This article first appeared in the Telegraph’s Questor column on Thursday.

‘Float like a butterfly, sting like a bee,’ Muhammad Ali famously said in 1964 before his fight with Sonny Liston. Today his words are also apt for Chrysalis (CHRY ), a private equity fund that helps incubate unquoted companies until they float on the stock market. Its shares have been the subject of an Ali-style pummelling but are picking themselves off the floor.

Having listed on the London market in November 2018 at 100p, Chrysalis unfurled its wings and fluttered to a 271p peak in September 2021, three months after this column first tipped them at 243p.

Unfortunately, a nasty sting followed as soaring inflation and interest rates led to the write-down of its investments, including its biggest position in Klarna, the buy-now-pay later credit provider. This outraged investors as Chrysalis fund managers Richard Watts and Nick Williamson and their then employer Jupiter Asset Management shared a £112m performance fee before the value of the fund’s stake in the Swedish fintech was slashed by a third.

The dire sentiment this caused swatted Chrysalis like a fly and the shares plunged, before bumping along for year to hit a 53p low last October.

Hopefully, these problems are in the past because a transformation, worthy of a real chrysalis, is underway. Having been the cause of its downfall, Klarna, the fourth biggest of 13 unlisted holdings, is in the forefront of a comeback by the £500m investment company.

First quarter results last week held out the prospect of a £100m windfall for Chrysalis should Klarna, in which 11.4% of the fund’s assets is invested, float in the US with a $20bn (£16bn) valuation this year.

Together with the potential £50m disposal of another investment flagged in December, Chrysalis could soon be flush with enough cash to start returning capital to shareholders.

In return for granting Chrysalis a further three years at a continuation vote in March, shareholders extracted important changes from the company and its managers, who left Jupiter last year to set up their own business dedicated to the fund.

Their performance fee has been cut and will not be paid until Chrysalis repairs the damage from its crash. In addition, the company has agreed that once a £50m cash buffer has been set aside, it will return the first £100m it makes on sales and flotations to shareholders.

This will be done by buying back its shares which, because they are cheap, will boost the value of shareholders’ remaining investments, as well as put money in their pockets.

The company will also pay out a quarter of all future gains made on disposals, ensuring the managers don’t eat all the profits first like a very hungry caterpillar.

After a dormant period when the shares languished as much as 61% below the value of its investments, Chrysalis has come to life, rallying 61% to 86.5p in the past seven months, although the stock still trails on a big discount of 41%.

While that leaves Chrysalis 68% below the 2021 high and 15% less than its launch price, the rebound looks secure as stock market flotations accelerate after a two-year hiatus and valuations look more rational.

Encouragingly, activist Asset Value Investors has become Chrysalis’ largest shareholder, disclosing an 8.4% stake held by its two investment trusts, AVI Global (AGT ) and MIGO Opportunities (MIGO ).

AVI’s involvement is good news because it can ensure Chrysalis keeps its promises. The company last year led a successful shareholder rebellion at Hipgnosis Songs, ultimately leading to what should be a profitable sale of the royalties fund,

Tom Treanor, AVI’s head of research, believes Chrysalis is at a “key inflection point” and could deliver significant gains now its investments are conservatively valued and markets more supportive.

The fund’s trading update also contained good news about Starling, a challenger bank that accounts for 24% of Chrysalis, which is hastening its profits push with Engine, a digital platform increasingly sought after by other banks.

However, wefox, the online insurer that was Chrysalis’ biggest holding at 23.5% of the portfolio in September, saw its stake held by the fund cut by a third, or £62m. This reflected share price falls in listed rivals and a shakeup under new executive chairman Mark Hartigan. 

When Questor last looked at Chrysalis in September 2022, it suggested investors needed nerves of steel but said it was a good time to buy the shares at 71.9p. That remains the case but with the shares’ 19% rise since then confirming our view that they have passed the worst.

‘Buy’ Chrysalis

Key facts

Market value: £500m
Year of listing: 2018
Discount: 44%
Average discount over past year:  48%
Yield: Nil
Most recent year’s dividend: Nil
Gearing: Nil
Annual charge: 0.78% (Sept 2023)