Few strategies have struggled in the post-pandemic rotation away from growth stocks quite like Chrysalis Investments .

On a £406m market valuation, the once high-flying investment company is languishing at a quarter of its peak share price from a year and a half ago, and trading at barely half what external valuers think its portfolio of disruptive and mostly private business is worth.

Richard Watts, co-manager of the listed fund, acknowledges investors looking incredulously at that discount to net asset value (NAV) need something to regain confidence.

‘I think people just want to understand the carrying values of companies, are they real?’ he said.  

The manager, who works at Jupiter running the UK Mid Cap fund as well as Chrysalis, says the ‘acid test’ will be realisations. Those look challenging at present with a slowdown in initial public offerings (IPOs)

Watts notes the current IPO drought has already lasted nearly as long as the financial crisis and, while there is no certainty on the timings, the effect could be dramatic when it ends.

‘Absolute appeal’ at IPO

Brandtech was highlighted as a particular flotation prospect in recent results, which emphasised the shift towards profitability throughout the portfolio.

‘We’ve got a number of candidates,’ Watts said.

Alongside the media company, he pointed to Klarna, Starling and Wefox, the German insurance technology business which has become Chrysalis’ biggest holding.

Together these businesses account for more than half of the portfolio. Watts argues that they have all the right ingredients to go public with strong growth, revenues in the hundreds of millions of dollars and, crucially, at or reaching profitability.  

‘They absolutely would appeal to people at the point of IPO,’ he said. ‘Particularly when we’ve been in a world over the last year and a half, where there’s been a dearth of high-quality IPOs.

‘If you look at those four names, that’s over 50% of the NAV of the portfolio right there.’

A flotation in the next few years could be a powerful vote of confidence, and demonstrate that valuations on the rest of the portfolio are ‘fair and reasonable’.

‘Very confident’ on Klarna

Watts acknowledged that the days of loss-making IPOs are probably over with the normalisation of interest rates. But he and co-manager Nick Williamson have been sending businesses a clear message on that front.

Companies have accepted expansion must slow so they can turn a profit more quickly, the fund manager noted. 

That comes after the proportion of Chrysalis holdings which reached profitability, or should be funded to it, hit 84% at the end of March. ‘We’ve literally doubled it,’ Watts said.

‘Profit’ or variations on ‘profitability’ came up 34 times during the uncut version of this conversation.  

Chrysalis’ former top holding Klarna provides one striking example. The leading buy-now-pay-later company’s valuation was slashed by around 85% in a spectacular down round a year ago as investors baulked at paying for growth at any price.

Watts said they are now ‘very confident’ the Swedish company will drive into profitability in the second half of this year, crediting that partly to supporting it in that funding round.

‘These companies have done a lot over the last 12 months… they’ve carried on growing and their balance sheets are in great shape,’ explained Watts.

Starling: ‘Don’t believe everything you read’

While Chrysalis has been a victim of the about-turn in market sentiment, the vehicle – launched by Watts and Williamson when they were still at Merian – has also faced specific controversies, including a performance fee furore.

Jupiter came under scrutiny for its shared position in Starling in Chrysalis and across Watts and his colleagues’ open-ended funds last year.

The firm attempted to draw a line under that with the funds’ sale of the digital bank earlier this year, and by vowing off unquoted investing henceforth.

While part of that sale was to Chrysalis, Watts says they can reassure investors that any potential conflicts of interest are now behind them. He also points out Chrysalis was not the ‘lead investor’ in that deal and so did not set the valuation.

Starling chief executive Anne Boden stepped down in May, in a move which has been connected to investor disenchantment over that deal. Watts pushed back firmly on those rumours, saying: ‘Don’t believe everything you read.’

Overall, despite some setbacks, he argues most of their holdings are still moving in the right direction and, if even a few of their investment theses play out, long-term returns for investors are going to be ‘phenomenally good’.

Other topics discussed in the in-depth interview include:

• Why a share buy-back has never been ruled out.
• A confirmed continuation vote next year.
• Strong underlying growth at Starling and elsewhere in the portfolio.
• The treatment of private company valuations and why it’s ‘probably more art than science’.
• Why Wise is an ‘exemplar’ of the strategy in action.