Understanding Portfolio Value And Irr

Understanding Portfolio Value and IRR

Portfolio Value

The “Portfolio value” shown on each investor’s Portfolio page reflects the current value, in aggregate, of their completed investments. For shares held by investors, “current value” will usually be based on the share price at which the company last raised equity investment.

For other assets, such as rights to shares through advance subscription agreements or convertible loans that have not yet converted, it will usually be the amount invested.

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 fees that may be incurred if the investments were sold.

The Portfolio value is for indicative purposes only and investors should understand how the valuation is set:

Calculating Current Value

Equity Investments

For equity investments, we determine the latest share price and valuation of portfolio businesses as follows:

1.Where the company has raised a round of equity capital through Republic Europe or otherwise, or where we are aware that there has been a substantial secondary transaction with institutional third-party investors and we have determined that such secondary transaction has as much indication of the market’s evaluation of the company’s share price as a new equity raise would (an Eligible Secondary Transaction), within the last three years, we have valued the shares at the share price of the most recent equity fundraising round or Eligible Secondary Transaction as applicable (the “Last Share Price”).

We will update the share price in this way, regardless of the class of shares that were issued as part of the last equity round or traded in the Eligible Secondary Transaction as applicable. Companies may issue new share classes which have preferential rights, such as a preferential return on liquidation or sale ahead of the class of shares held by Republic Europe investors.

2.Where the company has raised equity capital through a convertible instrument, e.g. an advance subscription agreement or convertible loan agreement and the instrument has converted at the longstop or maturity date, we will value the shares at conversion share price.

If the instrument converts at a discount to an equity fundraising triggering conversion, we will price the shares at the share price of the equity fundraising rather than the discounted conversion price.

3.Where the company has wound up, indicated its intention to wind up or ceased (or taken measures to cease) trading or preparing to trade or where we have not heard from the company but Republic Europe is of the opinion the company has ceased trading, we will mark the Last Share Price to zero.

It is worth observing that Republic Europe relies on information provided by the company in order to update the company’s share price in investors’ Portfolios. Where possible, we look to verify this information against third party sources (such as Companies House records), but this is not always possible for private companies.

Fund investments

For investments into limited partnerships (“Funds”), the value shown in your Portfolio reflects the amount of your commitment drawn down to date by the Fund.

We are working on also displaying the most recently reported value of your contributions to the Fund (as reported to Republic Europe by the Fund in the most recent capital statement) and will update investors once this is implemented.

Debt

For investments in debt instruments, the value shown in your Portfolio reflects the principal amount of the loan.

Last Share Price and the Republic Europe Secondary Market

For the purposes of the Republic Europe Secondary Market, shares are marked at the Last Share Price in accordance with the methodology above. We do not currently display the share class for Shares available for purchase on the Republic Europe Secondary Market.

We do not update the Last Share Price based on trades between buyers and sellers on the Republic Europe Secondary Market.

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 Republic Europe portfolio based on the investments’ current 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 Republic Europe fee that would be due on any profits an investor has earned off your investments on the “cash in” date. Other fees which may be payable in connection with a sale of the shares also have not been factored into the IRR figure (for example, transfer fees which investors may incur in using the Republic Europe Secondary Market or brokerage fees which an investor may incur in selling shares on a public market if the company IPOs). These fees may not be applicable in all exit scenarios and may differ depending on the type of exit.

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 has 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 practicable window into the performance of that investor’s Republic Europe 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 the Last Share Price, 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 no liquid secondary market for the vast majority of these investments, so it may be difficult for an investor to sell his or her shares at the Last 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.