Chrysalis Investments reports a 12% fall in its NAV over the six months ended 31 March 2023 to 130.02p per share. The share price fell from 61.7p to 58.7p. The chairman notes that the decrease reflects movements in both peer group stock market valuations and the tougher capital market conditions for both ‘follow on’ and ‘secondary market’ private capital. However, he says that there has been strong revenue growth and significant progress in profitability, or pathway to profitability, achieved across the portfolio.
84% (by NAV) of the portfolio is now either profitable or funded to anticipated profitability, up from 67% at 30 September 2022.
Follow on investments were made of about £25m over the six-month period, including primary investment into InfoSum (£1.4m) and wefox (£3.6m), and the purchase of secondary capital in Starling Bank (£20m). Further investment was made into Smart Pension following the period end (£12.5m). Total liquidity (cash etc.) at 23 June 2023 was about £43m.
Uplifts to come?
The chairman notes that valuations of some holdings such as Klarna and Starling have been written down to reflect fundraising/share transactions that have occurred since sentiment turned against growth stocks. He suggests that “Over the coming quarters, we may well see a number of these investments moving from a ‘price of last round’ valuation to a ‘peer group’ valuation, with a resulting positive impact on the NAV. ”
There are also hints that some portfolio companies are keen to IPO when market conditions permit.
The chairman’s statement also includes a comment that the recent Starling investment was made at an undemanding multiple of historic profits.
On Revolution Beauty – where that company is now alleging the co-founder and former chief executive breached fiduciary and other duties and is looking “to recover material sums relating to the exceptional costs incurred as a result of the matters alleged”, Chrysalis is considering its options and will be notifying shareholders of any decision at the appropriate time. Any decision to engage in legal action will be based entirely on what is deemed to be in shareholders’ best financial interest.
Buybacks
At the current time, the plan is to reinvest the company’s capital into the portfolio believing that this “will secure the financial runways of our portfolio companies and that our investment in their future growth will lead to greater shareholder value in the long term”. However, the board feels that investors want more explicit information about whether it is appropriate to establish rules for future share buybacks and/or returns of capital. It is canvassing larger shareholders for their views over the summer [though it wouldn’t do any harm if smaller shareholders wanted to write to them on this too].
Continuation vote
There is a continuation vote scheduled for the AGM to be held in 2024 (the next after the fifth anniversary of the IPO). The board’s intention is to send a circular to shareholders in the first quarter of 2024 with a proposal for the ongoing management of the company beyond April 2024. Shareholders will have an option at that AGM to determine if the company should continue investing proceeds from realisations, and if so, how much and over what period of time, or whether shareholders would prefer to see a return of all investment proceeds (and therefore no reinvestment) over a managed exit programme.
On this topic, in addition to canvassing larger shareholders for their views on the realisation/distribution policy referred to above, the board will also take the opportunity to elicit broader views on the way forward for Chrysalis beyond next year’s AGM.
[CHRY may have already turned a corner. Its share price was 65.3p last night and the discount has narrowed a little, though remains very wide. The manager’s efforts are on ensuring that as much of the portfolio as possible can stand on its own feet without the need for further funding, and conserving cash to support portfolio companies makes sense in that regard. A disposal – through an IPO or a trade sale – would likely be transformational for this fund, it would help validate the NAV and could result in a substantial re-rating. It might also help secure a future for the fund beyond the scheduled continuation vote.]
CHRY : Chrysalis is starting to consider its future as five-year IPO anniversary approaches