Exclusive: Exposure to private companies in Jupiter UK Mid Cap has risen even closer to allowed limits despite the £1.6bn fund slashing Starling bank’s valuation last month, a step that has opened up an extraordinary gap between how it and Jupiter’s Chrysalis (CHRY ) investment trust value their shared top holding. 

Between a 7.9% position in the digital bank and another small stake, the open-ended fund’s unquoted exposure hit 8.5% at 30 June, a step closer to the 10% maximum allowed by City rules. 

An estimated 16% cut to Starling’s valuation by Jupiter’s external valuer was triggered by sharp falls in public stock markets last month. It casts a shadow over Chrysalis, the listed investment fund which is also run by Jupiter and UK Mid Cap fund manager Richard Watts (pictured below). 

The under-pressure closed-end vehicle, a late-stage investor in private growth companies looking to float, has been shielded from even bigger losses this year by the relative resilience of Starling with no signs its valuation for the neobank has been cut. 

Jupiter’s open-ended funds usually make a quarterly assessment of their unquoted holdings, but revaluations can be triggered in between by extraordinary market movements, such as the sharp falls in comparable listed growth companies that have occurred this year.

This was the case for Starling early last month, leading the third-party valuer responsible to cut the digital bank’s estimated valuation. That was then passed onto the several Jupiter funds which own it.

According to Citywire calculations, which the group did not dispute, the value at which the open-ended funds hold Starling was cut by around 16%.  

That has also helped stop the UK Mid Cap fund from coming even closer to the private companies limit, but a Jupiter spokesperson emphasised this was not an active decision taken by the firm: 

‘The Starling revaluation was triggered when parameters on the fund were exceeded as monitored by Jupiter’s valuation committee which is completely independent of the investment managers and is chaired by an independent non-executive director. The valuation committee instruct a third party provider to provide an independent assessment which then feeds into this process.’

The move has seemingly opened up a situation where Jupiter’s open-ended funds and Chrysalis, an investment company where it runs the portfolio, now value Starling differently.

Chrysalis, which as an investment trust has its own board with ultimate oversight, recently set up its own independent valuation committee after a furore around performance fees. But based on the lack of recent updates to the market, the new committee will likely make investors wait another few weeks before its quarterly review of Starling’s valuation at the end of June.  

Despite the Jupiter funds’ Starling writedown, a bruising month for UK Mid Cap meant its stated exposure to the bank actually rose over June. Watts’ fund lost 15.1% in the month as rampant inflation and more rapid interest rate rises continued to upset the ‘growth’ stocks he has backed in recent years.  

By the end of the month, Starling’s weighting rose to 7.9% in the portfolio, according to the latest factsheet, up from just under 7.7% at the end of May. Along with a 0.6% holding in Secret Escapes, Jupiter confirmed that UK Mid Cap’s total unlisted exposure was now 8.47%.

The situation has been compounded by the fund’s shrinking size, more then halving from a peak of £3.7bn last summer as a result of outflows on top of poor performance. Investors pulled a net £382m from the fund in the first half of this year, according to Morningstar estimates, though that was concentrated in the first quarter.

Other Jupiter funds on the small and mid-cap desk also hold Starling, though much further below the 10% limit. Dan Nickols’ £820m UK Smaller Companies fund has 3.1% in the neobank, while the £158m UK Smaller Companies Focus had a 4.9% weighting at the end of June, according to factsheets. The latter had been managed by Nick Williamson before he moved to run Chrysalis full-time alongside Watts

Woodford legacy 

The potential pitfalls of holding unquoted stocks in open-ended funds were made clear in recent years by the spectacular downfall of one-time star manager Neil Woodford.

As funds promise the possibility of daily withdrawals to their investors, that can create a liquidity mismatch if private company positions, which can take months to sell, become too large.

Savers’ money still remains trapped in the former Woodford Equity Income fund more three years after it was forced to suspend trading amid doubts whether it could meet mounting outflows.   

Jupiter, which first invested in Starling before the Woodford debacle, said previously that it would take action to control the Starling position size in its open-ended funds if necessary.

The UK Mid Cap fund also sold some of its stake during an April funding round, when Starling was able to double its valuation year-on-year to £2.5bn via exisiting investors including Goldman Sachs.

However, in contrast to Woodford, the Jupiter funds’ private exposure essentially relates to one apparently saleable asset in Starling. Woodford’s fund started significantly beyond the 10% limit and was a key backer of multiple loss-making, unlisted companies, an area with which he had little previous experience.

Question mark for Chrysalis

The backdrop may set the stage for more bad news for Chrysalis, however. 

The £563m investment company’s shares have plunged to a more than a 50% discount to the stated value of its portfolio this year on a string of setbacks, the biggest recently being a massive writedown of its stake in Swedish buy-now-pay-later group Klarna.

Portfolio updates since Chrysalis’s latest full net asset value at the end of March make no mention of any tweak to Starling’s valuation due to market movements. As of early July in the wake of the Klarna writedown, the stake had actually swelled to a 25.1% position.

That suggests the investment company is still holding the digital bank at a level based on its April funding round – in contrast to the Jupiter funds, where it has already been cut – and could pave the way for Chrysalis to cut the value of its own Starling stake during the next quarterly valuation of its portfolio.

Both the trust and Jupiter funds are due to update their private company valuations in the coming weeks to reflect the situation at the end of the latest quarter in June.

Chrysalis declined to comment.  

Jupiter has also come under recent fire for its open-ended funds’ stakes in Chrysalis itself, which have generated more than £200m of losses in the last year for investors.