Chrysalis Investments (CHRY ) is considering its future once again as its top shareholder calls for an early continuation vote and the rapid pace of asset sales accelerates a plan to buy back £100m of the deeply discounted shares.

The £508m London-listed investment company, run by Richard Watts and Nick Williamson, announced a small drop in the value of its portfolio of fast-growing private businesses this morning, alongside an update on its capital allocation policy (CAP) and a fresh consultation with shareholders. 

The plans centre around what to do about its extremely wide discount, which stood at more than 41% yesterday. The vehicle’s £508m market value is far below the estimated £866m valuation for its technology-heavy portfolio, according to Deutsche Numis data. 

In announcement today, Chrysalis revealed Asset Value Investors – which is its largest shareholder with a more than 16% stake and also runs the AVI Global (AGT ) investment trust – has been pushing for a vote on the fund’s future next year.

A letter from AVI to board, co-signed by investors which own 27% of the listed fund in total, requested that the next continuation vote be held in 2026, which is a year earlier than currently planned. 

AVI, which declined to comment further, would presumably vote against continuation, leading to all assets being sold and a wind-up of the investment company. 

While the board has rejected the proposal, saying 2027 remains the best time for the next continuation vote, it will stage a shareholder vote on how capital is currently being allocated.

Having spoken to around 50% of the share register already, the directors have also launched a formal consultation exercise to find out what investors want from the fund. Options include considering whether alternatives to share buybacks, such as tender offers, might be a preferred way to return capital to investors after realisations, such as the recent sale of InfoSum. 

The possibility of a dual share class structure is also being considered. Looking at examples elsewhere in the sector, potentially, that could lead to realisation shares for those who want holdings to be sold and their money to be returned, while a continuing pool of shares would give others the option to maintain exposure to the current investment strategy.

Changes to the board are likewise under consideration, with findings to be shared in the final quarter of this year. 

Capital allocation questions

Chrysalis’ current CAP was green-lit by investors in March 2024 at the same time as they offered 97% support in a continuation vote. The policy states that as long as the fund maintains a £50m cash buffer, it will spend £100m on buying back its shares – to try to address the gaping discount. After that, at least 25% of net profits (versus original cost) from asset sales will be channeled into buybacks.

The latest update reports £57m has been deployed to date. 

That has been powered by cash receipts of £175m so far, potentially rising to £185m, from the sales of Graphcore, Featurespace and InfoSum for higher-than-expected sums. 

Chrysalis now has access to about £153m of liquidity, split between a £70m Barclays loan facility and its own cash, as well as about £3m of shares in London-listed Wise (WISE).

‘At the current pace, [Chrysalis] is on track to meet the full £100m target by September 2025 – achieving in 18 months what was initially expected to be achieved in 36 months,’ said the board. 

The directors acknowledged the around 40% discount was too wide, although they did reference some peers being on wider discounts. 

Shares in rival Molten Ventures (GROW ) are, for example, trading nearly 60% below reported portfolio value. 

However, the directors also observed that the Chrysalis portfolio is in a stronger position today than expected, ‘with a higher weighting in mature, break-even or profitable companies’.

About 88% of the portfolio (representing 81% of underlying NAV) is now profitable, a rate that has roughly doubled in the last year. 

Additionally, Klarna’s IPO has been delayed but remains committed to a stock market flotation, which the board said would generate another £125m of proceeds, based on the current valuation. 

Still, the board confirmed that no new investments would be made before the next annual general meeting – likely to be in March 2026, and latest next June – when investors will vote on whether to reaffirm the CAP. 

Winterflood analyst Shavar Halberstadt said clearly some Chrysalis investors want the fund to be ‘in a holding pattern’ for the next year, despite its developing strong track record. 

‘While we understand investors’ frustrations with the fund’s prolonged wide discount, we believe this is the wrong call,’ he said. 

‘Sitting on capital when the environment is distressed is bound to miss out on opportunities and foregoes the ability to diversify in a risk-off environment. The excessive focus on capital discipline represents an overreaction, in our view, leading the fund to enter a form of pre-emptive wind down.’

Peel Hunt’s Anthony Leatham was more more supportive, saying the shareholder consultation could provide a further catalyst to narrow the discount.

‘The consistent messaging around CHRY’s CAP, the quantum and run-rate of buybacks, the commitment to future capital returns, and no new investments should provide support for the rating as we approach the 2027 continuation vote,’ he said. 

First quarter slip

Separately, Chrysalis reported its portfolio NAV was 152.6p per share at the end of March, a decrease of 4p, or 2.6%, in the first three months of the year. 

Klarna and Brandtech were both written down after share price falls for listed peers in a turbulent quarter for tech, while the £25.1m spent on buybacks contributed 2.4p per share. 

The investment company’s shares rose 4.2% to stand at 98.7p on Thursday afternoon – for an optical 35% discount. 

‘Starling remains the largest position within the portfolio, and we believe the company has multiple levers for growth, some of which have the potential to transform its valuation basis,’ said Watts and Williamson. 

‘While it is disappointing that recent stock market volatility has delayed the IPO of Klarna, we do not believe these conditions will have a detrimental impact on its financial performance, placing it in a good position to float when uncertainty abates.’

Shareholders in Chrysalis have seen a 4.2% gain over five years, according to Deutsche Numis. However, the shares remain more than 60% down from their September 2021 peak at the height of optimism for fast-growing tech companies.