Chrysalis (CHRY ) says it must avoid a ‘de facto wind-down’ that could be caused by a blanket return of capital to investors after Klarna completes its expected listing this year.

Buy-now-pay-later group Klarna, the third-largest position in the £826m portfolio of unquoted companies at 14%, is expected to float this year after filing with the US securities regulator last year.

Chrysalis managers Richard Watts and Nick Williamson have suggested Klarna will go public in the first half of the year, with analysts discussing a valuation of $14.6bn (£11.8bn) for the Swedish fintech firm in October.

The last valuation by Chrysalis at the end of September valued its position at nearly £121m.

In full-year results, chair Andrew Haining said a Klarna initial public offering (IPO) ‘would not only provide the company with significant further liquidity, but could result in an uplift to the current valuation’.

While the IPO will clearly be positive for the fund, Chrysalis will find itself at a crossroads over whether to return a significant sum to shareholders – extending the capital allocation plan that has already seen it commit to buying back £100m of shares – or hunt for new, unquoted tech ‘unicorns’.

Haining said the fund is trying to balance the need to stay committed to its capital allocation plan with the need to ‘achieve and maintain scale’ in the portfolio.

‘If capital is simply returned, then portfolio concentration increases, and firepower and scale decrease. If this continued, it would effectively imply a winding-down of the vehicle,’ he said.

Haining said a ‘de facto wind-down’ was contrary to the plan set out at the continuation vote, which passed overwhelmingly in March last year. He added it would increase ‘the perception of risk’ around the portfolio and ‘could lead to the discount…beginning to widen again, undoing the impact of the capital return undertaken to date’.

Pressure on Chrysalis to strike the balance may grow as activist Asset Value Investors, which feasibly could push for a more rapid programme of capital returns to shareholders, increases its stake. 

The asset manager, already Chrysalis’s top shareholder, disclosed this week that it had increased its stake from 10.5% to 15.4%. 

The group manages AVI Global Trust (AGT ) and MIGO Opportunities (MIGO ), both of which have positions in the fund.

AVI declined to comment.

Chrysalis shares currently trade at a 30.5% discount to net asset value (NAV) – giving it a £574m market value – versus a staggering 60% at the nadir of sentiment towards the fund.

‘Key trigger point’

Deutsche Numis analyst Gavin Trodd said the managers and board were right to be mindful of the risks around the Klarna IPO.

‘We expect investors will view this potential exit, and what to do with any proceeds, as a key trigger point to re-examine Chrysalis’ strategy,’ he said.

‘The manager previously commented that it is considering the possibility of further investment activity. In our view, the bar for new investments is high and we believe that some investors are likely to currently favour the return of capital, despite the discount narrowing in recent months.’

Stifel analyst Iain Scouller said there has been a ‘significant improvement’ in balance sheet liquidity, which stands at £151m after the sale of Graphcore to Softbank, the £79m received as an initial consideration from the sale of Featurespace and a £70m loan facility agreed with Barclays.

He said Chrysalis was a ‘high-reward-high-risk portfolio’ given 75% of the NAV is invested in the five largest investments: Starling, Wefox, Smart Pension, Klarna, and The Brandtech Group.

‘We think the recent significant strengthening of the balance sheet does justify the shares trading on a narrower discount than in the past couple of years,’ said Scouller.

Chrysalis’s full-year results to the end of September, most of which had been pre-announced, showed that NAV rose 4.9% to 141.4p per share over the year, with increases in the carrying value of Starling, Klarna, and Smart Pension.

The listd fund also confirmed it had spent £31m buying back shares since September.

The increases in the value of key investments were somewhat offset by the 54% write-down of the Wefox holding last summer. The managers invested €20.5m (£17.3m) in the struggling insurance firm in a bid to put it back on the path to profitability.

The closed-end fund still has some way to go to putting its performance back on track, with the NAV declining 40.6% over three years, and the shares down 53% over the same period.