TIDMCHRY
RNS Number : 3497M
Chrysalis Investments Limited
23 May 2022
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is not for publication, release or distribution in the United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 to professional investors in 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 which forms part of
domestic law in the United Kingdom pursuant to The European Union
Withdrawal Act 2018, as amended by The Market Abuse (Amendment) (EU
Exit) Regulations 2019
23 May 2022
Chrysalis Investments Limited ("Chrysalis" or the "Company")
Quarterly NAV Announcement and Trading Update
Net Asset Value
The Company announces that as at 31 March 2022 the unaudited net
asset value ("NAV") per ordinary share was 211.76 pence.
The above NAV calculation is based on the Company's issued share
capital as at 31 March 2022 of 595,150,414 ordinary shares of no
par value.
March's NAV represents an 11.0% decrease since December 2021,
and a 1.8% increase since the Interim NAV as at 21 March 2022. The
following investee companies were the most significant drivers of
the movement in NAV over the quarter:
-- The Brandtech Group ("Brandtech") -saw an upward revision in
valuation, supported by revenue and profit growth that has
continued at what the Investment Adviser considers to be
exceptionally strong levels, both on an absolute basis, and in
comparison to listed peers;
-- Starling Bank ("Starling") - saw a modest increase in
valuation, and is now held at a valuation in line with its recent
primary round of GBP2.5 billion;
-- Klarna Holding AB ("Klarna") - notwithstanding its strong
Gross Merchandise Volume ("GMV") growth over 2021 of 51% in US
dollar terms, its valuation has been written down materially,
mainly reflecting weakness in the share price performances of its
listed comparators. The Company can confirm that the March NAV is
based on a valuation for Klarna of approximately $30 billion;
-- Deep Instinct and InfoSum - both saw write downs in
valuation, mainly due to weakness in their listed comparative sets;
and
-- THG plc ("THG") and Wise plc ("Wise") - which saw share price
falls of 60% and 35% respectively.
Investment Adviser Comments
Richard Watts and Nick Williamson (co-portfolio managers)
comment:
"We are very pleased with the robust rates of revenue growth -
approximately 80% per annum on a blended basis - we are seeing
across the portfolio, as we believe it will be the key determinant
of future NAV performance. Many of our companies are only in the
early stages of making an impact on their sizeable addressable
markets, which we expect to support their growth aspirations into
the medium term.
Listed market valuations have remained under pressure, a trend
which started in September 2021 and has continued into the current
quarter, reflecting uncertainty over a number of key variables
including economic growth, interest rates and inflation. It
therefore feels prudent to adopt a conservative stance with respect
to strategy, and a key focus for us over the coming quarters will
be supporting our companies in pursuing their growth
objectives.
As detailed above, we have given more colour on the valuation
levels of our two largest assets, Klarna and Starling. Together,
these holdings account for approximately 40% of the Company's gross
investable assets, which should give investors significant
valuation certainty regarding a material part of the
portfolio."
Overview
The pressure on the valuations of growth companies in global
stock markets that commenced in the previous quarter continued, and
in many cases increased. Investor concerns over the likely
trajectory of the interest rate rises required to tame growing
inflation expectations were heightened by the impact of the Russian
initiated war in Ukraine, which has led to supply constraints in
certain key global commodities.
Public market valuations form a significant input into the
Company's valuation process. The quarter to March 2022 saw some
significant declines in the share prices of many of the comparable
companies used by the valuer, for the reasons outlined above, which
have been reflected in the assessment of the March NAV.
The blended average revenue growth of the portfolio remains
strong, at approximately 80% per annum, with four portfolio
companies delivering over 100% per annum. The Investment Adviser
believes that growth will be the main driver of NAV in the medium
term, and logic suggests better-than-market rates of growth should
help to mitigate valuation multiple compression.
In addition, the portfolio benefits to some degree from
investment structures that have provided downside protection to the
valuations of companies comprising over 15% of the invested
portfolio.
There was a negligible impact from foreign exchange
movements.
Portfolio activity
Unlike previous quarters, which have focused on investment, the
quarter to March 2022 saw no new investment, but three
realisations.
The Company received GBP57.2 million of net proceeds from the
sale of Embark Group Limited ("Embark") to Lloyds Bank plc in
January 2022. A residual holding in Rowanmoor Group Limited -
previously a subsidiary of Embark - has been retained, but given
this is held at a notional amount, this transaction effectively
marks the Company's first full realisation.
While the Investment Adviser remains optimistic over the
prospects for continued growth in Wise plc, and is encouraged by
its trading performance, it took the opportunity to sell part of
the Company's stake in March to raise cash, both given increased
market risk with the commencement of the war in Ukraine, and with a
view to funding a follow-on in Starling, detailed below. This
raised approximately GBP12.2 million at an average share price of
approximately 500p.
Following an initial repayment of GBP588,000 from the
liquidation of Growth Street, which was received in December 2021,
the Company received a further GBP496,000 during the period. This
means that approximately GBP1.1 million has been recovered for
investors, broadly in line with expectations.
Taking the above into account, the quarter to March 2022 saw a
net realisation of approximately GBP70 million. Post period end, an
investment of GBP10 million was made in Starling's GBP130.5 million
fundraise at a pre-money valuation of GBP2.5 billion.
Portfolio news
Many of the Company's key assets continued their strong
operational progress over the period.
Starling's funding round, which completed in April, was
accompanied by statistics that showed it accounted for 7.5% of the
UK SME banking market (by numbers of accounts), which we believe is
approximately half the market share of Barclays plc. This has been
achieved in less than five years from the launch of its business
banking capability. Although this fundraise was announced post
period end, the Investment Adviser had sight of this during the
period, hence Starling being valued at the primary funding round in
the March NAV.
Klarna released its annual report to December 2021. Highlights
included 147 million active users globally, which has doubled since
the end of 2017, with US users growing fivefold since 2019. In
addition, there has been a 68% increase in purchase frequency in
mature markets over the last three years and over 240% increase in
new markets.
These statistics are key for Klarna. GMV growth is the main
driver of revenues, and can effectively be considered the product
of the number of users, multiplied by purchase frequency,
multiplied by average order value. This information demonstrates
Klarna's progress in enhancing two of the key inputs of GMV
growth.
Over 2021, GMV grew 51% with revenue rising by 48%, both in USD
terms. While credit losses increased as a percentage of GMV from 56
basis points ("bps") in 2019 to 67 bps in 2021, the majority of
this increase stemmed from volume growth in new markets, which were
expected to demonstrate higher loss rates. Thus on an underlying
basis, credit performance improved.
Given the significant proportion of the portfolio represented by
Klarna, the Investment Adviser is aware of shareholder interest in
the valuation of this asset and how comparisons can be drawn from
the listed market. With the acquisition of Afterpay by Block Inc,
the industry is left with only one material listed buy now pay
later ("BNPL") operator in Affirm Holdings Inc ("Affirm"). Affirm
has seen significant share price falls over the quarter, from
approximately $100 per share to approximately $46 per share by 31
March, with further falls to approximately $23 per share by
mid-May.
However, the Investment Adviser would highlight the
following:
-- "Pay Now", the use of Klarna to check out with no use of
credit, now accounts for 40% of GMV. The Investment Adviser views
this channel as having similarities to payment processing, thus
implying a pure BNPL peer group assessment for Klarna may be
misleading; and
-- Affirm and Klarna have differing business models, including
areas such as loan duration and initial size, but also in funding.
Whereas Affirm relies on warehousing and subsequent securitisation
of its loans, Klarna is a regulated bank. This means the latter has
access to customer deposits to fund its loans, which form the bulk
of its liabilities book. This potentially has ramifications, both
in terms of relative funding costs, and availability of
funding.
Smart Pension announced the acquisition of Stadion Money
Management ("Stadion") in January, following its series-D funding
round. Stadion is based in the US and offers personalised, digital
retirement solutions to advisers, employers and customers. The
transaction is expected to complement Smart's existing offering,
while increasing its presence in the significant US market. In
addition, Stadion will bring additional assets under management,
which have grown 2,000% over the last three years.
Graphcore has continued to progress its technology programme and
announced in March the launch of the Bow IPU. Bow is the world's
first Wafer-on-Wafer processor - effectively stacking wafers on top
of one another to create a 3D processor - and is expected to
deliver up to 40% higher performance and 16% better power
efficiency compared with its predecessors. The company continues
its drive to successfully monetise its products.
Post period end, Worldpay's Fraudsight - which is powered by
Featurespace - won The Card and Payments Awards' "Best Technology
Initiative". Worldpay is the number one global merchant acquirer,
processing 40 billion transactions per annum.
During the period Tactus announced the acquisition of online
gaming and technology retailer Box, which has a customer base
across the UK and Europe. Box takes the group's headcount to over
350 individuals, adds GBP100 million of revenues, and its purpose
built 120,000 sq ft logistics centre significantly expands the
scale of Tactus' supply chain and operations across the UK and
beyond, while providing enhanced capacity to accommodate future
growth.
As a result of organic growth and this significant acquisition
activity, Tactus has experienced very strong revenue growth over
the course of the last year.
Deep Instinct participated in 2022 MITRE Engenuity's ATT&CK
Evaluations for the first time, following the inclusion of a
protection component to the test, rather than just a reactive
"assumed breach" test. The test emulated the malicious activities
of certain threat groups, against which Deep Instinct demonstrated
a 100% prevention score, as announced in March.
Revolution Beauty detailed a trading update for its full year
ended February 2022, which showed revenues grew 42% over the
period. While this was marginally below expectations, given the
industry-wide headwinds discussed above, the Investment Adviser
believes this was a good performance. EBITDA forecasts for the
current financial year remain unchanged.
In April, THG released its full year 2021 results and a 1Q22
trading update. Over 2021, revenues were in line with expectations,
but margins were under pressure due to an increase in whey prices
in the nutrition division, compounding industry wide inflation in
other areas, such as freight costs. The company expects this to
persist into the first half of 2022 and it triggered approximately
10% EBITDA forecasts downgrades for the full year.
Ingenuity Commerce grew revenues to GBP45.4 million over 2021.
While this was lower than the GBP50 million expectations, this
still represented 135% growth year-on-year and the company
reconfirmed a forecast of circa GBP110 million for 2022. In
addition, THG acknowledged it had received several bid approaches,
which the Investment Adviser believes endorses its view that the
company's valuation has become overly depressed, and the share
price responded positively to this news.
Subsequently, on 19 May, the board of THG confirmed it had
rejected an indicative, non-binding proposal for the entire issued
and to be issued share capital of the company from the Belerion
Consortium at a valuation of 170 pence per share. The same day,
Candy Ventures Sarl, the investment vehicle of Nick Candy, also
confirmed it was in the early stages of considering a possible
offer for the Company.
In January, Wise released a trading update for the quarter to
December 2021, detailing 38% growth in volume year-on-year, and a
34% increase in revenue, despite cutting prices to customers
materially. This led the company to upgrade its revenue growth
guidance for its full year to March 2022 to approximately 30%, from
"low to mid 20s" in the previous quarter.
Cash Update
As of 19 May 2022, the Company held approximately GBP62m of
cash. In addition, the Company also has significant further
liquidity available, most notably its holdings in listed assets,
which currently total approximately GBP82m.
Portfolio Composition
As of 19 May 2022, the portfolio composition was as follows:
Portfolio Company % of portfolio
Starling 21.1%
--------------
Klarna 18.9%
--------------
wefox 11.2%
--------------
Smart Pension 8.9%
--------------
The Brandtech Group 8.6%
--------------
Graphcore 4.9%
--------------
Featurespace 3.2%
--------------
Tactus 3.1%
--------------
InfoSum 2.7%
--------------
Deep Instinct 2.6%
--------------
Revolution Beauty 2.4%
--------------
Sorted 2.3%
--------------
THG 2.1%
--------------
Wise 1.9%
--------------
Secret Escapes 1.2%
--------------
Growth Street 0.0%
--------------
Rowanmoor 0.0%
--------------
Cash 4.9%
--------------
Source: Jupiter Investment Management (UK) Limited. Holdings
size, as of 19 May 2022, are calculated using 31 March valuations,
adjusted for FX as of 19 May 2022 and capturing transactions
concluded post the NAV calculation period, and thus using cash as
of 19 May. For listed shares, the holding values are based on
closing share prices as of 19 May, namely: THG at 116p; Wise at
353p; and Revolution Beauty at 108p. Due to rounding the figures
may not add up to 100%. The above percentages are based on an
aggregate portfolio value (including cash) of approximately GBP1.27
billion.
Outlook
Pitchbook data indicates that the value of deals completed in
the late-stage venture space in Chrysalis's key European markets
grew year-on-year over the first quarter of 2022. The Investment
Adviser views this as a backward looking indicator and expects the
effects of volatility in listed markets, which has increased
further post period end, will filter through to private markets.
The Investment Adviser believes this is likely to manifest itself
in the following ways:
-- A renewed focus on the fundamentals of investment cases, and
thus increased selectivity in deal participation. This is likely to
involve an emphasis on companies with strong fundamentals and unit
economics, with a view to the potential characteristics of
businesses as they mature;
-- Some reassessment of growth valuations that in certain cases had become stretched; and
-- The likely increased prevalence of investor protections in
deal structures, such as liquidity preference.
The Investment Adviser notes that growth valuations have already
begun their "reset", as shown by the reduction in the Company's NAV
over the last two quarters, reflecting the independent valuer's
remit to determine fair value. Although growth valuations have
continued to decline post period end, the example of Starling,
which concluded a funding round in April at nearly twice the
valuation of the year before, shows that fast growth is able to
counteract valuation compression in certain circumstances. With
that in mind, the Investment Adviser views the growth being
delivered by the portfolio as a critical determinant of likely NAV
performance over forthcoming periods.
With regard to investors becoming more selective, the Investment
Adviser believes Chrysalis has investments in many exceptional
companies, with a number demonstrating best-in-breed
characteristics. In addition, the Investment Adviser's due
diligence process typically involves a focus on strong unit
economics. While over 40% of the Company's portfolio is profitable,
the Investment Adviser believes that the rest of the investments
also have the ability to scale successfully into profitable and
cash generative businesses in the medium term.
Factsheet
An updated Company factsheet will shortly be available on the
Company's website: https://www. chrysalisinvestments.co.uk
-S-
For further information, please
contact
Media +44 (0) 7542 846 844
Montfort Communications chrysalis@montfort.london
Charlotte McMullen / Georgia
Colkin / Lesley Kezhu Wang
Jupiter Asset Management:
James Simpson +44 (0) 20 3817 1696
Liberum:
Chris Clarke / Darren Vickers
/ Owen Matthews +44 (0) 20 3100 2000
Numis:
Nathan Brown / Matt Goss +44 (0) 20 7260 1000
Maitland Administration (Guernsey)
Limited:
Elaine Smeja / Aimee Gontier +44 (0) 1481 749364
LEI: 213800F9SQ753JQHSW24
A copy of this announcement will be available on the Company's
website at 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, financial, tax and
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