Chrysalis Investments’ (CHRY ) is looking to sell up to 19% of its portfolio in loss-making companies, adding to investors’ fears that further write-downs on its investments could delay the Jupiter growth capital fund’s recovery from a traumatic 2022.

A first quarter update today revealed the late-stage private equity fund’s net asset value (NAV) fell 13.2% in the last three months of last year, taking its total loss for 2022 to 46%.

Last year’s slump was largely caused by the huge write-down of credit provider Klarna at its $800m fund-raising in April, and also by declines in previously unquoted companies whose shares fell in the bear market after flotation.

All this led to a massive de-rating in the shares, which plunged 69% last year as investors feared more losses would come as the bubble in disruptive ‘unicorn’ growth stocks unwound.

Some also dumped the stock in disgust at the £112m performance fee Jupiter and managers Richard Watts and Nick Williamson extracted at the top of the market in 2021, although the company is revising the fee so that can’t happen again.

Chrysalis today didn’t specify which of its 13 holdings were responsible for most of the latest 19.53p drop in NAV per share to 128.26p at 31 December, but Stifel analyst Iain Scouller said comparison with annual results to September published just yesterday showed steep declines in four of the portfolio’s holdings.

The writedowns are the result of the fund’s new independent valuation committee taking a more market-based approach to valuing investments, as opposed to mainly looking at the price investors had paid in their most recent fund-raisings.  

Scouller said insurer Wefox and Starling bank, whose commercial progress has been strong, both fell about 18%, and Graphcore, the British semi-conductor maker successfully tapping into the boom in artificial intelligence, slid 27%, while Sorted, the retail delivery management platform that has had a more difficult 18 months, halved.

All this is backward looking, of course. In its statements today and yesterday, Chrysalis reiterated the message it gave in December’s capital markets day that two thirds of the portfolio was either profitable or was expected to be funded to profitability. Another 14% is in businesses with enough cash to survive the next two years.

With marketing specialist Brandtech, the fund’s second biggest holding, and even Klarna, now relegated to ninth position in the portfolio, among those said to be growing quickly, the managers were upbeat.

‘We believe the portfolio is attractively valued versus listed peers, particularly given its rate of growth. We continue to be pleased by the overall trading performance of the portfolio and of the major holdings in particular,’ Watts and Williamson stated today.

With the shares currently trading at 83p, Chrysalis clearly offers some kind of value on a hefty 36% discount below the December NAV. But today’s 4% share price decline shows investors’ concerns at the latest write-downs and the challenge Chrysalis still faces with stock markets closed to new flotations.

With IPO exits for the moment closed, Chrysalis yesterday set out its three options for the 19% of the portfolio that is unprofitable. These are:

• a follow-on funding from Chrysalis, which has £66m in cash and £12m of shares it can sell in Wise, the money transfer specialist;
• a follow-on from other investors that would dilute the fund’s stake;
• or selling stakes to another investor or trade buyer.

In the current environment, any of these options could involve further big cuts in valuation.

‘We think the NAV remains vulnerable to funding downrounds at some of the underlying companies, and we had been projecting a NAV declining to around the 120p level, with us now getting close to this,’ said Scouller.

Numis Securites, a corporate broker to Chrysalis, agreed the bigger-than-expected writedown in the last quarter could draw a line under last year and start to restore investor confidence. ‘The share price had been implying investors were expecting more write-downs and we believe that it is healthy to see the NAV reach a level where investors may start to believe the valuations are conservative.’ 

What would really help improve the share price rating and narrow the wide discount is another disposal, such as adviser investment platform Embark, on which Chrysalis doubled its money in a sale to Lloyds bank in 2021.

Another gain like this in the absence of further writedowns could see the depressed shares start to bounce back this year. At the moment that feels like a lot to hope for, but if the recession is shallow rather than deep, it might be possible.