REG - Chrysalis Invs Ltd - Net Asset Value(s) and Trading Update

Chrysalis InvestmentsAnnouncement

29/11/2021 07:00

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RNS Number : 8010T  Chrysalis Investments Limited  29 November 2021

The information contained in this announcement is restricted and is not for
publication, release or distribution in the United States of America, any
member state of the European Economic Area (other than Belgium, Denmark, the
Republic of Ireland, Luxembourg, the Netherlands, Norway and Sweden), Canada,
Australia, Japan or the Republic of South Africa.

 

The information contained within this announcement is deemed by the Company to
constitute inside information as stipulated under the Market Abuse Regulation
(EU) No. 596/2014 as amended by The Market Abuse (Amendment) (EU Exit)
Regulations 2019.

 

29 November 2021

 

 

Chrysalis Investments Limited ("Chrysalis" or the "Company")

 

Quarterly NAV Announcement and Trading Update

 

Net Asset Value

The Company announces that as at 30 September 2021 the unaudited net asset
value ("NAV") per ordinary share was 251.96 pence.

 

The above NAV calculation is based on the Company's issued share capital as at
30 September 2021 of 547,273,076 ordinary shares of no par value.

 

September's NAV represents a 7.7% increase since 30 June 2021. Whilst the
quarter to September was relatively quiet in terms of funding rounds, the
portfolio saw continued, significant revenue growth. The following investee
companies were the most significant drivers of NAV movement in the quarter:

 

·    Starling Bank Limited ("Starling") - which continues to deliver
exceptional growth and made its first acquisition in the period to build out
its origination capabilities. Post period end Standard Chartered Bank
("Standard Chartered") launched a green investment proposition at COP26- Shoal
- powered by Starling's Banking-as-a-Service ("BaaS") offering;

·    Wise plc ("Wise") - which successfully debuted on the London Stock
Exchange via a direct listing IPO in early July 2021. Over the quarter to
September 2021, the shares rose 35% from their closing auction price.;

·    Klarna Holding AB ("Klarna") - where growth continued to be strong,
with the US delivering more than 300% Gross Merchandise Volume ("GMV") growth
in the first three quarters of 2021 (in US dollar terms). The US currently has
Buy Now, Pay Later ("BNPL") penetration of only 2%, compared to 5% in the UK,
10% in Australia and 23% in Sweden (Source: Statista); and

·    THG plc ("THG") - which saw its market price fall from 610p as of
June 2021, to 507p as of September 2021. Further declines occurred post period
end which are discussed in more detail below.

 

Overview

The trading performance of the portfolio over the period continued to be
robust and, as the Company's Investment Adviser sees a strong link between
revenue growth and subsequent valuation performance of assets within the
portfolio, it believes this bodes well for the prospects of the Company's
investments.

 

Portfolio activity

Following a £300m capital raise by the Company earlier in the year,
considerable investment activity continued over the quarter. In particular,
four new investments were undertaken and one realisation announced:

 

·    in July a $67m investment in cybersecurity asset, Deep Instinct, was
made. Deep Instinct is the only company addressing the cybersecurity market
with a deep learning product, versus machine learning, which allows greater
than 99% accuracy on previously unknown threats and sub 20 millisecond
response times. This means it can be deployed as a prevention tool, rather
than a reactive response offering;

·    in July, the Company invested approximately £45m in Revolution
Beauty Group plc ("Revolution Beauty") as part of its IPO. Revolution Beauty's
core offering is colour cosmetics, and it operates a "digital first" strategy.
Its share price has softened since admission, reflecting investor concerns
over industry-wide headwinds in e-commerce, albeit trading has been in-line
with expectations;

·    in July, Embark announced its sale to Scottish Widows Group Limited
(a part of Lloyds Banking Group plc) for £390m, subject to regulatory
approval;

·    in August, a $65m investment was made in the parent company of
InfoSum as part of its Series B scale up round. InfoSum is a data
infrastructure company that allows organisations to share data with each
other, without putting customer data or personally identifiable information at
risk. Recent trading results from a number of tech platforms have shown the
impact of Apple's decision to give its customers the right to privacy,
effectively curtailing the effectiveness of third-party advertising campaigns.
InfoSum's technology has been designed to allow entities the ability to
"enrich" their own datasets, without falling foul of growing privacy awareness
by consumers, as well as regulation, such as GDPR; and

·    in August, the Company made a £40m investment in Tactus Holdings
Limited ("Tactus"). Tactus is a consumer technology expert, supplying a range
of own and third-party branded IT hardware, predominantly entry-level laptops
and high-end gaming PCs, to consumers. There is a substantial opportunity to
supplement organic growth with M&A.

 

Portfolio news

The Investment Adviser believes the most notable news, given the size of the
current investment, was the announcement post period end of a strategic
partnership between Klarna and Stripe, which will allow retailers using Stripe
to activate Klarna in their checkouts within minutes. Initial results from
Stripe retailers using Klarna indicate an average 27% increase in sales, with
some retailers experiencing up to 40% of Klarna shoppers being new to their
brand. It is estimated Stripe processed approximately $350bn of GMV in 2020
(Source: https://backlinko.com/stripe-users), versus Klarna's GMV of $53bn in
the same year.

 

Activity in the BNPL space over the course of 2021 has been significant,
namely:

·    Square's acquisition of Afterpay for $29bn;

·    Amazon's partnership with Affirm (the latter's share price has risen
by approximately 100% since, to 19 November 2021); and

·    PayPal's acquisition of Paidy in Japan for $2.7bn.

In combination with Klarna's continued strong progress - GMV growth (in USD)
of 63% over the first three quarters of 2021, driven by the US - the
Investment Adviser believes the ramifications of the Klarna/Stripe
relationship could prove material to the way investors consider Klarna's
valuation.

 

Elsewhere, Deep Instinct announced a partnership with Tanium that we believe
could be very significant. Tanium manages endpoints for nearly half of the
Fortune 100, and this relationship will see Deep Instinct integrated into its
Threat Response solution, thereby offering a new, major route to market.

 

Significant activity occurred at Starling. Following the successful fund raise
earlier in the year, Starling bought Fleet, a buy-to-let mortgage lender,
which marks the first move into mortgage origination. In addition, it
announced its intention to launch "Banking-as-a-Service" (BaaS) into Europe,
which will offer the opportunity to supplement traditional banking revenue
streams with high-value, recurring income. Post period end, Standard Chartered
launched its new green savings platform, Shoal, at COP26, which is powered by
Starling's BaaS offering. Standard Chartered expects to expand Shoal into
Europe in due course. In July it was named the "Best British Bank" for the
fourth year running and recently committed to offsetting its carbon emissions
from 2021, alongside other ESG commitments.

 

Tactus was active on the M&A front, acquiring two businesses - BIST and
Chillblast - to further build out its offering. M&A was one of the
rationales for it raising primary capital on the Company's initial investment,
and therefore early execution in this regard is encouraging.

 

THG

THG's share price fell from 610p as of the 30 June 2021 NAV statement to 507p
as of 30 September 2021. Post period end, the share price suffered further
heavy selling pressure falling below 200p in November. In the normal course of
business, the Investment Adviser would not expect to comment on individual
names in detail, but given the magnitude of this move, feels some commentary
is appropriate. While well documented, the reasons appear to centre around:

 

·    concerns over corporate governance;

·    uncertainty surrounding the possible exercise of the SoftBank option
to buy 19.9% of Ingenuity and the implicit £4.5bn valuation of the division,
as well as prospects for its future growth; and

·    a modest, mainly FX driven downgrade to EBITDA.

 

In response, THG has:

 

·    made several moves designed to improve corporate governance,
including: a commitment to rescind the founder's Golden Share, which
effectively prevents an unwanted takeover in the next two years, and splitting
the role of CEO and Chairman, with a process underway to identify an
independent candidate to fill the latter;

·    appointed a SoftBank representative to its board; and

·    upgraded expectations for Ingenuity growth.

 

As the representative of major shareholders, the Investment Adviser has
engaged with the company to support its plans, particularly in respect of
corporate governance, and is encouraged by the company's optimism surrounding
Ingenuity. As part of its normal process, the Investment Adviser has revisited
its investment case and believes there has been no substantive change to the
investment thesis since IPO. Given the current valuation, the Investment
Adviser believes there is significant upside potential in THG shares. As a
result, it has increased the Company's position in THG following the quarter
end.

 

The Company also notes the Wise share price has fallen by approximately 29%
since the end of the period.

 

Cash Update

As of 24 November 2021, the Company has approximately £24m of cash available.
In addition, the Company also has significant further liquidity available,
most notably its holdings in listed assets, which currently total
approximately £147m, and, subject to regulatory approval being provided, the
Company will receive its share of the proceeds from the sale of its
shareholding in Embark. In regards to the latter, the Investment Adviser notes
comments from Lloyds Bank plc suggesting this might take place in 4Q21.

 

Portfolio Composition

As of 24 November 2021, the portfolio composition was as follows:

 

 Portfolio Company   % of investment portfolio
 Klarna              27.6%
 Starling Bank       15.5%
 wefox               7.8%
 You & Mr Jones      7.1%
 Smart Pension       6.5%
 Wise                5.1%
 Graphcore           4.6%
 Embark              4.2%
 InfoSum             3.6%
 Deep Instinct       3.6%
 THG                 3.1%
 Tactus              2.9%
 Revolution Beauty   2.7%
 Featurespace        2.6%
 Secret Escapes      1.8%
 Sorted              1.3%
 Growth St           0.1%
 Cash                1.8%

 

Source: Jupiter Investment Management (UK) Limited. Holdings size, as of 24
November 2021, are calculated using 30 September valuations, adjusted for FX
as of 24 November 2021 and capturing transactions concluded post the NAV
calculation period, and thus using cash as of 24 November. For listed shares,
the holding values are based on closing share prices as of 24 November 2021,
namely: THG at 182.9p; Wise at 729p; and Revolution Beauty at 129.5p. Due to
rounding the figures may not add up to 100%.

 

Investment Adviser alignment

Based on the performance of the Company's assets, which is still subject to
final audit, there is likely to be a performance fee payable for the year,
which historically has been paid in cash. In order to further strengthen the
alignment of the Company's portfolio management team with the subsequent
performance of Chrysalis, and also to retain cash in the Company, the
portfolio management team of the Investment Adviser has elected, with the
agreement of the Investment Adviser and the Board, to take the deferred
element of its remuneration in new Chrysalis shares to be directly issued by
the Company.

 

The portfolio management team has agreed for this year to have shares issued
to it at the closing share price as of 30 September 2021 of 267p, a premium to
NAV, which reflects the team's confidence in the prospects for the portfolio,
as discussed below. Further details on this have been separately announced by
the Company today.

 

Outlook

The late-stage, private market continues to grow and develop. Over the nine
months to September 2021, fund raising in the Company's target European
markets hit £38 billion (Source: Pitchbook), more than double the year to
December 2020. Participation in this space by a major crossover investor has
roughly doubled over the last two years (measured as number of deals with
crossover participation), showing the growing interest in this type of
financing by companies, and recognition from investors that late-stage
investing offers significant opportunity.

 

Chrysalis is exceptionally well placed to take advantage of this growing
market, given its established track record and origination capability.

 

The portfolio continues to exhibit exceptional growth metrics, substantially
outperforming listed indices. Over the last two years, the Investment Adviser
estimates the portfolio has compounded out its revenue growth at approximately
3 times that of the NASDAQ, while the FTSE All Share has seen revenues decline
by 11% (Source for indices: Peel Hunt).

 

The Investment Adviser believes revenue growth is the key driver of valuation
in the medium-term, and so ensuring a continuation of growth is a key focus.

 

An analysis of the Total Addressable Market ("TAM") of the Company's portfolio
suggests a revenue opportunity of over $1 trillion, with current penetration
of less than 1%. Given the underlying markets making up this portfolio TAM are
typically growing, and the ability of most Chrysalis investee companies to
address adjacent verticals via technology, the Investment Adviser has
considerable confidence that portfolio revenue growth will continue to be
robust.

 

Investment Adviser Comments

Nick Williamson and Richard Watts (co-portfolio managers) comment:

"NAV growth in the quarter continued to be robust. While we saw limited
activity in terms of funding rounds in the period, considerable progress and
growth was achieved by several of the portfolio companies that underpinned the
NAV performance. Typically, growth remains strong across our investee
companies, and in some cases is exceptional. In addition, for some of our
larger units, we believe valuations look undemanding versus listed peers,
particularly given their growth rates.

 

Our origination process has grown in capability over the course of the year
and the pipeline remains strong. We currently have two modest follow-ons that
we are likely to be making before year end, and continue to receive numerous
opportunities concerning potential new investments.

 

With a portfolio of potent growth companies, we remain optimistic regarding
prospects for the Company in the year ahead."

 

Factsheet

 

An updated Company factsheet will shortly be available on the Company's
website:  https://www.chrysalisinvestments.co.uk
(https://www.chrysalisinvestments.co.uk)

 

-ENDS-

 

 

 

 

 For further information, please contact

 Media

 Montfort Communications                                   +44 (0) 7542 846 844

 Charlotte McMullen / Georgia Colkin / Lesley Kezhu Wang   chrysalis@montfort.london

 Jupiter Asset Management:                                 +44 (0) 20 3817 1325

 Magnus Spence

 Liberum:                                                  +44 (0) 20 3100 2000

 Chris Clarke / Darren Vickers / Owen Matthews

 Numis:                                                    +44 (0) 20 7260 1000

 Nathan Brown / Matt Goss

 Maitland Administration (Guernsey) Limited:               +44 (0) 1481 749364

 Elaine Smeja / Aimee Gontier

 

LEI: 213800F9SQ753JQHSW24

A copy of this announcement will be available on the Company's website at
https://www.chrysalisinvestments.co.uk
(https://www.chrysalisinvestments.co.uk)

The information contained in this announcement regarding the Company's
investments has been provided by the relevant underlying portfolio company and
has not been independently verified by the Company. The information contained
herein is unaudited.

This announcement is for information purposes only and is not an offer to
invest. All investments are subject to risk. Past performance is no guarantee
of future returns. Prospective investors are advised to seek expert legal,
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are no guarantee of future results. Neither the content of the Company's
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