Chrysalis’ Williamson: The IPO market isn’t broken but gains must come in other ways

Nick Williamson, co-manager of Chrysalis, is not relying on flotations to prove why shares in the growth capital fund should not trade at a 50% discount ahead of a continuation vote in April.

Nick Williamson, co-manager of Chrysalis (CHRY ), is quietly confident the flotation market will revive next year but thinks trade sales and other ways of realising gains from its unquoted companies are going to be critical as the growth capital fund looks to keep investors onside ahead of a continuation vote.

The closure of the listing market on both sides of the Atlantic has been a headache for Chrysalis, whose late-stage, private companies have sat in the wings while shareholders grow impatient at the lack of capital returns.

The disappearance of an initial public offer (IPO) route for its portfolio companies could fast become a life-or-death issue for the £797m investment company, whose shares trade at half their underlying asset value with a continuation vote looming at its annual general meeting next April.

Williamson, who spoke to Citywire in an interview before this week’s news that he and co-manager Richard Watts would leave Jupiter Asset Management to set up a new firm under which they will run the Guernsey closed-end fund, said while his portfolio is as prepared as it’s ever been for a public listing, it is ‘a bit of an ask’ for an IPO to occur in the next three to four months given ‘the state of the market’.

‘The shape or portfolio is probably better for an IPO than it has been before because you’ve got more companies which look more like, or at least heading in the direction of, listed market peers, ie, profitable,’ Williamson said.

The fund manager pointed out that at by the end of March, 84% of Chrysalis’ assets were profitable or funded to anticipated profitability. Since then more of its firms, including top-holding Klarna, have reported a swing to the black.

However, while there were market hopes of an IPO resurgence in early autumn these have been crushed as several candidates recently announced they were rethinking or delaying their debuts on the London Stock Exchange.

Williamson said the IPO market is ‘an important exit route’ for Chrysalis but said there were a number of unquoted companies in the 16-strong portfolio that were much more likely to exit via a trade sale and a realisation that ‘would be very helpful’ ahead of the vote.

‘We have to try to think of other ways which we might be able to release liquidity…we’re always kind of keeping an eye out for that,’ he said pointing to the sale of Embark to Lloyds, which was announced in July 2021.

The top five investments of the portfolio made up 72% of assets at the end of September, with two more companies, cybersecurity firm Deep Instinct and financial crime fighter Featurespace taking 6% apiece with the remaining nine companies accounting for 4% or less.

These smaller firms, which are unlikely to IPO, have struggled somewhat in the recent economic environment, with earlier-stage companies that are further away from profitability being hit the hardest, according to the manager.

‘If you’re a more marginal business, or hadn’t quite scaled, it’s more difficult now with more expensive cost of funding to persuade people to invest,’ Williamson said.

Top listing picks

Unsurprisingly the manager’s top pick for an IPO is fintech Klarna, which made up 7% of the portfolio at the end of September.

The Swedish buy-now-pay-later company has publicly stated its intentions to float and while the location and timeline for a listing has not yet been disclosed it recently set up a new legal entity in the UK.

The road is not going to be smooth for Klarna, despite generating $12m (£9.5m) of pre-tax profit in the third quarter, a huge turnaround from its roughly $200m loss last year.

The company still needs to convince investors about its business model as its last valuation put the company at $6.7bn, an 85% cut the height of the pandemic internet boom when it was valued at $46bn.

Starling Bank, which makes up 18% of assets, is also ‘ticking a lot of boxes’ when it comes to a public listing. ‘It’s profitable, it’s got great growth and a massive market opportunity,’ said Williamson.

However, the manager added that with Starling under an interim boss after chief executive Anne Bowden stepped down in June, the company needed to establish firm leadership before contemplating a move to the main market.

IPO conundrum

A public listing in the UK has been tricky, but not impossible, over recent months, but what worryies investors and companies is the punishing environment which has seen newly-listed stocks take a hit.          

London’s most prominent IPO this year, fintech CAB Payments, saw its shares collapse 72% as it scrapped its revenue forecast just three months after flotation. In the US, grocery-deliver app Instacart, which listed in October, is already languishing below its issue price of $30 to trade at $25.51 a share.

Referring to the failure of CAB payments, Williamson felt the ‘esoteric situation’ around the company, or a valuation predicated on aggressive growth forecasts that were then missed, led to the steep falls and it did not signal a collapse of the IPO market.

‘It’s not necessarily saying the market is dead, is just saying that they’ve missed their expectations they set at IPO,’ he commented. ‘I think the fact that those kind of guys have gone out the door is good news because that’s part of the trailblazing process that needs to happen.’

He pointed to UK chip designer ARM’s recent $54bn flotation in the US as more of a success story. The company listed on the Nasdaq technology exchange at $51 per share and then saw its stock climb 25% on debut. It has pulled back since but is still trading at $62.21 per share.

‘At the moment there is a better outlook for realisations I would say than there was six months ago in terms of the direction of yields and what you’re seeing in terms of equity markets,’ the manager said.  

Capital allocation and continuation

Ahead of the continuation vote the trust has been canvasing shareholders on a capital allocation strategy, the final version of which it will release with its annual accounts.

Under previously announced proposals, the company will first have a ‘prudent cash reserve’ which it suggests should be about £50m. It will then prioritise returning capital to shareholders, targeting buying back £100m of shares and after which it will balance retaining capital for future investments and returning 25% of profit from realisations or disposals to shareholders.

Williamson urged shareholders to understand the logic for allowing some reinvestment, stating that otherwise the investment company would become irrelevant. However, he added he understood the 50% share price discount needed to narrow to justify that use of capital.

The manager also highlighted that there have been a number of reviews around supporting the ailing UK equity market, and while Chrysalis is ‘not the solution’, supporting the domestic stock market was part of the reason the company was set up.

‘It feels a bit counterintuitive to me to be shutting down something which hopefully is trying to get companies to a position where they can float,’ he said adding that while they were agnostic about if companies picked the US or the UK to list, there were ‘definitely’ portfolio companies that would pick the UK. 

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