Chrysalis (CHRY ), the growth capital fund that angered investors by paying a £112m performance fee to Jupiter Fund Management last year before its shares crashed, has promised a new arrangement will be in place by September.

Having heard the criticisms of its top 20 shareholders from corporate adviser Rothschilds for the huge bonus that rewarded Jupiter for unrealised investment gains, Andrew Haining, the investment company’s chair, said a new improved framework better aligned with investors had been presented to the fund manager.

‘The board is working with Jupiter over the next quarter to finalise this and aims to provide shareholders with more details prior to the company’s year-end, with the intention that the new arrangement would operate from the beginning of the next financial year,’ Haining said.

The commitment came in half-year results in which Chrysalis confirmed a 16% drop in net asset value (NAV) in the six months to 31 March but ruled out share buybacks as it laid bare the stresses on its largely unquoted portfolio from the bear market in growth stocks.

Shares which had already more than halved to stand at a 41% discount to NAV in response to rising inflation and interest rates, tumbled another 13% to 98p, leaving the investment company below its flotation price of four-and-a-half years ago. They recovered some ground in late trading to close at 102p, down 9%.

Conserving cash

Although Haining acknowledged share buybacks would normally be an appropriate response to narrow the wide discount, he said Chrysalis needed to conserve its £55m cash to support unquoted companies that could no longer rely on stock market flotations to bring in the capital to support their expansion.

The portfolio companies had enough cash to survive for 14 months on average, which Chrysalis could extend by a year with its money, or up to three years if it sold its stakes in listed companies.

Failure to help companies weather the storm could see Chrysalis’ stakes diluted as they raised capital from other private equity investors, or could see those companies struggle to grow if they were starved of funding, Haining warned.

‘The investment landscape has changed materially over the last six months with central banks responding to elevated levels of inflation by tightening monetary policy. Rising yields have impacted the valuations of long duration assets, with the derating of growth stocks being particularly marked,’ said Haining.

‘The appetite or ability to provide capital has reduced and, consequently, those investors who are providers of capital are demanding very attractive terms. Therefore, Chrysalis has positioned itself with enough capital to ensure it can support its portfolio appropriately,’ he said.

Profits not growth

Fund managers Nick Williamson and Richard Watts, who earned their controversial fee half in cash and half in shares, said: ‘Profitability, not growth at any cost, is now the focus as companies look to extend funding runways. Chrysalis’ portfolio companies have not been immune to this environment, although for our profitable companies, or those with very strong balance sheets, the difficult funding market is of less or no concern.

‘In spite of the difficult backdrop, the portfolio continues to demonstrate its ability to deliver robust growth and operationally is performing well in aggregate. With approximately 40% of the portfolio already profitable, our focus has been working with the 60% that has yet to break even, where we have supported a number of companies to balance opex budgets with growth aspirations,’ the managers said.

‘If and when market conditions allow, or Chrysalis generates capital, share buybacks or new investments might be considered,’ Haining added.

‘In a similar way that many of our portfolio companies are adjusting to the “new normal”, so we have also needed to pivot,’ said Williamson and Watts. ‘The realities of the current capital position, while being adequate to protect the hard work since IPO of building out a portfolio of exciting assets, is that it is not of a sufficient scale to allow us to either expand the portfolio with new investments or look to retire a significant quantum of shares.’

Confirming the previously announced hit to the portfolio, with NAV per share declining from 251.96p to 211.76p at 31 March, Chrysalis ruled out making further adjustments in response to companies funding rounds until they were complete.

The closed-end fund faces an estimated further 9.5% blow to net asset value if Klarna, the credit company that is its second biggest holding  at 19% of assets, raises money at a reduced $15bn valuation. However, that ‘down round’ could be offset by online car insurer Wefox, its third largest holding at over 11% of assets, which is reportedly raising money at a higher valuation.

‘To the extent these funding rounds are verified before our next quarterly valuation, these will be reflected in the next valuation, but it is not our intention to comment on unverified events,’ Haining said.

As part of its move to become a self-managed investment company, Chrysalis is appointing its own valuation committee to take oversight of its portfolio from Jupiter.

Bad news, 50% discount

Despite the savage de-rating of listed growth stocks that directly and indirectly affected its portfolio and forced them to focus on the liquidity of their investments, Williamson and Watts said Chrysalis companies had seen revenue growth of over 80% in the first half.

Much of this was driven by Starling bank, the profitable online upstart that has attracted over 2.7m account holders in four years, but whose annualised rate of growth was levelling off. Starling, which is the fund’s biggest position at 20.6% of assets, would start to generate ‘meaningful amounts of income’ from its £5.3bn of deposits as interest rates rose, they said.

Numis Securities, Chrysalis’ broker, estimated the NAV per share had fallen to 191.3p since 31 March, accounting for a 19p hit from a reduced Klarna valuation, currency movements and further falls in its quoted holdings. After today’s slump, that wides the discount to 50%.

‘We believe this is factoring in a lot of bad news, particularly given the stage of development of some of the portfolio companies, and may offer significant upside over time for investors with a high-risk tolerance,’ analyst Ewan Lovett-Turner said.