Chrysalis (CHRY ) flagged its maturing portfolio, refined a capital return policy and said it may take legal action against troubled make-up company Revolution Beauty as it sought to prove its worth to investors ahead of a critical continuation vote.

In the 12 months to the end of September, growth capital trust Chrysalis reported its underlying portfolio had dropped 8.9% to 134.65p largely driven by currency movements, non-asset related costs and decline in valuations of Smart Pensions, Graphcore, Deep Instinct and Sorted.

However, performance improved at the end of the year as to the end of December the net asset value was 143.37p, up 6.5% thanks to the revaluation of buy-now-pay-later lender Klarna and fintech Starling Bank.

Fund managers Richard Watts and Nick Williamson, who are set to leave fund manager Jupiter to set up Chrysalis Investment Partners to focus on the running of the company, stressed that most of the portfolio was profitable or expected to be fund to profitability.

They also reiterated their realisation hopes, pointing to Starling, wefox and Klarna, with the CEO of the latter already teasing the market saying the company was ready to IPO. Klarna was valued at £57m at the end of September.

Revolution revolt

Chrysalis’ board and managers are also hoping to prove their reputation should not be judged by a failed investment in Revolution Beauty.

At the end of 2022 the duo fully divested from their position in Revolution, taking a 90% haircut with taking back just £5.7m of the initial £45m investment.

The beauty company’s shares were suspended from trading at the beginning of September 2022 following a failure to publish its audited results. An independent investigation into the company was ordered which revealed a series of questionable business deals, undisclosed loans and unnecessary stockpiling of inventory.

Now chair Andrew Haining say the company has ‘potential claims’ for actions of deceit, negligent misstatement and misrepresentation.

‘The original share purchase was made on the basis that information provided to the company by Revolution,’ he wrote in the results. ‘During the period in which the shares were held prior to their sale, contained misstatements and material omissions.

Chrysalis issued a formal letter of claim to Revolution on 22 November, which requested a response in 28 days. The response has been received asking for a further 28 days.

The investment company said it ‘is now considering next steps with its retained lawyers, Travers Smith’.

Capital allocation and continuation

As Chrysalis waits for a realisation it confirmed what it would do with the funds through a capital allocation policy, that it will seek approval for at an upcoming annual general meeting on 15 March.  

The proposal would see the board return £100m, likely through a share buyback programme, after it had a ‘buffer’ of up £50m held back for working capital and follow on investments. It currently has £33m in cash.

The board added that it will return at least 25% of net realised gains against historical cost prices, an improvement on the original proposal which was a quarter of net cash profit, with some shareholders presuming this was going to be measured against net asset value.

 The capital return policy is a critical part of the company’s attempt to keep its top shareholders on side ahead of a continuation vote at the agm in March.

Another element of this is a change to performance fee arrangements, which have been in the making since November 2022 after a backlash following a £112m payout to the managers before the company’s shares crashed.

At an emergency general meeting, immediately following the AGM, shareholders will vote on a reduction in the fee for new investment manager, Chrysalis IM.

The performance top-up would reduce from 20% to 12.5% and will be subject to a cap of 2.75% of net asset value (NAV). The current high watermark that Chrysalis’ net asset value must exceed remains at the September 2021 level of 251.96p.

Shares in Chrysalis rose 4% on Monday morning, continuing the strong start to the year, which has seen them rise 7%. However, trading at 81.6p per share they are still at a 44% discount to the end of December net asset value, and a 68% discount to the high watermark for the performance fee.

Top shareholders are Rathbones with almost 5%; Jupiter, whose funds have been reducing their stake but retain 4.6%; and Momentum Global Investment Management with 3.4%.