Chrysalis Investments (CHRY) has agreed to purchase £20m of equity in Starling Bank via a secondary market transaction led by an existing, third-party shareholder in Starling. It has emerged that the seller of the stake is Jupiter, which sold the 6% stake in Starling held by its open-ended fund (mainly by its £1bn Jupiter UK Mid Cap fund) to a group of existing institutional shareholders (including Chrysalis).
Separately, Jupiter has announced a change in policy whereby its open-ended funds will no longer invest in private companies (see below).
When commenting on the transaction, Chrysalis’s investment adviser says that it is optimistic about the prospects for Starling and believes this transaction will generate future value for Chrysalis shareholders. If the independent valuation committee recommends that the board apply the “price of recent investment” approach to the holding in Starling, this would result in a modest uplift in the company’s NAV per share compared with the 31 December 2022 calculation.
Starling Bank was founded by Anne Boden in 2014. She has previously said that it is her intention to float the bank within the next two years. Like other retail lenders in the UK, Starling is expected to benefit from improving lending margins as interest rates have risen in response to rising inflation. In its results that were announced last month, Starling expects to achieve pre-tax profits of £250m for the 2023 financial year with revenues in the region of £600m.
CHRY cash position
On 1 February 2023, Chrysalis’s quarterly NAV announcement detailed a gross cash position as of 30 January 2023 of approximately £69m and a total liquidity position (including the listed position in Wise Plc) of approximately £81m. Assuming the Starling transaction closes, the gross cash and total liquidity positions would both be reduced by £20m, and Starling would account for approximately 15% of the portfolio including gross cash, versus approximately 12% as of 30 January 2023.
At its recent capital markets day, the investment adviser referred to a potential follow-on commitment to fund the portfolio of approximately £20m. Chrysalis says that this secondary transaction did not form part of this analysis.
[QD comment: the share price impact on Chrysalis’s share has been minimal – that was true at the time that we wrote this, but subsequently the share price fell by about 5%. Investors may wonder why the trust has chosen to increase its exposure to Starling at this time, given the constraints on its liquidity and (as the transaction is taking place at a modest premium to Starling’s current valuation) there was no requirement to make a follow-on investment to avoid being diluted. There is the possibility that Chrysalis’s participation in the transaction is a signal that the advisers believe that there’s a potential liquidity event for Starling Bank to come in the near future.]
Comments from Jupiter’s CEO, Matt Beesley
In a letter to its clients, which has been reported in the FT, Jupiter’s CEO Matt Beesley has said that market volatility in recent years has led to a change in investor sentiment towards holding unlisted assets in open-ended funds. Reflecting this, Jupiter is changing its policy and its open-ended funds will no longer be allowed to invest in unlisted companies.Following the sale of Starling Bank, Jupiter is said to hold very small stakes in a minimal number of other unlisted assets, but will prudently manage these.
[QD comment: From Jupiter’s point of view, we think that some commentators may well argue that this is a case of shutting the stable door after the horse has bolted. However, we think that this is a good long-term policy for Jupiter, which other managers should follow. We have long made the case that holding illiquid assets, such as private equity investments, infrastructure assets and property, in open-ended funds is not appropriate to that structure. In times of distress, these sorts of open-ended funds have frequently been gated – locking investors in – and sometimes this has persisted for quite an extended period. We firmly believe that illiquid assets should only be held within a closed-ended structure. These can continue to trade through difficult market conditions and, while transactions may occur at a discount to the prevailing NAV, investors who wish to trade should still have the option to do so.]