Chrysalis (CHRY) is deliberating when to sell its stake in Klarna (KLAR.N), the credit provider whose disappointing performance since its New York flotation in November helped knock 3.7% off the growth capital fund’s net asset value in the last quarter.

The £545m investment company, which is about to start a three-year wind-down and recorded a bumper 21.5% gain in the previous 12 months, held 13.2% of its assets in Klarna at 30 September, but saw the £115m stake fall £24.3m to £90.7m over the next three months. It is its third biggest holding on a reduced weighting of 11.1% of the portfolio.

Today Chrysalis shares fell 4.3% to 107.2p as the company also revealed its board had slapped an “uncertainty discount” on the valuation of online insurer wefox, reducing it by £35.5m to £56m, or 6.8% of assets, from £91.5m in September. It remains Chryalis’ fourth biggest position.

Although wefox made a profit for the first time last year and its main businesses in Austria and the Netherlands are doing well, lending agreements prevent the subsidiaries passing money to the group which requires €12m-15m in funding. With the terms of this support from Chrysalis and other investors still being thrashed out, the investment company’s board had responded to the risk that a transaction will not happen.

There was better news from Starling, the challenger bank that accounts for over 53% of Chrysalis’ portfolio after the valuation of the position rose to £436m from £406.5m in September, a £29.5m gain that offset the £24.3m loss at Klarna. Starling “hit a major milestone” in November signing a ten-year contract with Scotiabank’s Tangerine Bank and in December Watts was appointed to its board.

Klarna’s loss caused by loan growth

Klarna’s decline from its $40 per share IPO price to $28.91 at 31 December generated 4.8p of the 6.29p per share fall in Chrysalis’ NAV per share which stood at 165.36p at the end of the year.  

The decrease would have been higher were it not for the £100m share buyback that added 1.39p to NAV per share from purchasing shares trading at a 35% discount below the value of Chrysalis’ investments.

Despite Klarna raising guidance on its financial prospects, the buy-now-pay-later company’s shares have tumbled a further 16% this year to $24.14.

Fund managers Nick Williamson and Richard Watts believe the market is discouraged by Klarna falling to a small operating loss due to accounting rules that require it to front-load loan loss provisions for its rapidly growing Fair Financing lending business in the US, with actual losses anticipated to be less than the amounts set aside.

Third quarter results showed the value of items bought with Klarna and its revenues continued to accelerate, up 23% and 26% respectively. The managers said there were particularly strong performances from the Klarna Card – which they said had four million signups since July 2025 and now accounts for 15% of global transactions – and Fair Financing which they said grew 244% in the US and had over twice the margin of the rest of the group.

“As the ramifications of the growth in Fair Financing work their way through the P&L, as well as the activation of the ability to sell loans from the balance sheet – thus releasing their associated provisions – the investment adviser expects the profit profile of Klarna to substantially improve, which is backed up by market forecasts,” said Chrysalis.

Klarna conundrum

That positive view creates a dilemma for the Chrysalis board on what to do with the Klarna shares once a lock-up on the holding expires in March and the company is free to sell them.

Shareholders have told Chrysalis that it should not be holding listed stocks for investment purposes given its remit has always been focused on unquoted companies preparing to float.

While the publicly traded shares would be easy to sell and provide more capital to return to shareholders, the board wants to get the best value for investors and said it was taking advice from Williamson and Watts, and other advisers, on timing.

One adviser is consultant Sam Dobbyn, a former boss of lender Urban Exposure, who has helped Chrysalis review the portfolio ahead of the start of lengthy disposal process, and has been invited to join the board.