Understanding Portfolio Value and IRR

Portfolio Value

The “Portfolio value” shown on each investor’s Portfolio page reflects the fair value, in aggregate, of their completed investments. Investors can select the value in Sterling or in Euro. Currencies are converted using European Central Bank official exchange rates, and investment values and portfolio values may vary depending on the currencies of the initial investments, the currency in which investors choose to view their portfolios, and exchange rate fluctuations. The Portfolio value does not reflect the impacts of any tax reliefs that may be available or any third party fees that may be incurred if the investments were sold.

Calculating Fair Value

We calculate fair value by looking at two share prices: the share price at which the investor invested; and the most up-to-date fair value of the shares (which we calculate when we obtain relevant information about the company in question).

To determine fair value, we have developed and followed a comprehensive Valuation Policy following the industry-standard International Private Equity and Venture Capital Valuation (IPEV) Guidelines. In brief, that policy provides as follows:

  1. Where the company has raised a further round of equity capital within the last three years, and (1) the capital was raised for shares of the same class of shares as, or a class of shares substantially the same as, the class held by Seedrs investors, and (2) the company is continuing or preparing to trade, we have valued the shares at the value of the most recent fundraising round.
  2. Where the company has not raised additional capital for the same or substantially the same class of shares since its Seedrs round, but (1) the Seedrs round closed within the last three years, and (2) the company continuing or preparing to trade, we have valued the shares at the value of the Seedrs round.
  3. Where the company has not raised capital for the same or substantially the same class of shares over three years, through Seedrs or other means, but is it is continuing or preparing to trade, we have conducted a substantive valuation analysis with a presumption of decline in value. Note that this is the only situation where, in theory, we could mark the fair value of an investment as worth more than the share price in its latest round of finance, but we would only do so based on recognised financial metrics. None of the deals covered by this report have been marked up on this basis.
  4. Where the company has wound up, indicated its intention to wind up or ceased (or taken measures to cease) trading or preparing to trade, we have valued the shares at zero.

Ernst & Young LLP (EY) has reviewed these processes and procedures and consider that they are in line with the IPEV Guidelines.

It is worth observing that we were able to obtain much of the information required to make these fair value determinations, in a robust and verifiable way, by exercising the information rights we hold in our capacity as nominee for each investment. One of the benefits to investors in our acting as nominee—and entering into subscription and/or shareholders agreements with each investee company—is that we have reliable access to ongoing information about the performance of the investments. Platforms and networks that do not have the comprehensive information rights granted in these agreements do not have access to the same level of information. 

Calculating IRR  

The most common way to measure the performance of a portfolio of private equity or venture capital investments is to look at its “Internal Rate of Return”, or IRR. This is a measure of annualised performance that demonstrates, in effect, how much the portfolio has increased or decreased per year. The Portfolio IRR shows the annualised performance of an investor’s entire Seedrs portfolio based on the investments’ fair value.

Non-Tax Adjusted IRR

The non-tax adjusted IRR figure does not take into consideration any tax reliefs or liabilities that may be associated with an investment. This means that it ignores the impact of relief schemes like the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS), as well as any Capital Gains Tax or Income Tax that may be due.

Important points to note:

When an investor’s portfolio is converted to a different currency, currency fluctuations will impact the IRR calculation.

We have set the “cash out” date(s) for each investment as the date(s) an investor paid for that investment.

We have set the “cash in” date for each investment as the present date, for businesses that remain in existence, or the dissolution date, where the business has dissolved. We include additional “cash in” dates where any distribution has been made by a business.

The IRR figure is presented net of (i.e., after the deduction of) any Seedrs fee that would be due on any profits an investor has earned off your investments on the “cash in” date.

Tax-Adjusted IRR

We have also provided a tax-adjusted IRR figure. The tax-adjusted IRR figure takes into account the impact of the tax reliefs associated with the main two tax schemes: EIS and SEIS. It also accounts for any Capital Gains Tax on investments that are not SEIS or EIS eligible, as well as taxes on distributions, all at prevailing UK tax rates.

Important points to note:

Tax treatment depends on individual circumstances and may change in future. For these purposes, we have assumed that the investor is a UK taxpayer who is able to fully maximise all of the SEIS and EIS tax reliefs available to them. We recognise that this will not be the case for many of our investors, especially our investors across Europe, and so non-tax adjusted IRR will be a more useful measurement for them.

We have used 31 January after the tax year end in which the investment is made as the “cash in” date for income tax relief. We assume the investor will not be carrying back the income tax relief.

In respect of loss relief, we assume the investor will claim it on 31 January immediately following the dissolution date.

As with non-tax adjusted IRR, if an investor’s portfolio is converted to a different currency, currency fluctuations will impact the IRR calculation

If the shares are not SEIS or EIS eligible, or if an investor has disposed of the shares at a profit before the three-year holding period completed, the impact of Capital Gains Tax is taken into account.

Any distributions received otherwise than those received on the winding up of the company are assumed to be taxed at the highest rate of Dividend Tax.

Understanding the Numbers

We believe that the portfolio value and IRRs shown on each investor’s Portfolio page provides the most accurate window possible into the performance of that investor’s Seedrs investments to date. But it is important to bear in mind several things when looking at these numbers:

First, the performance figures largely reflect paper returns, which means that while they show the notional performance of investments based on market activity and fair value, they do not necessarily reflect the cash returns that could be achieved if the relevant investments were sold. In addition, the figures refer to the past and past performance is not a reliable indicator of future results.

Second, there is not a liquid secondary market for the vast majority of these investments, so it may difficult for an investor to sell his or her shares at the current share price or at all.

Finally, it is well understood that the value of investments may go down as well as up, and nowhere is that more true than in a high-risk asset class like startups and growth businesses. We would expect the share prices of most of these investments to change substantially in coming years: some are likely to appreciate, and others to depreciate, and it is impossible to predict whether the net effect of those changes will cause a given investor’s portfolio value to increase or decrease over time.

Special care should be taken when considering the tax adjusted returns. As explained above, these assume that you could take full advantage of all applicable tax reliefs; in practice this is not always the case. It is also worth noting that because much of the benefit of the EIS and SEIS reliefs is realised near the time of making an investment, that investment’s tax adjusted IRR will appear particularly strong for investments that have been held for a short period, but over time it will increase more slowly (or decrease more quickly) than the non-tax adjusted IRR for the same investment.