Is Elevation Partners “the worst run institutional fund of any size in the United States?” That was the assertion of a Wall Street 24/7 post earlier this week, and a bunch of readers have emailed me for 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, particularly for a shop whose high-profile partners include Bono, Roger McNamee and Fred Anderson. 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, Move.com and Forbes Digital Media. So let’s look at them one by one:

PALM

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/debt 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.

MOVE.com

Elevation invested $100 million into Move.com back in 2005, when the company was still known as Homestead HomeStore. 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.

Move.com 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 Move.com financials indicate that Elevation has plenty of downside protection. Likely upside, of course, remains lacking.

FORBES

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.

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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 Elevation 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, because a final verdict is not yet in.