Chrysalis (CHRY) has published its annual results for the year ended 30 September 2022. During the period, CHRY experienced an NAV decline of 104.17p (to 147.79p) which was largely driven by Klarna (57.66p) and the listed portfolio (31.90p) with the remaining assets performing strongly against a challenging backdrop.
Key takeaways are as follows:
- CHRY received £108.0m of cash from investments that were realised over the period. Chrysalis fully divested two assets, Embark Group and THG. Embark realised net proceeds of £57m for a cash-on-cash return of 2.1x. Some of CHRY’s investments have not met their original expectations – THG and Revolution Beauty fall into that category.
- No new investments were made during the course of the year, although £80.3m of follow on investments were made following a £60.0m capital raise in December 2021 and realisations in the period.
- Available liquidity of £82.8m as at 30 September 2022 leaves CHRY well placed to support the existing portfolio in the drive towards profitability
- The portfolio ended the year well-funded, with 67% of portfolio now either profitable or expected to be funded to profitability (35% of the portfolio is now profitable and 32% expected to be funded through to expected profitability) and a further 14% with a cash runway of approximately two years. Where necessary, the managers have worked with portfolio companies to reduce cash burn and extend their cash runways.
- During the year, the premium to NAV that CHRY had enjoyed for most of the three preceding years, was replaced by a substantial discount. This discount has begun to narrow in recent months but still persists and, as at 31 December 2022, stood at 48%.
- The board and manager believe the portfolio has considerable opportunity for further growth.
- Given the potential in the portfolio and the change in markets, the investment team is for now focusing on ensuring that its existing investments are positioned correctly.
- CHRY’s largest four or five holdings have the capacity to take advantage of public capital markets, as and when they open again for IPOs. Given their value and profile, the manager and board think that there is also a limited private market for some holdings.
- The majority of portfolio companies have continued to execute on their growth plans and expand, albeit some, such as Klarna, chose to moderate their pace of growth given the expected squeeze on consumers’ income.
Managers’ comments on the portfolio
“Most of our portfolio companies, particularly those which are relatively more mature, made considerable progress over the year, albeit this was masked in the NAV calculation by weakening listed market comparables.
“This led to six of our companies successfully raising capital, despite the difficult market backdrop, netting a total of approximately $1.5bn.
“Although Klarna undertook its funding round at a post-money valuation of $6.7bn – well down on the peak it achieved in June 2021 of $45.6bn – the investment adviser believes the fact that it managed to raise $800m at the height of the growth sell off is testament to its strong investment case. Subsequent to this raise, Klarna has confirmed that it expects to achieve profitability in the second half of 2023, which the investment adviser views as extremely positive news.
“This is likely to be in part achieved via last year’s announced cost savings, where Klarna indicated expected job losses equating to 10% of its workforce, but also due to its on-going strong credit performance. Although the market had been worrying about the impact of rising rates on Klarna’s business model – both in terms of funding costs and the potential for customers to default – Klarna actually saw impairment charges fall over 3Q22 to 0.7%, from 0.8%, with a faster improvement in the US than the wider group, despite its growing at 92% over the nine months to September 2022.
“wefox also managed to close a substantial round of $400m at a similar time to Klarna.
“While the investment adviser believes securing funding for its continued expansion was the right move for Klarna to deliver long-term value for shareholders, the ramifications of the down round were felt on the company’s NAV per share.
“Over the year, Chrysalis’ NAV per share fell from 251.96p to 147.79p, or approximately 104p. Of this move, Klarna alone accounted for 58p – given the scale of the decrease in its valuation and its starting position size in the portfolio – more than all the other movements combined. Ex-Klarna, the listed part of the portfolio (THG, Wise and REVB) contributed 32p of downside – of which THG was the main contributor – with unlisted positions causing the smallest impact at 14p.
“In terms of the latter, some of the company’s positions contain downside protection mechanisms, which help to minimise the decrease in certain share classes, at the expense of others. Due to its share structure, this benefit is not embedded in Klarna, hence the decrease in its valuation fed straight through to the company’s shareholding.
“Across the unlisted portfolio as a whole, the weighted average write down in the investee companies’ market capitalisations has been approximately 50% from their respective peaks.”
Managers’ comments on portfolio activity
“Given the changing market conditions, and the fact that the company’s share price traded on a discount to its NAV per share for much of the year, there was limited ability to raise significant quantities of new capital, bar the £60 million raised in December 2021.
“As a result, the investment adviser focused on raising liquidity where available, notably from its listed holdings, as well as receiving approximately £57m net proceeds from the sale of Embark to Lloyds Bank plc in January 2022.
“The investment adviser spent considerable time over the year working with investee companies to prepare them for tighter funding markets, by encouraging operational efficiencies where able, as well as pre-emptive capital raises, to put them in the best possible shape for the likely more restrictive capital raising environment to come. As a result, the company’s capital was exclusively targeted at follow-on investments; no investments into new holdings were made over the year.
“As a result of this activity, the position in THG was entirely disposed of in the period. THG’s share price suffered from inflation-induced downgrades to profit expectations and Ingenuity performing less well than expected. The investment adviser felt it more value enhancing to redeploy capital elsewhere.
“Wise was also used as a source of capital. Although Wise has been a strong performer for the company, and the investment adviser believes it is still only scratching the surface of its potential, given its current market share, a balance needs to be made between running positions, and ensuring adequate liquidity is available to support other holdings.
“Given the progress achieved over the course of the year, the investment adviser believes that much of this support work has now been completed.
“The situation that unfolded at Revolution Beauty was extremely disappointing. Over the course of August it became apparent that the group’s auditors had issues in relation to the company’s audit, which culminated in the launch of an independent investigation and the suspension of the company’s shares. The investment adviser, in consultation with the board, is considering the initial findings of the investigation, before deciding on the appropriate steps to take.
“Post period end, the company was able to sell its entire holding of Revolution Beauty in an off-market transaction. This netted proceeds of over £5m, compared with the carrying value of nil as of September 2022.
“In terms of the rationale to hold listed positions in the portfolio, the investment adviser still considers that there is an argument for doing so, in order to capture expected gains post flotation, as well as managing liquidity. While the experience of the last year is contradictory to the above, and the investment adviser recognises the points of learning to be taken from this, it is also of the view that each investment case is unique and needs to be judged accordingly.”
Comments from Andrew Haining, chair of Chrysalis
“After what was a tough year in the markets in 2022, Chrysalis begins the new financial year with confidence in its portfolio of high potential, market leading businesses. We have a robust cash position that will enable us to further support these companies; a reinforced valuation process overseen by a group of highly experienced independent experts; and an agreement in principle, subject, inter alia to shareholder approval, with Jupiter for the ongoing management of the company’s assets which we believe is well aligned with the interests of our shareholders.”
Comments from Richard Watts and Nick Williamson, co-portfolio managers, commented:
“Despite the challenging market for growth companies in 2022, we saw some exceptionally strong performances from within the portfolio, over two thirds of which is now profitable or funded through to profitability. This gives us confidence in the significant growth potential of these businesses and their ability to generate or exceed the returns expected from our shareholders.”