With or Without Yelp

Bono's PE firm may need a successful Yelp IPO to salvage its initial $1.9 billion fund

Elevation Partners, the private equity firm started by Bono and some heavyweight Silicon Valley partners, has had enough drama to warrant its own Behind the Music. There was the near-bankruptcy of the firm’s $460 million investment in Palm; a risky $300 million bet on the online properties of Forbes, which didn’t pan out; and the $100 million purchase in 2005 of Move.com stock, which turned into a dud, its shares not trading remotely close to the conversion price. Last fall, investors voted to deny Elevation an extension on its fund’s five-year investment period. All this prompted a widely circulated blog post on 24/7 Wall Street that called Bono “the worst investor in America.”

Then Elevation laid off a sizable chunk of staff, and a key principal soon left. In January, co-founder Marc Bodnick delivered a surprise blow, jumping ship to run Quora. That one got ugly, as Bodnick and fellow co-founder Roger McNamee engaged in a nasty battle over Bodnick’s stake in Elevation’s first fund. The firm’s downward spiral of bad deals, bad press, and brain drain has all but killed off Elevation’s hope for raising a new fund.

Still, a minority of market observers believe Elevation has a chance at revival. Take Palm—Elevation managed to protect its principal via a last minute sale to HP. In 2009, Elevation pivoted, choosing to pursue late-stage tech investments over its original focus on media, gaming, and music. And even though a mid-cycle strategy change is, in general, torturous for investors, this was one time Elevation got it right. (Too bad the guy behind much of it—Bodnick—is gone.) One of Elevation’s smartest decisions was to snap up $120 million worth of Facebook stock when the company was valued at just $14 billion; that deal could negate some of Elevation’s disasters. But a Facebook IPO isn’t expected until May 2012, and until that money is in investors’ pockets, the firm can forget raising a new fund. 

That pins Elevation’s fate on a Yelp bet of up to $100 million, although the reviews site faces stiff competition for ad revenue from the likes of Groupon. Yelp had long rebuffed an IPO, but last week its CEO suggested public offering plans are under way. Until that happens, Elevation will remain underwater (as of September 2010, its internal rate of return was pegged at -0.4 percent)—and Bono will have to walk on.