Chrysalis (CHRY) has provided the market with an update which sets out its capital allocation policy (this follows a consultation with shareholders in light of the emerging maturity of some of the company’s investments), details of proposed revisions to the performance fee and plans for a consultation with shareholders (based on the capital allocation policy and proposed performance fee changes). The board says that it would also welcome shareholders’ broader views during this consultation on the way forward for Chrysalis beyond next year’s AGM at which the continuation vote will be proposed. The board considers that this timing provides shareholders with the opportunity to agree the future of Chrysalis as a whole.
Summary of capital allocation policy
The proposed policy sets out a framework for disciplined capital usage, based around three principles:
- The company will aim at all times to maintain a prudent cash reserve – the board and portfolio manager guide that an appropriate cash reserve is currently believed to be £50m;
- Having met the cash reserve requirement, the company will next prioritise distributions to shareholders – the board currently intends to utilise its existing authority to buy back up to 15% of its share capital and, if required, seek further authority from shareholders to continue share buy backs until £100m of cash has been distributed, conditional on the ongoing discount; and
- Thereafter the company will balance its capital allocation between further distributions to shareholders and portfolio investments, aiming to distribute up to 25% of net cash profits on realisations.
Summary of proposed performance fee arrangements
CHRY and its portfolio manager have agreed changes to the existing performance fee payable under the portfolio management agreement. In doing so, CHRY has sought to ensure long-term alignment between the management team and shareholders’ interests. The changes to the performance fee will not take effect until approved by shareholders.
The proposed changes to the performance fee will be considered a related party transaction pursuant to the Listing Rules and accordingly will require the approval of shareholders by way of a simple majority of votes cast on an ordinary resolution at a general meeting to be held of the same day as the AGM. The board is publishing full details of the proposed changes to the performance fee now in connection with the wider consultation exercise and a separate circular will be published in due course in order to convene that meeting.
The board is unanimous in believing that the amendments to the performance fee are in the best interests of the company and its shareholders as a whole, for the following reasons:
- it will result in a reduction in the overall performance fee level that is potentially payable by the company to the portfolio manager in respect of any single financial year (or other calculation period) of the company from 20% to 12.5%;
- it will introduce a cap as to the level of performance fees paid in any single financial year (or other calculation period) of the company to 2.75% of the audited net asset value;
- it will implement a primarily share-based performance fee, which is to ultimately be paid to members of the portfolio manager’s management team, creating greater alignment between the portfolio manager’s management team and shareholders;
- 75% of any performance fee in respect of a particular financial year of the company will be deferred and subjected to conditions based on the long-term performance of the company, ensuring that the portfolio manager’s management team is incentivised to generate long-term value creation; and
- the High Water Mark will be retained, meaning that no performance fee will become payable unless the previous High Water Mark (being 251.96 pence) is reached.
Comments from Andrew Haining, chairman of CHRY
“In deriving the proposed capital allocation policy, the Board has sought to balance its recognition of the compelling opportunity to buy back the Company’s shares at what we believe is an attractive discount, with our intent to drive long-term returns by providing disciplined support for the current portfolio companies and potentially by allocating to new opportunities in the future. The proposed amendments to the performance fee also reflect an alignment of interests between the Company and the portfolio management team which has been welcomed by Shareholders since the initial announcement of the key terms and we are pleased to provide additional detail today in advance of the resolutions being proposed next year alongside the continuation vote.
“Both the Board and the Portfolio Manager are excited about the current prospects for the portfolio and remain confident in the Chrysalis investment strategy, which backs high growth, innovative businesses which are leading transformation within their sectors. The Board looks forward to discussions with Shareholders in the coming months regarding the proposed capital allocation framework and the future direction of the Company.”