Scoop: Elevation Plans to Raise Seed Fund, Will LPs Dig It?

Private equity firm Elevation Partners plans to raise a new seed stage fund, peHUB has learned.

As peHUB previously reported, Elevation Partners co-founder Roger McNamee said in a speech late last month that his firm would start make seed stage investments. A source with knowledge of Elevation’s plans tells peHUB that the firm will not make the seed investments out of its $1.8 billion PE fund, raised in 2005. Instead, the firm will raise a new fund, the source says, noting that the size of the vehicle has yet to be determined.

McNamee first spoke about his interest in seed deals at the Paley Center for Media in Los Angeles, telling the audience that seed investing would represent “another 180-degree turn” for him. In his talk, McNamee predicted several major changes in the technology industry that he said would create big opportunities for startups. “In tech, people get blown up by startups,” he said. “I’m going to do what I call full-contact investing.”

McNamee said, “I’m going into seed investing now as part of Elevation,” but he offered no details about how the firm would make the investments and did not respond to peHUB’s request for comment.

McNamee has gotten himself in hot water before for making overstatements.

It is unclear how Elevation’s limited partners will react to the seed strategy. Some may wonder why McNamee and his partners aren’t putting all their energies into the firm’s current fund, which is performing below industry benchmarks, according to Thomson Reuters (publisher of peHUB).

As of the end of last year, Elevation’s debut fund had an IRR of 6.88% since inception, according to the Colorado Public Employees’ Retirement Association (PERA), an LP in the fund. (Colorado committed $30 million to the fund. So far, Elevation has drawn down $27.4 million of that amount and has distributed just $13.7 million to the pension fund.)

For vintage 2005 buyout funds sized between $1.5 billion and $2 billion, second-quartile funds generated IRRs ranging from 7.56% to 8.11%, according to Thomson Reuters.

Elevation has experienced a couple of departures over the past couple of years. Marc Bodnick, one of Elevation’s co-founders, left earlier this year to work at Quora. And last year, veteran fundraiser Kevin Albert split from Elevation after five years to join British fund of funds Pantheon. Also Rajiv Dutta, an Elevation managing director and eBay veteran, passed away in January after battling cancer.

Elevation’s biggest bet to date was on smartphone maker Palm, but that investment did not produce a monster return, based on performance data published by Colorado PERA. Elevation invested a combined $460 million in Palm from 2007 to 2009 through PIPEs, starting with a $325 million PIPE in October 2007. Hewlett Packard bought Palm for $1.2 billion in July 2010.

Elevation’s portfolio includes Facebook, the behemoth social network; Forbes, publisher of magazines and other media products; MarketShare, a business analytics company; Move (NASDAQ: MOVE) an online real estate company; SDI Media Group, a localization services provider for media and entertainment companies; and Yelp, a website where consumers posts reviews of restaurants and other local businesses.

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