Chrysalis Investments AGM 2024

Continuation vote

Alongside the ordinary business of the 2024 AGM, a resolution for the continuation of the Company is included in the Notice. The Board unanimously recommends that Shareholders vote in favour of the Continuation Resolution.

Background

Under the Articles, at the first annual general meeting of the Company following the fifth anniversary of IPO (such anniversary being 6 November 2023), the Directors must propose an ordinary resolution that the Company continues its business as a closed-ended investment company. If the Continuation Resolution is passed at the 2024 AGM, the Directors will put a further Continuation Resolution to Shareholders at the annual general meeting of the Company every three years thereafter, as set out at the time of the Company’s IPO.

The Board, Richard Watts and Nick Williamson (the “Principals”) and the Company’s brokers have engaged with a range of shareholders representing a substantial majority of the Company’s ordinary share register in respect of the Continuation Resolution, with such engagement including consideration of the Company’s Capital Allocation Policy (the “CAP”) and revised management arrangements which were announced in principle on 13 October and 27 November 2023, respectively, and which are discussed further below. The Board has been encouraged by the support from Shareholders during these discussions and believes that there is broad consensus that the Company’s continuation is in Shareholders’ interests.

Rationale for continuation

The Company was formed to take advantage of the trend for growth companies to source expansion capital from the private markets rather than the public markets. That trend, five years later, has accelerated with fewer companies coming to the public market and growth companies largely continuing their high-growth development as private companies. Some of the world’s largest private growth companies have been in existence for more than ten years, have accessed private capital repeatedly and have avoided public capital markets until becoming very mature and substantial businesses. Given its structure, the Company is ideally placed to provide institutional and retail investors with access to those types of growth companies in a form that matches with the investee company’s aspiration for growth and our capacity to be a long-term holder and supporter.

It is, however, inevitable that building successful companies over those time horizons involves straddling periods of macroeconomic and political shocks, such as several of the world’s main economies have suffered in the last two years. The Board and the Principals have spent much of their time ensuring that the companies Chrysalis have invested in have a plan fit for the constraints of the near-term economic environments without losing sight of their long-term disruptive strategies which made them attractive for investment originally and which, the Board are confident, will deliver value for our shareholders.

The longer-term strategy remains valid, namely to provide Shareholders with access to an attractive portfolio of approximately 15 later stage companies capable of above average growth. The shorter-term consideration is that the market discount to the net asset value of the Company’s Shares makes purchasing our own Shares a potentially higher returning investment than new portfolio investments.

Realisations to fund investment (either in new investments or the Company’s own Shares) have taken longer and yielded less free cash flow than anticipated, due either to an acceleration in the trend of companies staying private for longer, or to cyclical issues, or a combination of both.

The proposed CAP (details below) is therefore designed to recognise these shorter-term cyclical considerations could be a factor. Consequently we are proposing to shareholders that a three year extension to the life of the Company be agreed at the forthcoming AGM. In that period, we aim to demonstrate that the Company can return to its long-term purpose of making investments on the basis that the share price in that period will have returned more closely to our NAV from the exceptional discount levels we currently have.

In summary, the Board believes that the Company has demonstrated an ability to invest in a number of fast growing businesses. There is no question that a long-term funding structure for these types of investment is the right structure. The Company expects to be able to demonstrate the ability to realise such investments to Shareholders and the market within a three-year extension period.

Capital Allocation Policy

One of the key components of obtaining shareholder support for the proposed three-year extension is to provide Shareholders with a framework for how capital will be allocated during that period. The Principals have worked closely with the Board to form an appropriate CAP, which the Board duly consulted Shareholders on in October 2023.

In summary, a CAP for the Company must consider four core potential uses of capital:

(i)         to support existing portfolio companies;

(ii)        to fund working capital (such as operating costs and fees);

(iii)       to invest in late-stage growth opportunities in accordance with the Company’s investment policy; and

(iv)       to return available capital to Shareholders through share buybacks (or equivalent programmes) where it is economically attractive to do so.

During the next three years, the Board and the Principals have already committed to return the first £100 million of realisations to Shareholders, likely in the form of a share buyback programme and subject to the prevailing discount, after satisfying the “buffer” of up to £50 million being held back for working capital and follow on investments.

Both the Board and Principals believe that it is essential to hold a certain level of capital reserve to fund anticipated follow-on investments into existing portfolio companies and attend to the estimated costs of running the Company over a reasonable period; these requirements are seen as more working capital in nature. Additionally, they believe it prudent to hold capital on a more strategic basis, to guard against currently unknown funding needs in the portfolio, which can increase in times of economic stress and/ or periods of funding market dislocation.

The absolute size of the appropriate cash reserve is likely to change over time; an appropriate cash reserve is currently believed to be up to £50 million, c.6.2% of net assets, which compares with a current total liquidity position of approximately £33 million as at 30 September 2023.

The capital return of £100 million has been structured in such a way that the proceeds of any future exit of one of the Company’s larger later-stage assets could potentially fund the working capital buffer and either a significant part, or all, of the proposed capital return. In this regard, and as of September 2023, the Company had three positions valued at over £100 million: wefox, Starling and Brandtech, all of which are later-stage assets. In addition, Klarna – in which the Company’s holding was valued at approximately £57 million as of September 2023[1] – could make a meaningful contribution to the proposed return. The proposed capital return quantum of £100 million is also deemed sufficient to allow significant enhancement to NAV per Share.

The further commitment relating to the implementation of the CAP, should the Continuation Resolution be approved, is to continue to return at least 25% of net realised gains on the Company’s investments, with such gains being measured as net realised gains against historical cost price (and not NAV). This element is envisaged to be actioned after the £100 million capital return has been executed, and it addresses the longer-term aspirations of the Company and Principals to balance capital discipline with their desire to invest in new opportunities. The Principals believe scale is important in both gaining access to the best investments and supporting them as they develop. This proposed further commitment allows the Company to gradually rebuild its NAV, following any capital return, while still providing for returns of capital to Shareholders, whether undertaken through buybacks or otherwise.

The Board reserves its discretion on the mechanism for the distributions described above, but currently intends to return capital to Shareholders by exercising its AGM authority to buy back shares in the market, equivalent to c.15% of issued share capital and, if required, seek further authority from Shareholders to continue share buybacks.

In proposing the CAP, the Board is seeking to balance capital allocations between potential further opportunities to enhance near-term Shareholder returns through buying back shares and the opportunity to drive long-term returns through continuing to provide capital in pursuit of the Company’s investment objective. Overarching all of the CAP considerations is an acknowledgement that the Company’s capital needs to be managed in a dynamic way. As we consider the uses of the Company’s available capital going forward the Board and the Principals will, when determining the appropriate implementation of the commitments described above, take into account, inter alia, the:

(i)         prevailing discount to NAV per share at which the Company’s shares are trading;

(ii)        likely timeline of realisations;

(iii)       likely uses of capital to fund existing investee companies; and

(iv)       strength of any new investment opportunities.

Subject also to scale, the importance of which is discussed above, abnormally wide Share price discounts to NAV are likely to favour capital returns to Shareholders over new investments.