Chrysalis - about to become a butterfly (again)
Chrysalis Investments (LON:CHRY) is a company with a short but rich history. It was set up by Merian as a sort of tech/fintech incubator, which then ended up in the Jupiter stable, where it seems to have become an embarrassment. There were some similarities with Cathy Woods ARK Innovation ETF (PCQ:ARKK) and it garnered the same sort of focus in 2021 as the share price went stratospheric.
Obviously, it didn't last. But with a market cap now a little under £400m and an enterprise value of £350m, I think its worth a second look.
First, the caterpillar in the room. Chrysalis gained notoriety as the result of a shocking performance fee, which was earned on the performance during 2021, but only became payable in 2022, when it had become obvious to everyone that the superb performance in previous years was less the result of manager skill and more the luck of being in the middle of a very large bubble. The performance figures year by year bear this out: 2 fantastic years followed by one shocker, coupled with a premium to NAV falling to a discount, and this has been a disaster for buy and hold investors.
Chrysalis runs a concentrated portfolio, taking chunky holdings in a small number of companies. It's biggest winner to date has probably been Wise (LON:WISE) and they still hold a little of that. It highlights that if you have a big stake in a company several years before IPO, you can make many multiples of your original investment.
Right now, the portfolio looks like this:
And while I am cutting and pasting, here's what they all do.
Here's why I think this is a fantastic opportunity. The share price is currently around 65p. The last NAV was 134.65p, or very close to a round £800m.
The NAV report late last October set out how all the companies were doing, and the biggest holdings seem to be thriving. Graphcore looks like a dead duck, but its not a big holding. Anyway, there are 2 specific catalysts that could make the share price rise.
The first is that Chrysalis and Jupiter have agreed a divorce. It is part of a whole raft of changes, the upshot of which is much reduced managers fees and no more performance fees until the share price exceeds the old highs, around 4 times higher than today. Jupiter have been selling shares hand over fist, but that won't last forever.
The second is a verification that the NAV is realistic. That may come shortly, for last month the company announced "visibility" on the "likely disposal" of a company that would add 5.5p to the NAV.
Now, that works 2 ways. Either it is a very big holding (lets say wefox, currently worth around 24% of NAV). If that were to be sold, it currently represents around 34p of NAV. So if it were sold for the equivalent of 39.5p, the NAV of the company (ex cash) would be 100.65p (580m), but suddenly the company would be holding a huge amount of cash. The enterprise value of the company would drop to around £110m, leaving the discount to an NAV that had just been validated by a sale a whopping 80%.
If it is a smaller holding, then it will be sold at a bigger uplift to NAV. Klarna is seen as a potential candidate, and amounts to 7% of the NAV, or the equivalent of around 9.4p. If it were sold for 14.9p, that would be around a 60% uplift to the NAV. The EV would drop from £350m to around £265m, while the NAV (ex cash) would drop from £800 to around £746m.
But if that sale happens, whether it is a big holding or a relatively smaller one, it will free up a lot of cash and verify the existing NAV. It's a paradox that the bigger the mark-up to NAV, the smaller the effect on the discount to NAV post that sale, but one of those mathematical quirks that is worth understanding. On a disposal at a premium the NAV (ex cash) will drop by the amount the asset was valued at, while the company will hold the cash it is sold at. In other words, a smaller amount of an uncertain valuation is replaced by a bigger amount of cash.
That's all based on what is known. However, I can't help but feel that the IPO market has to open up this year. We've had 2 tough years, but #UMG and #ARM, 2 of the biggest recent IPOs, have both regained their highs. Confidence is certainly coming back to the US market. A lot of the companies in the portfolio are growing strongly: Starling seems a genuine challenger bank, Klarna is ubiquitous, wefox was expected to become profitable at the end of last year, featurespace has an AI powered fraud detection device they've been working on with NatWest that has won awards and shown great results. All in, this may be the opportunity to buy a portfolio of exciting assets at a bargain price.
There is an even bigger discount on offer at Molten Ventures (LON:GROW) but I feel the portfolio there is more junior.
Augmentum Fintech (LON:AUGM) may be another comparison for those interested in the fintech space.
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50 comments
Last nights Citywire update gave some background to yesterdays SP fall in Chrysalis Investments (LON:CHRY)
https://citywire.com/investmen...
Article below;
Shares in Chrysalis (CHRY) have taken another knock after a report of a €550m (£463m) bid approach for Wefox that could leave the fund and other shareholders with the riskiest rump in the loss-making insurance fintech.
Bloomberg reported that insurance broker Ardonagh is preparing an all-share offer of €350m up front with €200m in earn-out payments if Wefox meets subsequent targets. Abu Dhabi sovereign wealth fund Mubadala Investments is said to support the plan as under the terms of its investment in Wefox it is guaranteed to double its initial outlay on a sale of the company.
Wefox founders, Chrysalis and fellow investor Target Global are said to object to the deal, however, as it would split the company in two with Ardonagh taking the core of the company and leaving other shareholders with its technology platform and Swiss business. That would put them at risk at of losing their entire investment if they could not turn round the remaining operations.
Chrysalis, which has 14.4% of its assets in Wefox, is reported to be arranging €50m (£42m) of financing for the insurance platform of which it would provide €15m (£12.6m).
In a first quarter update last month, Chrysalis said it had total liquidity of £27m at 31 March made up of £16m in cash and £11m in shares in Wise (WISE), the money transfer company.
According to Bloomberg, a presentation by Mubadala showed Wefox lost over €100m last year and may need up to €70m in fresh capital this year. It is engaged in talks to stem losses in its Italian unit, close operations in Germany, sell part of its business in Poland and unwind a joint venture in Switzerland.
Chrysalis shares slid 4.6% to 76.3p, a 48% discount to their net asset value per share of 147.5p at 31 March and 10.4p below the level we tipped them last month.
They stand just above the level they began the year at with hopes for a Klarna flotation next year, a big disposal flagged in December and encouraging results from Starling Bank offset by the problems at Wefox.
Before today’s fall, the shares had gained 15% in the past year but had lost 64% over three years.
In first quarter results early last month Chrysalis wrote down the value of Wefox by a third, which Deutsche Numis, its joint corporate broker, said implied a $3.4bn valuation compared with the $4.5bn put on it in a Mubadala-led funding round two years ago.
Chrysalis Investments (LON:CHRY) is fascinating though. Because it only holds a handful of investments you can drill down into them, and each one is its own soap opera. If the news about wefox is negative - though when the company knew, whether it was in the last NAV, and the degree to which it is a product of the CEO seeking to maximise his personal rewards are all “known unknowns” - then the other large holdings appear to be firing on all cylinders. Lots of positive news out there about Klarna’s AI engines and their uses in customer service and programmatic advertising, Starling’s “Engine” division delivering start up alternative banks in Romania, Australia and with a pipeline elsewhere, Featurespace’s DIANNA AI empowered cyber fraud prevention system. All of these look like potentially materially important and not factored into current valuations at all. I am as bullish here as ever, tbh. The nature of the business is that there will always be some failures, but the successes should be huge winners. The IPO drought has, imo, killed off the likely failure, but what is left - Starling, Klarna, Brandtech, Smart Pension and Featurespace in particular - look like very good businesses that will be around, and growing, for a very long time.
Interesting article here https://www.thisismoney.co.uk/money/markets/article-13432943/Former-LV-boss-Mark-Hartigan-old-tricks-uses-scare-tactics-sell-latest-tech-firm.html
Perhaps Wefox is the ‘likely disposal’ recently alluded to
Very interesting Unprecedented. I can see this becoming a minor version of Hipgnosis Songs Fund (LON:SONG) with Hartigan getting booted out and someone else coming in to steady the ship before getting a decent sized float away - all complete guesswork.
I thought long & hard over the weekend about what to do with my Chrysalis Investments (LON:CHRY) holdings - and ultimately decided to hang on.
Whilst it is a kick in the teeth, it is one of a large number of investments and if they can get 1 or 2 away and close the discount I still think there is a major upside in their SP.
I am happy to keep holding and will keep a close eye on things and see how they go. I see the SP was up 4% today and the volume appeared to be a more normal level - I take this as a good sign that there was not another barrage of sellers having spent the weekend deciding what to do.
Interestingly the Money Makers podcast this weekend interviewed Richard Watts, but it was recorded before Thursday so no mention of the We Fox issue. Although Jonathan Davis did say he would go back and ask him for a comment.
Kevin- The SONG analogy might be the way. I suspect AVI are getting involved. But I am out- made an error buying sold at a loss and onto other opportunities.
This isn’t much help to anyone undecided about whether or not to sell Chrysalis Investments (LON:CHRY) but might be useful as a general point. It might also annoy some. I’m very good at doing that!
I always sell on bad news or a disappointing update as there are always so many alternative investment choices that under promise and over deliver, and the result of this sell on bad news tactic is very few if any big losers in our portfolios. (My biggest loser is Henderson Far East Income (LON:HFEL) down 15% and dividends have more than covered that loss)., I used to do what so many small investors do and continue to hold after bad news and look for silver linings. The result can be a portfolio of too many duff investments.
So I sold Chrysalis Investments (LON:CHRY) yesterday at 78p and then after the markets had closed remembered I had a second stake I had forgotten about. That one went this morning at a lucky 82p after the temporary rise on the unconvincing update.
Sometimes the share price does go up after I’ve sold, but far more often it goes down. AND the proceeds of the sale can go in to an alternative investment. If that alternative does as well or better than the investment sold on bad news, then so what if the one sold also goes on to do well.
Ken
I think there is a lot to be said for this approach. The investment universe is large and there are always more stones to turn over. There is also the difficult psychology of continuing to look at a position which you are no longer confident in or trust. The benefit of a private investor is being able to move in and out of most stocks / trusts.
Hi Ken
I’m totally with you on this approach. I think of it as having a portfolio mindset - anything that looks like it will cause damage to the portfolio is jettisoned as soon as the bad news becomes apparent (e.g. profit warnings).
i’m not sure why people hang on to be honest - Failure to admit being wrong? Fear of realising a loss? Falling in love with the share? I have learned through bitter experience over the years that successful investing is as much about avoiding the losers as it is about picking the winners. And like you say, there always other investment options available.
Cheers
Simon
FOMO is always a force. I (unhappily) take losses- the acceptance of an error of judgement/material change is an important aspect of investment. I am fortunate to have spent 10 years in stockbroking- through some bad as well as good times. Black Monday in 1987 still rankles- I was luckily at work-dumped the entire portfolio and then bought back at what I thought was the bottom -same day. The market continued to fall that week. Harsh lesson i9n trying to be to smart and not realising many had struggled to get into work- pre Internet days .
I have sold Chrysalis Investments (LON:CHRY) at a loss-my fault should have stuck to my original view of the company.
Shambles. Poor communication. Attempts to keep information to a minimum. Will take a while to recover from here. I'm out. Better opportunities elsewhere.
Doctor Dave- I am dithering mainly as AVI are the largest shareholders. Ideally CHRY needs to sell Klarna and then use the proceeds in a tender offer at the usual 1% discount- not re-invest the proceeds as they appear to have poor judgement. So in short slowly wind the trust up. Having said that I may sell as I am looking to buy Shopify (TSE:SHOP) - share price has slid back. I used to do a lot of business with the POS team and SHOP have big ambitions.
For the time being, I have exited my position this morning for a small profit. I just have a niggling doubt about the transparency and ability of management here. I did not get caught up in the previous shortcomings of Chrysalis Investments (LON:CHRY) and can see potential in the overall portfolio. However, I would prefer to be cautious and watch from the sidelines.
It may well be that the Sky News report highlights one scenario, where the CEO expresses that Wefox could be insolvent in the coming months, and there are a number of other 'scenarios' that could play out to Wefox's advantage . Especially following the refinancing mentioned this morning.
However, I'm not comfortable with the explanation given in the quarterly update, which refers to the devaluation as a result of listed peer groups, rather than specifically highlighting serious issues with the operations inherent in the CEO's memo to shareholders.
I am on the verge of exiting at a loss.
Seems to be a slight over-reaction to the potential news on Wefox.
This mornings RNS says they had reduced their holding to be 14% of the NAV earlier in the year, but still have confidence that things will be OK - or at least that is my interpretation.
I am holding tight, as I would still be hopeful of the other holdings providing a significant uplift ........... and with a following wind Wefox might still have some value.
Kevin- I am holding for the moment- at least they had the decency to issue a RNS in response to the Sky story and share price fall.
I went from no holding (as highlighted above) to one of my biggest (if not the biggest) holdings across all accounts - so whilst slightly painful yesterday, it wasn't the end of the world as it has gone up a reasonable amount across the weeks/months.
I still have confidence that we should start to see some floats later this year and I would hope that Chrysalis Investments (LON:CHRY) will get a couple of floats away and all will be OK. I will need to have a think about the sell price though with this latest information.
Bit of a shock last night to come off the golf course and check what had happened to markets during the day to see a -17% against one of your largest holdings. However, it was super easy to find out what had happened by looking at this and the IT boards on stocko, so thanks for keeping these communications going.
ATB - Kevin
Ouch, https://news.sky.com/story/ins...
Wefox was considered to be Chrysalis Investments (LON:CHRY) second biggest holding at 14.4% in the March NAV update - only two weeks ago! comment at the time from Chrysalis Investments (LON:CHRY) was:
wefox
wefox continues on its road to profitability; while it achieved a full month of profitability in December 2023, the Company is aware that there are also seasonal factors that make extrapolation to a full year inadvisable. Revenues increased to $800 million in 2023 while the cost base fell year-on-year.
The company is continuing to invest in its technology platform, which uses AI, data analytics and automation to streamline insurance workstreams, and caters to insurance companies, brokers, partners and customers. The Company views further monetisation of the platform as a key future value driver and was encouraged by the announcement of the WindTre partnership towards the end of last year.
The company intends to continue its focus on profitability this year, which is likely to involve further cost base optimisation and concentration on its distribution proposition. The Company has previously highlighted the appointment of Mark Hartigan as Executive Chairman and CEO; Mark was previously CEO at LV= and Head of Operations for Europe, Middle East and Africa at Zurich Insurance Group.
The valuation of wefox fell in the period, reflecting a deterioration in the assessed multiple of the listed peer group against which wefox is marked, a fading of the calibrated premium to the last funding round reflecting passage of time, and strategic repositioning within the business.
This is such a poor outcome, question what these guys actually know about the portfolio they are holding... Will wait to hear the explanation and then decide on my holding. Late price action has reflected the above write down of Wefox
ouch indeed
I have emailed them asking for a RNS to comment on the news story from Sky. Annoyed with myself- avoided Chrysalis Investments (LON:CHRY) for several years for good reasons- bought in a few months ago when it looked like things were moving in the right direction and PE trusts in general were looking more attractive. I will wait to see if they comment (if they do-which I doubt)but my feeling is pretty negative towards them.
Sky article suggests the following was circulated to shareholders (i.e. Chrysalis Investments (LON:CHRY) ) earlier this month:
“In a memo circulated to shareholders earlier this month - details of which have been obtained by Sky News - Wefox's new executive chairman and chief executive, Mark Hartigan outlined a bleak scenario in which its holding company "becomes insolvent in August, or potentially even earlier".
Mr Hartigan, former boss of the UK-based insurance mutual and friendly society LV=, said that the company was engaged in urgent discussions aimed at stemming losses in its Italian unit, as well as closing operations in Germany, selling part of its business in Poland and unwinding a joint venture in Switzerland.
He warned them: "My key deduction is that Italy has been running on systematically false operating assumptions…and is now insolvent without ongoing Group cash support."
Mr Hartigan also told investors that its liabilities in Germany were "very significant and could introduce a large cash strain on the company".”
If that is the case then this should have been included in the quarterly NAV issued by Chrysalis Investments (LON:CHRY)
Thank you for contacting them, Charles. Their RNS this morning doesn't fill me with confidence. Like you, I wish I had continued to avoid them.
Bought Chrysalis Investments (LON:CHRY) today having watched for a while. Sold my poor investment in BH Macro (LON:BHMG) which has performed very disappointingly. AVI just announced now hold 8.4% according to Citywire.
Yes - Citywire updated their 5.7% AVI stake from this morning when they found it was actually 8.4% - good news whatever the figure. I might take another nibble.
An interesting development in Chrysalis Investments (LON:CHRY) with AVI buying a 5.7% stake.
https://citywire.com/investmen...
JTC Employer Solutions Trustees Ltd have been selling, todays TR-1 notification shows they have reduced their holding from 2.974% to 1.0812%
Could help explain why the SP is struggling to advance towards 100p.
Chrysalis makes further investment in Smart Pension
Chrysalis Investments (LON:CHRY) has invested around £4 million in Smart Pension Ltd, a London-based pension and retirement platform. This follows a previous £2 million investment in Smart Pension in January.
Chrysalis says the combined £6 million investment will add around 3.7p to the company’s net asset value.
‘We are delighted to support Smart alongside its other key investors. As a result of this new investment, Smart is now even better placed to grow its master trust and platform business, and we look forward to supporting Smart on its journey towards profitability, with significant progress towards break-even expected over 2024.’ Nick Williamson and Richard Watts, co-portfolio managers at Chrysalis
Chrysalis's other investments include Starling Bank Ltd and wefox Holding AG.
Thanks Donald. Great write-up.
Having looked at the latest comments and reviewed the thesis I decided to up my stake today and have now taken a large position in Chrysalis Investments (LON:CHRY) making it my largest holding.
Looking forward to further news coming our regards the potential for new floats/IPO's.
If I'm not mistaken. TR-1 notification today suggests a new Chrysalis Investments (LON:CHRY) holding by AVI Global Trust plc amounting to 5.275977%
Yes, and we are looking more and more like a stock entering a stage 2 uptrend.
I've been having a chat with others and the Quoted Data figure looks wrong on klarna: if CHRY owns 1% then a $18bn valuation would mean that the holding is worth $180m, or around 24p. It would be an uplift but not a 30p one.
On the other hand, they say in the same piece that Starling could add 40p to NAV.
The recent Quoted Data write up said this:
Now we hear the valuation is likely to be around $20bn. let's stick to $18.
NAV was 143.4 at 31/12, of which Klarna was 10.9% or 15.6p. So if the IPO happened on that basis, the NAV would rise to around 174p, of which 45.6p would be cash. And unlike a company like Tekcapital (LON:TEK) which has a history of floating speculative companies which then sink, Wise (LON:WISE) has been a success and Klarna and Starling look like big, credible companies.
Plus there is the talk of Graphcore being sold imminently. That will be at a loss, but still likely higher than the carried NAV. So the value here just seems to build and build.
Last quarter, interestingly, they made no investments, because the portfolio companies did not need new capital. Again highlighting the maturity of the portfolio and that the companies are getting to the stage where they can be harvested. All the growth has been paid for by the early investors and placings at £2+...now we can buy the fruit just as it ripens!
Klarna in talks with banks for IPO at $20 billion value
https://www.irishtimes.com/bus...
Interesting research not from Quotedata published 7 Feb 2024:
Chrysalis Investments – Turned a corner
I have also added this to my portfolio towards the end of market close today. The chart signals do look look bullish at the moment. Hopefully I can train myself to hold this as a longer term investment.
The big issue for Chrysalis Investments (LON:CHRY) and similar companies holding late stage investments like Augmentum Fintech (LON:AUGM) is when the IPO markets reopen. Because when they do, there is a big pipeline of companies like Klarna, Starling, Tide, Monzo etc which are all ready to go. With most markets close to all time highs, and most investment banks not busy at all, it is baffling that this hasn't happened already.
Donald, thanks for highlighting this ten days back. I've taken a look over the last week and added this to my portfolio of Private Equity IT's as a medium sized postion. Like many, I had probably written it off after the terrible bonus structure which resulted in ridiculous payments on unrealised changes in valuation. However, I have learnt it's important to look again at these types of situation and reassess.
I haven't had time to read today's annual report, but the quarterly NAV update is interesting, with uplifts in key positions of Starling and Klarna. It looks like something positive is happening with Graphcore too.
No specific mention in the NAV update of the RNS from early December which pointed towards a 5.5p uplift based on a likely disposal. Quite possibly relates to one of the above though, I imagine.
Looks like it is Graphcore that is about to be sold by Chrysalis Investments (LON:CHRY) as muted previously. That would be a good result for an investment that had previously been heavily written down. It was subsequently written up again in the most recent RNS
https://www.investmentweek.co....Good spot. That looks like very good news as people had generally suspected Graphcore was a dead duck, and meanwhile Klarna continues to make the right noises about an IPO. If both happened that would be extremely positive for Chrysalis Investments (LON:CHRY)
Thanks for this interesting post Donald. I hadn't looked at Chrysalis Investments (LON:CHRY) before but do hold Augmentum Fintech (LON:AUGM) and IP (LON:IPO)
One of Liberums alternative picks for the year
Why the sudden +12% rise in the SP today Donald?
A huge transaction went through - looks like Jupiter finally getting out. That’s huge selling pressure that’s been hanging over it for months. That’s the catalyst I mentioned in the original post. There was also a news story on Bloomberg that klarna is arranging its IPO in the US
Thanks for this thread, I think it's a really interesting situation.
I read through the recent RNS' regarding the change in Manager (albeit existing two chaps remain as IM), revised fee structure and the capital allocation proposal. Personally, I like the proposal to retain liquidity up to £50m (assume that would continue to include any listed holdings - such as Wise), and then buy back a chunky amount of shares. At a 50% discount, and assuming it is done in volume, the buy back is a good use of capital. With an exit / buy out, or IPO of one or more of the larger holdings I believe greater credibility will be placed on the NAV.
The last thing I need to check prior to any purchase, and most important, is to understand a bit more about the top 4 holdings. Donald, are you relying on broker notes and CHRY's updates for background on the value of their investments, or looking elsewhere? Any pointers would be much appreciated.
I was relying on the factsheet from Chrysalis themselves. There is a lot of value in wefox (around 24% of the PF) so clearly if there were any more objective account of the progress of that business it would be great to find.
Huge volume today and up 6% within an hour of the big trades going through. Could be Jupiter Fund Management (LON:JUP) leaving the building. Catalyst 1 for the rerating.
Thanks Donald. Like Charles I hold Augmentum Fintech (LON:AUGM) and had previously been put off Chrysalis Investments (LON:CHRY) by its greedy investment managers pocketing a ludicrously large bonus a couple of years back - it reminded me of the housebuilder CEO (can't remember which one) who pocketed tens-of-millions in bonus a few years back.
To this end I would have to think very hard about wether I could bring myself to invest in something like this, or whether things have changed enough that I could bring myself to take a different stance.
Anyway, a lot more research to undertake, but appreciate your post and the research undertaken.
Absolutely, I think the bonus embarrassed everyone involved. But as a result they have reduced fees massively and there is no performance bonus payable until the SP regains former highs, so it needs to go up 300% from here before that is an issue (and even then, it is much more reasonable). It strikes me as a company that is out of favour for many reasons, but most of them are historic and have been addressed. I font hold Augmentum Fintech (LON:AUGM) but the companies in the finch sector have been doing really well in the US. With Nasdaq at an all time high surely the IPO market is going to reopen and all of these "incubators" should respond positively.
Thanks Donald, comprehensive research. I hold Augmentum Fintech (LON:AUGM) - not been a great investments so far, but portfolio has interesting companies. I use Wise frequently- great product. I was put off Chrysalis when I looked 18 months ago- will re-look but sounds interesting. The IPO/Realisations market is key to many PE funds. I hold a few PE funds.
Thanks for highlighting this, certainly warrants some further research.