2007 was a golden year for video games, with more units sold than any other year. The total volume of unit sales, $17.9 billion, represented a 43% increase from 2006 totals, according to the NPD Group, as efforts to broaden the audience apparently paid off. While this is good news for the video game industry, it also reflects the maturity in the space. Video games have officially gone from cottage industry to big business, and with this transformation has come a need for scale.

Elevation Partners apparently recognized this long ago, when it first combined videogame makers BioWare and Pandemic Studios onto one platform, VG Holdings. The sale of the company last October, meanwhile, sparked a rash of similar deals that had the rest of the market simply trying to keep pace.

BioWare is best known for fantasy role-playing computer titles like Baldur's Gate, but has released several console titles as well, including the more action-oriented Mass Effect for Xbox 360. Pandemic, meanwhile, specializes in action adventure games such as Full Spectrum Warrior and several titles in the Star Wars franchise.

According to Bret Pearlman, a managing director at Elevation, the key draw was the quality of the product. "The games to be released were getting extraordinary reviews," he says. "It was at a time when the publishers really had a great need for triple-A content."

In the two years of ownership, Elevation spent a good deal of time and money building a successful MMO, or massively multiplayer online, effort. The most successful MMO game is World of Warcraft, which allows tens of thousands of people to link together online, explore a virtual world and battle at the same time.

"The view was with BioWare's role playing game background, they had an opportunity to develop an extremely successful MMO game," Pearlman says.

The appeal, he adds, is that MMO enthusiasts tend to be extremely loyal, regular players. As this relates to revenues, it also provides some stability in the business model, as MMO gamers pay a monthly subscription fee that grants access to the online world. Traditionally, video game makers live or die with certain titles, making them particularly susceptible to a form of gamer fashion risk. The same way a movie can flop, a video game title can carry the same threat, which would normally make it a risky bet for a PE shop.

"We were pursuing what I would describe as a world class license intellectual property, one that would have immediate recognition from MMO enthusiasts," Pearlman describes.

While Elevation was focusing on brand building, the video game landscape around them changed dramatically, a development that was not unexpected. When Elevation first acquired VG Holdings, video game consoles were just entering their seventh generation with the release of the Microsoft's Xbox 360, Sony's Playstation 3 and Nintendo's Wii. And unlike past cycles, there is no one dominant platform, although the family-friendly Wii with its motion-sensitive technology has emerged as a popular favorite. That means that game makers had to build stronger platforms and a more diversified audience.

It was this change that opened the door for Elevation's exit, as Electronic Arts, a giant in the sports games niche, sought to expand into other areas such as role playing. The $860 million deal, at the upper end of what could be considered the middle market today, paid VG shareholders $620 million, VG employees another $155 million, and included the assumption of around $50 million in outstanding stock options. For Elevation, which poured $300 million into the company at the outset of the investment, the sale yielded a reported 2x return on equity.

With game development budgets climbing to as much as $20 million, on occasion, the pressure is on game makers to find synergies that are available through scale. The sale of VG Holdings triggered a consolidation wave in the space, and helped spur Vivendi's acquisition of Activision, and was a precursor to EA's recent bid for Take-Two Interactive.

The successful deal for Elevation wasn't just a case of good timing or a lucky bet in the right sector. Pearlman notes that it went far beyond that, and he credits the firm's operational capabilities with helping to drive VG Holdings' growth.

In fact, John Riccitello, the current and two-time chief executive of Electronic Arts, spent the period in between his two EA stints as a managing director at Elevation.

"Our view is if we're going to be in the sector, you really need to have an operations focus, which includes operations partners," Pearlman says. "The general reaction in private equity is to avoid [video game investments], but if you embrace it, do it with people who know what they're doing."