Chrysalis (CHRY) has announced its annual results for the year ended 30 September 2024, during which its NAV increased by 4.9% to 141.26p per share, while its share price increased by 50.0% to 93.30p per share, although this was still at a substantial discount to NAV of 34% – down from 54% as at the end of September 2024. Some of CHRY’s largest holdings performed well during the year – which was reflected in the increased carrying values of Starling, Klarna and Smart Pension, but this was largely offset by a write down in the value of Wefox and the impact of foreign exchange movements. There was also a write down in Tactus. However, as discussed further below, the majority of its holdings continue to perform strongly. [QD comment: Our James Carthew selected CHRY as his spicier idea in our analysts’ top picks for 2024. Although James was struggling at the half way point, his idea came good at the end with CHRY being the best performing of all of the analysts’ spicier top picks for last year. You can read about how we all got on and check out our ideas for 2025 by clicking here.]

Adviser focused on supporting existing investments

With the trust’s shares continuing to trade at a material discount to NAV CHRY’s investment adviser has focused its efforts on supporting existing investments. During the year, approximately £23m was invested into existing positions – circa £6m in Smart Pension and circa £17m in wefox – while realisations totalled around £54m – with around £45m coming from the sale of Graphcore to SoftBank Group Corp via trade sale and around £9m was realised from Wise. CHRY says that these transactions led to a net capital inflow of almost £31m and £47m of liquidity was available at the year end.

CHRY says that there has been a continued focus on driving the portfolio towards profitability, which is reflected in a 45% improvement in the weighted average PBT of the portfolio – from around £91m to £132m during the period. It adds that the portfolio continues to grow strongly, with the weighted average rate of sales growth over the year at 22%.

Substantial liquidity available

At the end of the financial year, Chrysalis signed a loan agreement with Barclays Bank and, subsequent to the period end, the full £70m available under the facility was drawn down. In addition, the deal to sell Featurespace to Visa completed after the financial year end, which yielded initial proceeds of approximately £79m.

CHRY has used this liquidity position to fund follow-on investments in certain investee companies as well as to return capital to shareholders. As of 7 January 2025, approximately £31m had been used to buy back CHRY’s shares. CHRY currently has a strong liquidity position of approximately £151m, which it intends to use to continue its capital return programme of up to £100m, as previously detailed.

Transition to new advisory business was seamless

During the year, CHRY’s advisory team moved out of the employment of Jupiter and into its own separate structure. This process was overseen by CHRY’s board and its chair, Andrew Haining, says that this transition passed off seamlessly. He adds that he believes that this new structure provides a better foundation for the management of the company in the future.

The majority of the portfolio continues to perform strongly

CHRY reports that the majority of the portfolio continues to perform strongly but that the reversal in value of Wefox has been frustrating. However, its investment adviser has been working to refocus Wefox under new management, with a revised business plan.

Liquidity events for Graphcore and Featurespace

The first liquidity event was the exit of Graphcore, which generated initial cash proceeds of approximately £45m and allowed for a recycling of capital that was used to fund the initial tranche of the share buybacks.

The sale of Featurespace to Visa, which closed post period end, has generated strong returns for shareholders and is likely to yield a 3.0x money-on-money multiple once full proceeds have been received (initial proceeds of approximately £79m were received post period end). The completion of this transaction allows CHRY to meet “the second pillar” of its capital allocation policy (CAP), which is to return £100m of capital to shareholders.

CHRY’s chair says that he is optimistic that further liquidity will be generated in 2025 with the expected IPO of Klarna, which recently announced that it had filed its F-1 with the SEC as a prelude to a listing. CHRY’s adviser believes the first half of 2025 offers an obvious window for Klarna’s IPO, and notes that news flow regarding product announcements has been building in recent months.

Update on the CAP

CHRY’s CAP was a key element of its three-year extension strategy and, during the extension period, CHRY’s board had anticipated the trust would dispose of investments in an orderly way that would allow it to fund both buybacks and, potentially in time, new investments. Within the first year of the extension, CHRY has benefited from a number of important liquidity events which its board now says places the trust in a good position from which to refine its approach to reinvestment and long-term value creation.

The four core potential uses of capital set out in the CAP were: to support existing portfolio companies; to fund the company’s working capital (for operating costs and fees); to invest in late-stage growth opportunities in accordance with the company’s investment policy; and to return available capital to shareholders through share buybacks (or equivalent programmes) where it is economically attractive to do so. CHRY also said that the uses of capital in the future would consider: the prevailing discount to NAV per share at which the company’s shares are trading; the likely timeline of realisations; the likely uses of capital to fund existing investee companies; and the strength of any new investment opportunities. CHRY’s board says that it remains committed to enacting the second pillar of the CAP – the return of up to £100m of capital, as well as supporting the existing portfolio – to ensure the best possible returns for CHRY shareholders. It also expects to return at least 25% of net realised gains on further asset sales, thus ensuring further capital returns to shareholders are possible.

As of the end of December, CHRY had bought back approximately 28m shares at a cost of £26.5m, representing 66% of the initial buyback size of £40m, and 27% of the maximum second pillar of the CAP, namely the return of up to £100m. So far, CHRY’s board has chosen to return capital to shareholders via share buybacks, which it believes maximise the NAV per share accretion available to remaining shareholders but says that the appropriate mechanism of capital return will be kept under review.