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Scoop: Elevation Partners Looks to Raise up to $1.9B for Growth Fund

Elevation Partners, the PE firm that sports Bono as a co-founder, is expected to begin formally raising a second fund soon, five sources tell peHUB.

With offices in New York and San Francisco, Elevation is currently “unofficially” marketing to LPs, placement sources say.

Officials for Elevation declined comment.

Elevation is expected to seek a smaller pool than its debut fund. Fund II will likely look to raise from $1 billion to $1.9 billion, one of the sources says.

In June, Elevation co-founder Roger McNamee gave a speech at the Paley Center for Media in which he 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. In July, a source told peHUB that Elevation would raise a seed fund.

A person close to the situation says fund II won’t be a venture capital seed fund. Instead, it will be a middle-market growth equity fund that will have the latitude to invest from seed to late stage, the source says.

Elevation raised $1.9 billion with its first fund in 2004, of which 92% has been invested, sources say. The debut fund has a net IRR of 8.52%, according to a March 31 report from the Washington State Investment Board, a limited partner. But one placement source says the fund actually has a net IRR of 12.2 percent.

“[Elevation I] literally just went positive at 4Q 2010 after being underwater due to a number of bad investments,” the placement source says. “LPs are not happy.”

However, one LP maintains that Elevation has done a “good job navigating through” various problems. “Fund I turned out not to be the best return, but it’s respectable,” the LP says.

Elevation has yet to hire a placement agent for fund II, one source says. Marketing for the fund is expected to benefit from the addition of Avie Tevanian, a former senior Apple executive. The Mac OS X architect joined Elevation in January as a managing director.

The biggest investment Elevation made from its debut fund was in Palm. The PE firm invested a combined $460 million in Palm from 2007 to 2009 through PIPEs, starting with a $325 million PIPE in October 2007, peHUB has reported. Hewlett Packard bought Palm for $1.2 billion in July 2010.

“Palm was a slight gain,” the LP says.

Elevation has also made a sizable bet on Facebook. It has invested $270 million in Facebook via three investments with a “blended valuation of $16 billion,” a source says. The PE firm is looking at a 5x return on its Facebook investment, the source says.

The PE firm also invested $100 million in Yelp, which has hired Goldman and Citi to lead an IPO that could value the company between $1 billion and $2 billion, according to a report by the Wall Street Journal on Wednesday. The Yelp investment could yield a 3x return for Elevation, the source says.

While Elevation may post nice returns on Yelp and Facebook, “Is that really value-add private equity investing that PE firms promise their LPs when they fundraise? ” says a PE exec who asked not to be named. “Or is it pseudo public equity investing?”

Elevation has seen some turnover since it launched. Marc Bodnick, a co-founder, left in January to join Quora, while Kevin Albert, a partner and global head of business development, jumped to Pantheon in September 2010. Rajiv Dutta, an Elevation managing director, passed away last January after battling cancer.