Stock Picks | Chrysalis - About To Become A Butterfly (again)

19th Jan by donald pond

50 comments 3028 reads

Chrysalis Investments (LON:CHRY) is a company with a short but rich history. It was set up by Merian as a sort of tech/fintech incubator, which then ended up in the Jupiter stable, where it seems to have become an embarrassment. There were some similarities with Cathy Woods ARK Innovation ETF (PCQ:ARKK) and it garnered the same sort of focus in 2021 as the share price went stratospheric.

Obviously, it didn't last. But with a market cap now a little under £400m and an enterprise value of £350m, I think its worth a second look.

First, the caterpillar in the room. Chrysalis gained notoriety as the result of a shocking performance fee, which was earned on the performance during 2021, but only became payable in 2022, when it had become obvious to everyone that the superb performance in previous years was less the result of manager skill and more the luck of being in the middle of a very large bubble. The performance figures year by year bear this out: 2 fantastic years followed by one shocker, coupled with a premium to NAV falling to a discount, and this has been a disaster for buy and hold investors.

Chrysalis runs a concentrated portfolio, taking chunky holdings in a small number of companies. It's biggest winner to date has probably been Wise (LON:WISE) and they still hold a little of that. It highlights that if you have a big stake in a company several years before IPO, you can make many multiples of your original investment.

Right now, the portfolio looks like this:

And while I am cutting and pasting, here's what they all do.

Here's why I think this is a fantastic opportunity. The share price is currently around 65p. The last NAV was 134.65p, or very close to a round £800m.

The NAV report late last October set out how all the companies were doing, and the biggest holdings seem to be thriving. Graphcore looks like a dead duck, but its not a big holding. Anyway, there are 2 specific catalysts that could make the share price rise.

The first is that Chrysalis and Jupiter have agreed a divorce. It is part of a whole raft of changes, the upshot…

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Charles Mitchell

16th May

I have emailed them asking for a RNS to comment on the news story from Sky. Annoyed with myself- avoided Chrysalis Investments (LON:CHRY) for several years for good reasons- bought in a few months ago when it looked like things were moving in the right direction and PE trusts in general were looking more attractive. I will wait to see if they comment (if they do-which I doubt)but my feeling is pretty negative towards them.

OldSchool05

Sky article suggests the following was circulated to shareholders (i.e. Chrysalis Investments (LON:CHRY) ) earlier this month:

“In a memo circulated to shareholders earlier this month - details of which have been obtained by Sky News - Wefox's new executive chairman and chief executive, Mark Hartigan outlined a bleak scenario in which its holding company "becomes insolvent in August, or potentially even earlier".

Mr Hartigan, former boss of the UK-based insurance mutual and friendly society LV=, said that the company was engaged in urgent discussions aimed at stemming losses in its Italian unit, as well as closing operations in Germany, selling part of its business in Poland and unwinding a joint venture in Switzerland.

He warned them: "My key deduction is that Italy has been running on systematically false operating assumptions…and is now insolvent without ongoing Group cash support."

Mr Hartigan also told investors that its liabilities in Germany were "very significant and could introduce a large cash strain on the company".”

If that is the case then this should have been included in the quarterly NAV issued by Chrysalis Investments (LON:CHRY)

KevinS1

17th May

Seems to be a slight over-reaction to the potential news on Wefox.

This mornings RNS says they had reduced their holding to be 14% of the NAV earlier in the year, but still have confidence that things will be OK - or at least that is my interpretation.

I am holding tight, as I would still be hopeful of the other holdings providing a significant uplift ........... and with a following wind Wefox might still have some value.

Northender

Thank you for contacting them, Charles. Their RNS this morning doesn't fill me with confidence. Like you, I wish I had continued to avoid them.

Kevin- I am holding for the moment- at least they had the decency to issue a RNS in response to the Sky story and share price fall.

I went from no holding (as highlighted above) to one of my biggest (if not the biggest) holdings across all accounts - so whilst slightly painful yesterday, it wasn't the end of the world as it has gone up a reasonable amount across the weeks/months.

I still have confidence that we should start to see some floats later this year and I would hope that Chrysalis Investments (LON:CHRY) will get a couple of floats away and all will be OK. I will need to have a think about the sell price though with this latest information.

Bit of a shock last night to come off the golf course and check what had happened to markets during the day to see a -17% against one of your largest holdings. However, it was super easy to find out what had happened by looking at this and the IT boards on stocko, so thanks for keeping these communications going.

ATB - Kevin

For the time being, I have exited my position this morning for a small profit. I just have a niggling doubt about the transparency and ability of management here. I did not get caught up in the previous shortcomings of Chrysalis Investments (LON:CHRY) and can see potential in the overall portfolio. However, I would prefer to be cautious and watch from the sidelines.

It may well be that the Sky News report highlights one scenario, where the CEO expresses that Wefox could be insolvent in the coming months, and there are a number of other 'scenarios' that could play out to Wefox's advantage . Especially following the refinancing mentioned this morning.

However, I'm not comfortable with the explanation given in the quarterly update, which refers to the devaluation as a result of listed peer groups, rather than specifically highlighting serious issues with the operations inherent in the CEO's memo to shareholders.

I am on the verge of exiting at a loss.

doctor dave

Shambles. Poor communication. Attempts to keep information to a minimum. Will take a while to recover from here. I'm out. Better opportunities elsewhere.

Doctor Dave- I am dithering mainly as AVI are the largest shareholders. Ideally CHRY needs to sell Klarna and then use the proceeds in a tender offer at the usual 1% discount- not re-invest the proceeds as they appear to have poor judgement. So in short slowly wind the trust up. Having said that I may sell as I am looking to buy Shopify (TSE:SHOP) - share price has slid back. I used to do a lot of business with the POS team and SHOP have big ambitions.

I have sold Chrysalis Investments (LON:CHRY) at a loss-my fault should have stuck to my original view of the company.

ken mitchell

This isn’t much help to anyone undecided about whether or not to sell Chrysalis Investments (LON:CHRY) but might be useful as a general point. It might also annoy some. I’m very good at doing that!

I always sell on bad news or a disappointing update as there are always so many alternative investment choices that under promise and over deliver, and the result of this sell on bad news tactic is very few if any big losers in our portfolios. (My biggest loser is Henderson Far East Income (LON:HFEL) down 15% and dividends have more than covered that loss)., I used to do what so many small investors do and continue to hold after bad news and look for silver linings. The result can be a portfolio of too many duff investments.

So I sold Chrysalis Investments (LON:CHRY) yesterday at 78p and then after the markets had closed remembered I had a second stake I had forgotten about. That one went this morning at a lucky 82p after the temporary rise on the unconvincing update.

Sometimes the share price does go up after I’ve sold, but far more often it goes down. AND the proceeds of the sale can go in to an alternative investment. If that alternative does as well or better than the investment sold on bad news, then so what if the one sold also goes on to do well.

Ken

I think there is a lot to be said for this approach. The investment universe is large and there are always more stones to turn over. There is also the difficult psychology of continuing to look at a position which you are no longer confident in or trust. The benefit of a private investor is being able to move in and out of most stocks / trusts.

Brilliant Leader

18th May

Hi Ken

I’m totally with you on this approach. I think of it as having a portfolio mindset - anything that looks like it will cause damage to the portfolio is jettisoned as soon as the bad news becomes apparent (e.g. profit warnings).

i’m not sure why people hang on to be honest - Failure to admit being wrong? Fear of realising a loss? Falling in love with the share? I have learned through bitter experience over the years that successful investing is as much about avoiding the losers as it is about picking the winners. And like you say, there always other investment options available.

Cheers
Simon

FOMO is always a force. I (unhappily) take losses- the acceptance of an error of judgement/material change is an important aspect of investment. I am fortunate to have spent 10 years in stockbroking- through some bad as well as good times. Black Monday in 1987 still rankles- I was luckily at work-dumped the entire portfolio and then bought back at what I thought was the bottom -same day. The market continued to fall that week. Harsh lesson i9n trying to be to smart and not realising many had struggled to get into work- pre Internet days .

Unprecedented

20th May

Interesting article here https://www.thisismoney.co.uk/money/markets/article-13432943/Former-LV-boss-Mark-Hartigan-old-tricks-uses-scare-tactics-sell-latest-tech-firm.html

Perhaps Wefox is the ‘likely disposal’ recently alluded to

Very interesting Unprecedented. I can see this becoming a minor version of Hipgnosis Songs Fund (LON:SONG) with Hartigan getting booted out and someone else coming in to steady the ship before getting a decent sized float away - all complete guesswork.

I thought long & hard over the weekend about what to do with my Chrysalis Investments (LON:CHRY) holdings - and ultimately decided to hang on.

Whilst it is a kick in the teeth, it is one of a large number of investments and if they can get 1 or 2 away and close the discount I still think there is a major upside in their SP.

I am happy to keep holding and will keep a close eye on things and see how they go. I see the SP was up 4% today and the volume appeared to be a more normal level - I take this as a good sign that there was not another barrage of sellers having spent the weekend deciding what to do.

Interestingly the Money Makers podcast this weekend interviewed Richard Watts, but it was recorded before Thursday so no mention of the We Fox issue. Although Jonathan Davis did say he would go back and ask him for a comment.

Kevin- The SONG analogy might be the way. I suspect AVI are getting involved. But I am out- made an error buying sold at a loss and onto other opportunities.

donald pond

21st May

Chrysalis Investments (LON:CHRY) is fascinating though. Because it only holds a handful of investments you can drill down into them, and each one is its own soap opera. If the news about wefox is negative - though when the company knew, whether it was in the last NAV, and the degree to which it is a product of the CEO seeking to maximise his personal rewards are all “known unknowns” - then the other large holdings appear to be firing on all cylinders. Lots of positive news out there about Klarna’s AI engines and their uses in customer service and programmatic advertising, Starling’s “Engine” division delivering start up alternative banks in Romania, Australia and with a pipeline elsewhere, Featurespace’s DIANNA AI empowered cyber fraud prevention system. All of these look like potentially materially important and not factored into current valuations at all. I am as bullish here as ever, tbh. The nature of the business is that there will always be some failures, but the successes should be huge winners. The IPO drought has, imo, killed off the likely failure, but what is left - Starling, Klarna, Brandtech, Smart Pension and Featurespace in particular - look like very good businesses that will be around, and growing, for a very long time.

15th Jun

Last nights Citywire update gave some background to yesterdays SP fall in Chrysalis Investments (LON:CHRY)

https://citywire.com/investmen...

Article below;

Shares in Chrysalis (CHRY) have taken another knock after a report of a €550m (£463m) bid approach for Wefox that could leave the fund and other shareholders with the riskiest rump in the loss-making insurance fintech.

Bloomberg reported that insurance broker Ardonagh is preparing an all-share offer of €350m up front with €200m in earn-out payments if Wefox meets subsequent targets. Abu Dhabi sovereign wealth fund Mubadala Investments is said to support the plan as under the terms of its investment in Wefox it is guaranteed to double its initial outlay on a sale of the company.

Wefox founders, Chrysalis and fellow investor Target Global are said to object to the deal, however, as it would split the company in two with Ardonagh taking the core of the company and leaving other shareholders with its technology platform and Swiss business. That would put them at risk at of losing their entire investment if they could not turn round the remaining operations.

Chrysalis, which has 14.4% of its assets in Wefox, is reported to be arranging €50m (£42m) of financing for the insurance platform of which it would provide €15m (£12.6m).

In a first quarter update last month, Chrysalis said it had total liquidity of £27m at 31 March made up of £16m in cash and £11m in shares in Wise (WISE), the money transfer company.

According to Bloomberg, a presentation by Mubadala showed Wefox lost over €100m last year and may need up to €70m in fresh capital this year. It is engaged in talks to stem losses in its Italian unit, close operations in Germany, sell part of its business in Poland and unwind a joint venture in Switzerland.

Chrysalis shares slid 4.6% to 76.3p, a 48% discount to their net asset value per share of 147.5p at 31 March and 10.4p below the level we tipped them last month.

They stand just above the level they began the year at with hopes for a Klarna flotation next year, a big disposal flagged in December and encouraging results from Starling Bank offset by the problems at Wefox.

Before today’s fall, the shares had gained 15% in the past year but had lost 64% over three years.

In first quarter results early last month Chrysalis wrote down the value of Wefox by a third, which Deutsche Numis, its joint corporate broker, said implied a $3.4bn valuation compared with the $4.5bn put on it in a Mubadala-led funding round two years ago.

Chrysalis - about to become a butterfly (again)

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Donald Pond

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