Not a financial expert, but that section is talking about how they are forced to account for many of their investments at the price they paid, even if the underlying company has grown significantly in “likely” value, they haven’t triggered any action that would allow Indie to adjust the value of their investment on Indie’s books. So Indie’s reportable returns are muted in an accounting sense.
The “as converted” IRR seems roughly to mean “if we take our best guess as to our investments are really worth, our IRR is much higher”. (Now, what an illiquid investment is “really worth” is always dicey, which is why the GAAP accounting rule is in place, so the truth might be in the middle, but it’s pretty clearly not on the left edge.)
That's a pretty common issues in VC. I run a more traditional seed stage firm and we have to deal with similar issues. It's not uncommon for the IRR in the first few years to be artificially low given we have to hold investments at cost until they raise priced rounds. And when there's finally a wave of price marks your IRR will jump to a more accurate level it can usual maintain.
e.g. Our 2017 vintage fund was sitting around 45% IRR for years, and jumped to 93% almost instantly this year due to markups we could finally account for. We always knew the value was there, but couldn't reflect it in the numbers.
Likewise our 2019 vintage fund is currently showing 20% but we're fairly certain it'll jump to 40%+ in the not too distant future.
This dynamic makes it hard for emerging managers to show their performance relative to other fund managers with older vintages— even if you're excellent it'll be hard for LPs to recognize until 5+ years in, if that. It's just the nature of VC.
Ah, thank you. I would have called this the "net asset value" or perhaps the book value, or something like that.
So, in other words, Indie lacked in notable liquidity events so realized IRR was low while the perceived book value was somewhat higher. I'd imagine this happens all the time in VC.
The “as converted” IRR seems roughly to mean “if we take our best guess as to our investments are really worth, our IRR is much higher”. (Now, what an illiquid investment is “really worth” is always dicey, which is why the GAAP accounting rule is in place, so the truth might be in the middle, but it’s pretty clearly not on the left edge.)