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Valuation of Private Equity Investments

The Adviser shall follow the following principles and guidelines which are in accordance with International Financial Reporting Standards. These are valid at all times and should be applied as, and when, events justify and/or demand a change in valuation. Specifically a formal review of each investment must be carried out at least half-yearly as part of the semi annual reporting process.

Each Private Equity Investment should be independently reviewed and these guidelines applied regardless of any previous upward or downward revaluation.
 

Basic Principles

In accordance with IAS 39, private equity investments shall be valued at fair value. This is defined as “the amount for which an asset could be exchanged between a willing buyer and a willing seller in an arm’s length transaction”. The principle of conservative valuation shall always be followed. If an adjustment to fair value is deemed necessary it should, as far as possible, be carried out on the same basis as other co-investors in the company. Downward revaluations carried out by a lead investor must be followed. Should a company become publicly traded (e.g. via an IPO) then the valuation principles of Marketable Securities shall be followed.
 

Valuation Guidelines for Direct Investments

Participations in privately held companies shall, in principle, initially be valued at cost since this is considered to be an approximation of fair value at the date of the transaction.
However, adjustments to Fair Value may become necessary as a result of subsequent events and the measurement of such Fair Value shall be made as follows:

New Financing Round / Sale of Shares:
An increase or decrease in valuation shall be made if a new financing round takes place or a partial takeover / sale occurs. In both cases, shares in the company will have been sold at a different price to that originally paid or the most recent valuation.
In the case of a new financing round, the new price may be used for valuation purposes if

• shares are sold to non-strategic investors at arm’s length
• an amount of at least 5% of issued capital is raised
• the new valuation varies by at least 10% to the current valuation.

In the case of a partial takeover, the new price may only be used if an offer, in cash, was received for all or part of the holding in the target company. The offer must have been accepted for a significant portion (>20%) of the target company by third party investors not related to the offering company.
If some form of payment, other than cash, is received (i.e. shares) then the new valuation is calculated using these valuation principles. In particular, if quoted securities are received, the new valuation shall be fixed at the market value of the securities on the first date on which they can be traded.

Material Diminution in Value:
A downward adjustment to the valuation is made if significant market or company events have occurred since the date of investment which leads to a material diminution in value. The following point system illustrates the weighting applied to the various factors considered when deciding if and to what degree a diminution of value has occurred.

• Financial situation:
  10 points: the company is theoretically insolvent and has no short-term rescue plan;
  4 points: cash available in, or committed to, the company is sufficient only for the next 3 months at the expected burn rate
  2 points: cash available in, or committed to, the company is sufficient only for the next 6 months at the expected burn rate
  2 points: failure to raise planned new funds within 6 months
   
• Achievement of milestones / change of strategy:
  up to 5 points: a change in the strategy of the company when compared to the original business plan or failure of the company to meet agreed milestones
   
• Business plan / Budget comparison:
  up to 4 points: for either / or:
  - lower sales than budgeted in the half-year review period
  - higher losses than budgeted in the half-year review period.
   
• Market conditions:
  up to 3 points: adverse market development, in particular a significant stock market correction in the sector in which the company is active since the date of the investment.

A decrease in the valuation shall not be made, even if factors exist which would otherwise justify such a reassessment, if a company has issued new shares to non-strategic investors at arm's length and a significant amount is raised (at least 5 % of issued capital) within the last three months at a price equal to, or above, the most recent valuation.
In addition, should a downward valuation have been made based on the points system described above, then the valuation is adjusted upwards to a maximum level of the previous valuation if the factors causing the devaluation are no longer valid.

Material Increase in Value:
An upward adjustment to the valuation should be made if a significant event occurs which leads to a material increase in value. Such an event could be:

• regulatory approval
• issuance of a patent
• revenue generation
• profit generation
• positive cash flow generation
• receipt of a term sheet meeting the “new financing round” criteria

An increase in the valuation shall not be made, even if factors exist which would otherwise justify such a reassessment, if a company has issued new shares to non-strategic investors at arm's length and a significant amount is raised (at least 5 % of issued capital) within the last three months at a price equal to, or below, the most recent valuation.
 

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