Facebook & Yelp: A Platform for Redemption

Blake Brown

Arizona University

Facebook & Yelp: A Platform for Redemption

Introduction

In 2004, private-equity firm Elevation Partners launched amid the fanfare of having U2’s Bono as a co-owner and a $1.9 billion investment fund. Bad bets on companies coupled with the high turnovers between some of the firm’s initial six founders, left Elevation Partners in a far too precarious of a state for their investors. Elevation initially promised their investors they would have their money back after ten years along with annual returns starting at 8%. 2010 saw the firm only able to return $8 million in profits to investors, but 2012 is an entirely different story. Elevation is hoping that investments in Facebook and Yelp will make their investors forget about the several missteps they have endured along the way.

Analysis

Backed by technology-industry veterans and the front man of the world’s most successful rock group, Elevate is in the process of raising $1 billion for a new investment fund. Attempting to rise from the ashes after investments in Palm Smartphones, Forbes Media LLC, and other companies left Elevation’s investor’s pockets far less deep then they had been promised. Despite rival private-equity funds questioning the stability of the management of the two funds, Elevation’s luck seems to be changing.

Their lottery tickets of sorts lies in the performance of two social media titans, Facebook and Yelp. After both Facebook and Yelp’s initial public offerings were announced to the public last month, the firm seemed to hit gold. Should Facebook’s IPO maintains priced at the high end of early expectations, the fund stands to profit $1.4 billion dollars. Their investment in Yelp’s has subsequently seen its value triple in the past month. “As of September 30, 2011 the two blockbuster hits boosted the private-equity fund’s annual return to 11% after fees and expenses” (Ovide, 2012). The titanic returns have likely have proved since then as well as give the executives at Elevation the confidence that was thought to be long lost.

Potential investors seem to be receptive to Elevation’s new pitch, but it is all but certain that without the large gains on Facebook and Yelp the new fund would never see the light of day. Speculation has arisen as to, “the time spent hunting for new investments by co-founder Roger McNamee whom is often traveling extensively with his band or giving speeches on technology trends” (Ovide, 2012). While Elevation disputes those claims they don’t shy away from informing investors that Bono has never been involved in the day-to-day operations but sometimes is involved with wooing investors.

Blimps in their first fund and constant speculation didn’t stop Elevation from investing; they met with Yelp’s CEO before the firm poured $100 million into the company in 2010. Their initial stake is now worth roughly $270 million dollars, the same amount their stake in Facebook is currently valued at after buying several chunks of the company beginning in 2009. After re-strategizing the fund in 2009 to focus on technology companies, Mr. McNamee utilized his position an early mentor to Facebook founder Mark Zuckerberg to secure the fund’s stake in Facebook.

Conclusion

Despite Elevation’s return of 11% out performing their initial promise and the median US return of 9.4%, it is still short of the targeted 20% that most investors shoot for with private-equity investments. Their offering document states investment plans of $25-$150 million per transaction, a far cry from the first fund in which over 50% of the stakes were investments of higher than $150 million. Elevation Partners is thinking small with their new fund and structuring deals to limit losses to protect their investors, seemingly having learned from their first fund.

Reference:

Ovide, Shira. (2012, March 19). Fund hits gold with Facebook, Yelp. The Wall Street Journal.

Retrieved from

http://online.wsj.com/article/SB10001424052702303812904577291901182429724.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsTop