Jupiter has sold more of its stake in Chrysalis (CHRY ), the deeply out-of-favour growth capital fund that has failed to sustain the growth it enjoyed in the past two quarters.

Investors in the pre-flotation ‘unicorn’ investment company had witnessed some green shoots of recovery this year as the £800m portfolio clocked up two quarters of gains. However, its fortunes over the three months to the end of September have reversed slightly with fund managers Richard Watts and Nick Williamson overseeing a 1.6% drop in net asset value (NAV) per share to 134.56p from 136.86p.

The fair value of the assets in the portfolio fell 3.99p per share over the quarter, but this decline was offset 2.01p by favourable foreign exchange movements.

At 54.4p yesterday the shares trailed at a 60% discount to the updated NAV, having fallen 29% this year.

Investors lost faith in the closed-end fund, which suffered in the growth selloff as valuations of unlisted companies came under scrutiny, pushing the shares 30% lower this year. Chrysalis’s own parent has sold down its stake in the fund, selling off shares in July, August and September.

The number of shares owned by the asset manager has been slashed by 32% from 113m at the end of 2022 to 76m at the end of September, leaving the group with a 12.8% stake in the fund, although it is still the largest shareholder by some margin, with Rathbones coming in second place with 5.2% of the fund.

Ewan Lovett-Turner, investment companies analyst at Numis, said realisation activity ‘will be key to the turnaround in sentiment if [Jupiter] can provide support for valuations and also generate the cash required for the board to execute its capital allocations’. 

Positive signs

The managers have already identified an uptick in transactions and more stability in the market, stating that the ‘broadly flat’ NAV largely mirrored the performance of key equity markets. They said the initial public offering (IPO) market ‘continued to show signs of life’, noting the listing of UK chip designer Arm on the Nasdaq in September.

San Francisco-based online grocery delivery company Instacart and US software company Klaviyo also listed in September, which Watts and Williamson said ‘represents a step in the right direction’.

‘Buy now, pay later’ credit company Klarna, which was once the fund’s top holding but is now the fifth largest position at 7.1% following a shocking $800m valuation write-down last year, provided some good news over the quarter.

It returned to profitability in the first half of the year and signalled it had met the requirements to initiate a listing.

‘The portfolio contains a number of later-stage assets, either profitable or funded to profitability, that we believe will make very attractive targets in due course, with some considered IPO-ready’,’ said the managers.

‘With this in mind, Klarna’s comments in the period that the “requirements have been met” to consider an IPO were encouraging to us.’

Overall, they said key assets are ‘continuing to perform well’ both operationally and financially, and this provides ‘confidence in the potential of the portfolio to drive NAV progression’.

The fund’s largest position, insurance platform Wefox, a 23.5% holding, demonstrated a ‘roadmap to profitability’ over the quarter, and Williamson and Watts are expecting the group to become profitable towards the end of 2023 and to post its first full year of profitability next year.

The duo made one investment over the quarter, investing a further £6.5m in Secret Escapes in July as part of a wider £31.7m fundraise by the travel group in order to refinance existing debt facilities.

‘This capital will enable the company to accelerate marketing spend with a view to driving customer acquisition and ultimately growth,’ said Williamson and Watts.

‘The company is already profitable, but it is hoped that the additional capital raised will result in a faster rate of growth and an even more profitable business in the near to medium term.’

The Secret Escapes fundraise is part of a wider recovery in private equity markets, helped by a clearer picture of interest rates and macroeconomics.

‘Private equity markets have also seen signs of recovery as the interest rate and macroeconomic picture becomes clearer,’ they said. ‘Deal volumes are increasing from a low point in the first quarter 2023, and the tech sector remains key for private equity.’

Lovett-Turner said the quarterly update was solid but the ‘big news’ happened this month, when the fund announced a shareholder consultation on a new capital allocation policy and proposed an overhaul to its contentious performance fee ahead of the continuation vote in April.

‘The shares are currently trading at a 60% discount to the estimated NAV,’ he said. ‘This offers significant value given the operational performance from the portfolio is solid and we believe the changes around capital allocation are a significant positive.’