Chrysalis Investment’s interim results, covering the six months ended 31 March 2022, confirm the reduction in its NAV from 251.96p to 211.76p.
Net realisations of about £33m were generated in the period. Incoming cash came from: the sale of Embark Group (£57m of proceeds), sales of Wise (£18m at an average price of 588p), and liquidation proceeds from Growth Street (about £1m). Outflows comprised follow-on investments made in Smart Pension (about £15m), THG (again about £15m, the bulk at 195p) and Sorted (about £12.5m as part of a $40m fund raise, to enable its acquisition of Clicksit).
Focus on the existing portfolio
The statement says that about 40% of the portfolio by value is profitable. The investment adviser has been working with the unprofitable companies within the portfolio on refining funding plans and on how to elongate cash runways. The average cash runway for this group is said to be approximately 14 months. However, should it choose, Chrysalis has £55m of cash on hand (as at 27 June 2022) to “extend these runways substantially”. The primary objective in the current environment will be to support the existing portfolio rather than to use capital to narrow the discount. The managers say “If and when market conditions allow, or Chrysalis generates capital, share buybacks or new investments might be considered.”
The final decision on this will of course rest with the board, and the chairman says that the board agrees with the manager that greater asset value growth will occur if the company is in a position to manage these next 12 to 18 months appropriately. The working assumption is that capital markets stay closed for the foreseeable future, and private capital market fundraising processes reflect the scarcity of cash with increasingly punitive terms for those investors who choose not to support their growth companies.
The chairman notes that “two of our larger investments are rumoured to be raising capital – Klarna at a discount and Wefox at a premium to our holding values. To the extent these funding rounds are verified before our next quarterly valuation, these will be reflected in the next valuation, but it is not our intention to comment on unverified events.”
Performance fee arrangements
In conjunction with Rothschilds, the board has consulted the 20-largest shareholders on the performance fee arrangements. The study confirmed that these shareholders shared the board’s view of the shortcomings of the existing performance fee structure and wished to see amendments made. The board has provided Jupiter with a framework for how a new arrangement could work, which would align the payment of any performance fee due to Jupiter with shareholders more appropriately over the medium term. The board is working with Jupiter over the next quarter to finalise this and aims to provide shareholders with more details prior to the company’s year end, with the intention that the new arrangement would operate from the beginning of the next financial year.
Extracts from the managers’ report
As of March 2022, the year-on-year blended revenue growth over the first half of the Company’s year was over 80%, similar to the level of a year earlier. The 2021 performance was assisted by an extremely strong performance from Starling Bank, as lending began to drive revenue growth, which has now annualised out. This has been partly offset by a first-time contribution from Smart Pension, which has seen a period of exceptional growth. Our expectation is that this growth rate could be viewed as “super-normal” and may attenuate somewhat in the coming periods, but nevertheless, still represents a very strong performance.
Given prevailing market conditions, and despite the strong start to 2022, we expect investors to:
- become more selective in committing capital over the coming months, which has already led to a slowdown in funding activity post period end;
- put pressure on deal pricing, particularly for assets with weaker economics; and
- look to increase the use of investor protections via capital structuring.
CHRY : Chrysalis conserving cash to fund existing portfolio