put on the Forbes investment, but that its time has not yet arrived. So again we have some downside protection, but now it would serve more as salvage than salvation.


The most recent fund performance data for Elevation is from the end of Q3 09, and is publicly available via the Washington State Investment Board. At the time, the fund was around 70% committed with a positive IRR of 12.7 percent. I am assuming that this includes the at-cost valuations for the Palm and Move stock, plus a $17.46 per share price for Elevation’s Palm common stock.

If my math is correct (and I hope that it is), the Elevation portfolio at the end of Q3 was worth around $1.66 billion (including a decent return from its sale of gaming company BioWare/Pandemic Studios). That would be on cost of around $1.26 billion (thus the positive IRR).

Just taking into account the Palm changes, that portfolio value today would still be just a hare over $1.5 billion. This does not, of course, include further decline in Elevation’s Forbes investment, the new investment in Yelp or any other portfolio value changes. Moreover, some LPs might agitate for Elevation to revalue its Palm and Move convertibles, but the vast majority probably won’t.

Even if we assume that Elevati on is underwater – which some of its investors do indeed believe – it’s hardly “the worst” fund out there. Again, this is not an endorsement, and I’m glad that I didn’t invest (not that I had the option) – particularly given the management fees which are not included in the above math. Moreover, I think Elevation’s ability to raise another fund is very much in question, although its recent hiring of new partners is clear indication that it plans to try (newbie economics is mostly with Fund II). And, yes, Elevation’s fortunes are very much tied to those of Palm.

So I’ll keep watching, but a final verdict is not yet in.

Top Three

Thoma Bravo has agreed to acquire PLATO Learning Inc. (Nasdaq: TUTR), a provider of online learning solutions for K through adult. The deal is valued at approximately $143 million, or $5.60 per share (closed yesterday at $4.91 per share).

SciQuest Inc., a Cary, N.C.-based provider of on-demand supply and procurement software, has filed for a $75 million IPO. It plans to trade on the NYSE under ticker symbol SQI, with Thomas Weisel Partners serving as lead underwriter. The company reports $39 million in 2009 revenue, compared to $29 million in 2008. SciQuest had been VC-backed before going public via a $120 million IPO in 1999. It was then taken private in 2004 by Trinity Ventures. Additional investments were made byIntersouth Partners and River Cities Capital Funds.

Jason Finger, co-founder and former CEO of SeamlessWeb, has joined Bessemer Venture Partners as an entrepreneur-in-residence. SeamlessWeb was an Internet-basedfood ordering and billing services company that was acquired by Aramark in 2006.

VC Deals

U-Systems Inc., a San Jose, Calif.-based maker of automated breast ultrasound systems, has raised $10 million in sixth-round funding. iD SoftCapital Group led the round, and was joined by fellow return backers Sycamore Ventures, Lumira Capital, Radius Ventures and PIIH. The company previously raised over $58 million.

Ad Summos, a New York-based startup focused on helping “online publishers and marketers engage consumers of interest across the leading web destinations,” has raised $3.05 million in VC funding, according to a regulatory filing. Rich Levandov of Avalon Ventures is listed as a director.

Leap Medical Inc., a Montreal-based medical device company focused on the rapid detection of brain injuries and infection, has raised C$1.025 mil! lion in new VC funding. Backers include MSBi Valorisation, BDC Venture Capital and GO Capital Fund.

Buyouts Deals

Cerberus Capital Management has agreed to buy Boston-based hospital system Caritas Christi Health Care for $830 million, including capital earmarked for hospital upgrades. The deal still must be approved by the Archbishop of Boston, Massachusetts Attorney General and the Massachusetts Department of Public Health.

Golden Gate Capital has agreed to buy restaurant brand On The Border Restaurant Grill and Cantina from Brinker International Inc. (NYSE: EAT). No financial terms were disclosed.

Gores Group reportedly is considering a bid for videoconferencing system Polycom Inc. (Nasdaq: PLCM), which is then would merge with portfolio company Siemens Enterprise Communications. Apax Partners previously had ! considered offering to buy Polycom for around $3 billion, but talks later broke down.

Main Capital has acquired a “substantial minority stake” in IASO Backup Technology, a Dutch provider of online backup software. No financial terms were disclosed.

RadioShack Corp. (NYSE: RSH), an electronics retailer, is exploring strategic options that could include a share buyback or sale, according to the NY Post. A sale could net in excess of $3 billion.

PE-Backed IPOs

Envestnet Inc., a Chicago-based provider of online investment solutions and services to financial advisors, has filed for a $100 million IPO. It plans to trade on theNYSE under ticker symbol ENV, with Morgan Stanley, UBS and Barclays Capital serving as co-lead underwriters. The company reports nearly $78 million in 2009 revenue, down from $92 million in 2008. It also dropped from a $5.2 million net profit in 2008 to an $872k net loss in 2009. Envestnet has raised over $40 million in VC funding, fromGRP Partners (29.14% pre-IPO stake), Foundation Capital (9.45%), Apex Venture Partners (7.2%),Edgewater Funds (7.15%) and Siguler Guff (5.24%).

PE Exits

Lions Gate Entertainment has opted not to raise its mid for PE-backed film studio MGM, after being told it was outbid by Time Warner.

Human Resources

Derek Lemke-von Ammon has left Bessemer Trust, which he joined last November as a managing director. According to his LinkedIn profile (which reflects the departure), Lemke had been in charge of “overseeing the firm’s client relationships and business development efforts in Northern California, Oregon and Washington.” Lemke-von Ammon previously had spent five years as a partner with VC firm FTV Capital, and the previous six years as a director of private equity with Thomas Weisel Partners.

Lillian Montoya-Rael has joined Flywheel Ventures as an entrepreneur-in-residence. She previously launched LMR Consulting, while also working as a wealth management advisor withCiti Smith Barney.