The Glitter’s Gone From Celebrity Media Funds

Big names like U2’s Bono were used to lure investors — but the dividends aren’t coming, and the retreat is on
By Johnnie L. Roberts 10/13/10 The Wrap

Sticking a marquee name at the top of a private equity firm may open doors when it comes to raising money, but it turns out that having Bono as the name on the door doesn’t bring big returns. Especially when the U2 frontman has been dubbed “The Worst Investor in America.”

And it’s not just Bono. The trend away from those funds is clear as three top firms that together lured over $9 billion investors with celebrity sizzle are taking a break from raising new funds.

Steve Rattner’s Quadrangle Group, Guy Hand’s Terra Firma and Bono’s Elevation Partners are unlikely to raise new funds, according to people familiar with their inner workings.

In some quarters of the private-equity industry, that’s an admission of defeat.

“It was hubris on their part,” says one competitor, who would only speak anonymously.

Adds another: “What made investors think that they should write a check to Elevation because Bono, a rock star, was involved.”

Principals of each firm declined official comment.

In each case, differing factors led to the decision to step back from investing — not just that Investments in today’s tumultuous media climate are far too risky.

Scandal and headline-making failures are behind Quadrangle’s decision to retrench. And gaudy, failed investments are a factor for Elevation Partners and Terra Firma.

Quadrangle, for example, is struggling to recover from a 2009 fundraising scandal. Currently, the New York attorney general is investigating Rattner in connection with an alleged industry practice dubbed “pay-to-play,” in which private equity firms essentially buy access to the state’s pension fund to raise money.

Rattner left Quadrangle last year to become the Obama Administration’s auto czar — a position he was forced to leave when the scandal broke. On Tuesday, the New York Times reported that he has settled a separate investigation by the Securities and Exchange Commission, agreeing to a fine of more than $5 million and a ban from the securities industry for several years.

Legal woes aside, last year, Quadrangle relinquished control of Maxim parent Alpha Media after magazine advertising dried up. Alpha was left without adequate cash to repay massive debt that Quadrangled borrowed to help finance its original purchase of the publishing business

Terra Firma, meanwhile, has flooded EMI — the weakest of the major music labels — with almost $2 billion, only to write off 90 percent of it as the recording company teetered on loan defaults. (Hand’s firm is scheduled to begin a courtroom showdown with Citi Group this month, alleging fraud by the bank as an advisor in Terra Firma’s buyout of EMI in 2007.)

A person associated with Terra Firma told TheWrap, however, that the firm is flush with more than $2 billion of un-invested cash committed to its existing fund from previous fundraising.

Another marquee-name firm, Robert Pittman’s Pilot Group, is unlikely to raise new funds, though that seems more because Pittman appears to be focused on finding the next chapter of a career that included top jobs at MTV and AOL.

Pittman hit a gusher in 2008 on a $3 million investment in the newsletter DailyCandy when Comcast acquired it for a reported $125 million. According to a confidante, Pittman, at 57, doesn’t want to commit himself to the seven to 10 years it takes to raise, invest and wind down a fund. His name recently surfaced as a potential CEO of Tribune Co. — along with Michael Eisner’s — once it emerges from bankruptcy.

Then there’s the widely reported $300 million investment by Bono’s Elevation in Forbes Media. The investment has plummeted in value, mirroring the plight of Forbes and old-media magazines generally.

The headline-grabbing debacle — plus a similarly huge bet on Palm that barely yielded a profit — appears to have dramatically chilled prospective investors on any new Elevation fund. A spokesperson says Elevation hasn’t commented publicly about any new fundraising plans.

Elevation has had a few hits. A $300 million investment in videogame makers BioWare and Pandemic Studios five years ago earned a hefty return when Electronic Arts acquired the stakes. It also invested a reported $90 million in Facebook since last November.

Still, the general perception of Elevation’s lagging performance has been a downer for Bono.

The website 24/7WallSt dubbed him “The Worst Investor in America,” a title that is repeated incessantly in the media. This may be a bit unfair, considering that Elevation, named after a U2 tune, was founded by Silicon Valley veterans — chiefly tech investor Roger McNamee, who helped recruit Bono as a partner shortly after the firm launched in 2004.

Bono “participates in all the investment activities, but he is magic with respect to internal partnership issues and opening doors,” McNamee told Bloomberg BusinessWeek this summer.

Perhaps it’s an issue of mismatched partners. Bono may be better suit to help make Guy Hand’s EMI a hit for investors.

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