REG - Chrysalis Invs Ltd - Quarterly NAV Announcement and Trading Update

Chrysalis InvestmentsAnnouncement

02/05/2024 07:00

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RNS Number : 8912M  Chrysalis Investments Limited  02 May 2024

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(EU) No. 596/2014 which forms part of domestic law in the United Kingdom
pursuant to The European Union Withdrawal Act 2018, as amended by The Market
Abuse (Amendment) (EU Exit) Regulations 2019.

 

2 May 2024

 

 

Chrysalis Investments Limited ("Chrysalis" or the "Company")

 

Quarterly NAV Announcement and Trading Update

 

Net Asset Value

 

The Company announces that as at 31 March 2024 the unaudited net asset value
("NAV") per ordinary share was 147.46 pence.

 

The NAV calculation is based on the Company's issued share capital as at 31
March 2024 of 595,150,414 ordinary shares of no par value.

 

March's NAV represents a 4.09 pence per share (2.9%) increase since 31
December 2023.

 

Movement in the fair value of the portfolio accounted for approximately 5.15
pence per share, with foreign exchange generating an adverse movement of
approximately 0.87 pence per share. Fees and expenses make up the balance.

 

Portfolio Commentary

 

Richard Watts and Nick Williamson, Managing Partners of Chrysalis Investment
Partners LLP comment:

 

"The Company's NAV rose modestly over the period, driven by the on-going
positive performances of assets such as Starling, Klarna and Smart, the latter
having been written up by approximately 24% (translating to 3.7p of NAV), as
per the March guidance relating to Chrysalis's follow-on investment.

 

Klarna saw a rise in its assessed valuation multiple, which was the main
driver of its valuation uplift. Starling saw its valuation rise due to less
prominence placed on valuation metrics that were calibrated back to the time
of the Company's acquisition of secondary stock in February 2023. wefox was
marked down in the period, as discussed below.

 

As we look forward, we remain cautiously optimistic about a rebound in market
activity, which could lead to opportunities to realise significant liquidity
for the Company. In addition, the process around the "likely disposal"
announced in December 2023 continues, and we hope to be able to update the
market in the coming months."

 

Market Environment

 

Market action remains broadly favourable, but not ebullient, particularly in
the UK where risk appetite, as measured by IPO activity, has been subdued.
Over the quarter, only two IPOs occurred on the LSE's

Main Market and AIM, raising just over £6 million in total. This comes on the
back of 2023, which saw only 21 IPOs in these two markets, a level
commensurate with 2009, when the global economy was recovering from the GFC.

 

Action elsewhere has been more positive: the US has seen 63 IPOs so far in
2024, up nearly 7% on the same period in 2023 (Source: Stock Analysis, data as
of 1 May 2024), and Europe ex UK has seen eleven IPOs in 1Q24, versus
approximately five in 1Q23 (Source: PwC, LSE and Chrysalis Investment Partners
LLP).

 

There are also signs of life in the trade sale market, where consolidation is
occurring, often at high implied take-out multiples. Examples pertinent to the
portfolio include LiveRamp acquiring Habu (a data cleanroom company; analogous
to InfoSum) for $200 million - with estimated historic revenues of c$9.4
million and expected FY25 revenues of $18 million, implying 11x-21x revenues -
and a number in the cyber security space, including Crowdstrike buying Bionic
(a cyber security company; analogous to Deep Instinct) for $350 million, which
had estimated revenues of $10 million.

 

This suggests that those assets occupying a strategic niche and/or performing
strongly in their markets are proving attractive to competitors.

 

Portfolio Activity

 

Over the quarter a modest, expected investment of approximately £6 million
was made into Smart Pension. As with most of the portfolio, Smart continues to
look for ways to operate more efficiently, and this additional capital will
help it to continue to grow - potentially via M&A as well as organically -
and support the company to profitability. The Company believes the latter
state is achievable in relatively short order. Elsewhere, the position in Wise
was reduced, taking advantage of the rising share price, yielding
approximately £3 million.

 

Portfolio Update

 

The portfolio in aggregate continues to perform robustly:

 

Starling

 

Starling continues to generate significant monthly profitability; over the
quarter, there were two important pieces of news flow.

 

The first concerns the appointment of Raman Bhatia as a new permanent CEO.

 

Raman will take over from John Mountain, who is interim CEO, following the
decision of Anne Boden to step back from the role in 2023. Prior to joining
Starling, Raman was CEO of OVO, a leading energy retailer in the UK, and
before that was Head of Digital Bank for HSBC's Retail Banking and Wealth
Management business in the UK and Europe.

 

The second centres around Engine by Starling ("Engine"), the
Platform-as-a-Service ("PaaS") offering which enables Engine to deliver a
cloud native, modular, API-based banking platform to businesses that want to
rapidly deploy a banking solution. This technology is the same that powers
Starling Bank.

 

In the prior quarter, two contracts were announced. The first was with Salt
Bank in Romania, and the second with AMP in Australia, which is expecting to
spend A$60 million setting up a new digital bank.

 

In the quarter, Engine demonstrated the power of the platform with the
successful "go-live" of the Salt Bank iteration, which managed to on-board
100,000 customers in two weeks, making it one of the fastest growing banks in
Southeastern Europe.

 

The Company views Engine as potentially significant in terms of Starling's
long-term enterprise value as it opens up a wider addressable market for
Starling, in an area - recurring software - that typically commands high
valuation multiples.

 

wefox

 

wefox continues on its road to profitability; while it achieved a full month
of profitability in December 2023, the Company is aware that there are also
seasonal factors that make extrapolation to a full year inadvisable. Revenues
increased to $800 million in 2023 while the cost base fell year-on-year.

 

The company is continuing to invest in its technology platform, which uses AI,
data analytics and automation to streamline insurance workstreams, and caters
to insurance companies, brokers, partners and customers. The Company views
further monetisation of the platform as a key future value driver and was
encouraged by the announcement of the WindTre partnership towards the end of
last year.

 

The company intends to continue its focus on profitability this year, which is
likely to involve further cost base optimisation and concentration on its
distribution proposition. The Company has previously highlighted the
appointment of Mark Hartigan as Executive Chairman and CEO; Mark was
previously CEO at LV= and Head of Operations for Europe, Middle East and
Africa at Zurich Insurance Group.

 

The valuation of wefox fell in the period, reflecting a deterioration in the
assessed multiple of the listed peer group against which wefox is marked, a
fading of the calibrated premium to the last funding round reflecting passage
of time, and strategic repositioning within the business.

 

Klarna

 

Klarna released full year 2023 results during the quarter.

 

These showed revenue growth of 22% over the year, outstripping GMV growth of
17%, due to a mix of effects, such as higher relative growth from the US at
higher take-rates. Profit in 4Q23 was negative, due to a pick-up in
impairments - reflecting normal seasonal patterns - and operating costs, but
the Company understands this to be driving expected growth into 2024.

 

Elsewhere, the company continues to make multiple statements regarding its AI
investments. In particular, in February Klarna highlighted the deployment of
its AI powered assistant into the customer service function. Within a month,
this had undertaken 2.3 million conversations with customers, representing two
thirds of all interactions. The impact saw resolution times for queries fall
from eleven minutes on average to less than two, a 25% drop in repeat
enquiries, and it is now doing the work of 700 full-time agents. Klarna
quantified its likely positive financial impact at $40 million in 2024.

 

Speculation concerning an IPO continues to swirl, with the CEO giving a number
of interviews in the quarter saying that an IPO is likely to happen "quite
soon" and intimating it would occur in the US.

 

The Company has already considered the ramification of such a move; at the
Company's carrying value, this could imply a liquidity injection of £100
million, equivalent to approximately 20% of the Company's current market
capitalisation.

 

Smart Pension

 

Smart has continued to grow well; in March 2024, Assets under Management
("AuM") hit £5 billion in the UK Smart Pension Master Trust ("SPMT"), with
regular contributions now running at £1 billion per annum. With many schemes
being relatively young, the company forecasts faster growth over 2024 and into
2025 from this division.

 

Keystone - the technology platform underpinning SPMT as well as its
international PaaS offering - has an exciting pipeline of opportunities to
pursue, in addition to its existing contracts that range from operations in
Hong Kong, the Middle East and, nearer to home, in Ireland.

 

Like most of the portfolio companies, Smart continues to balance its growth
opportunities with its cost base and cash runway. To that end, Chrysalis
committed £6 million to a raise in March 2024, alongside Smart's other major
investors. The Company believes this extra capital will support Smart's growth
aspirations - including via M&A - and underpin the company's drive towards
profitability.

 

Brandtech

 

Brandtech has spent much of the last nine months integrating the acquisition
of Jellyfish, which it acquired in June 2023. Jellyfish has significantly
built up the company's media division and has increased the scale of
Brandtech, taking group revenues to over $1 billion.

 

Another, more recent acquisition by Brandtech - PencilAI - was named by Fast
Company as one of the "World's Most Innovative Companies"; it was the only
GenAI company to be mentioned. Pencil has now created over one million
advertisements and deployed over $1 billion in media spend since it was
founded in 2018. Engagement with its offering is showing strong momentum, as
large enterprise clients move towards adoption.

 

While organic growth was softer than prior years over the course of 2023,
reflecting a challenging market backdrop for the media sector, there are signs
that the outlook is improving. As a result, the Company believes it reasonable
to expect a better performance in 2024.

 

Featurespace

 

Fraud continues to be a major issue in society. The Nilson Report predicts
global fraud losses are likely to be nearly $400 billion over the next ten
years, with approximately $165 billion being in the US. Scams, such as
Authorised Push Payments ("APP"), are also rising. In 2023, the Financial
Times reported a 193% increase in APP scams over the last five years, with
£239 million lost in 1H23 alone in the UK.

 

Featurespace saw excellent growth over 2023, as its software sold well against
this market backdrop. The company continues to invest in its technology, with
products such as TallierLTM - built using a GenAI model - showing significant
improvements in performance against its core offerings.

 

This strong growth has been a factor in Featurespace's upward revaluation.

 

Cash Update

 

As of 31 March, the Company had net cash of approximately £16 million and a
position in Wise of £11 million, to give a total liquidity position of
approximately £27 million.

 

The majority of the portfolio remains well funded. While there are expected to
be additional, modest funding requirements across the portfolio in the short
to medium term, it is considered that the Company has sufficient available
liquidity over that period to address these.

 

Looking ahead, the Company is cautiously optimistic that expected realisations
will improve this liquidity position, in the near-term particularly via the
"likely disposal".

 

Portfolio composition

 

As of 31 March 2024, the portfolio composition was as follows:

 

                       31-Mar
                       Carrying Value

 Portfolio Company     (£ millions)    % of portfolio
 Starling              207.0           23.6%

 wefox                  126.5          14.4%

 Smart Pension          105.2          12.0%

 Klarna                 100.0          11.4%

 Brandtech              96.9           11.0%

 Featurespace           72.2           8.2%

 Deep Instinct          45.4           5.2%

 InfoSum                36.1           4.1%

 Graphcore              35.1           4.0%

 Secret Escapes         26.2           3.0%

 Wise                   11.1           1.3%

 Sorted                 0.3            0.0%

 Growth Street          0.1            0.0%
 Gross cash            16.5            1.9%

 

Source: Chrysalis Investment Partners LLP. Due to rounding, the figures may
not add up to 100%. The above percentages are based on an aggregate portfolio
value (including cash) of approximately £878 million for 31 March 2024.

 

Outlook and Update on Capital Allocation Policy ("CAP")

 

With the Continuation Vote passed and shareholders having shown their support
for the CAP, the Company is focused on maximising NAV and looking for
opportunities to boost liquidity, which would enable the CAP to take effect.
In this context, the Company is in discussions regarding a potential debt
facility to provide short-term, low-level gearing which, if completed, could
complement the Company's liquidity profile.

 

The process around the "likely disposal" continues; the Company is optimistic
that positive news flow will be forthcoming over the coming months. In
addition, there are other potential avenues for liquidity, but these need to
be finessed to ensure maximisation of value for investors. One of the most
obvious of these would be a Klarna IPO and, while the Company has no direct
control over this process, it believes the prevailing sentiment in this regard
is positive.

 

Factsheet

 

An updated Company factsheet will shortly be available on the Company's
website:  https://www.chrysalisinvestments.co.uk
(https://www.chrysalisinvestments.co.uk) .

 

 

-ENDS-

 

 For further information, please contact

 Media

 Montfort Communications:                        +44 (0) 7921 881 800

 Charlotte McMullen / Imogen Saunders            chrysalis@montfort.london

 Chrysalis Investment Partners LLP:              +44 (0) 20 7871 5343

 James Simpson

 G10 Capital Limited (AIFM):                     +44 (0) 20 7397 5450
 Maria Baldwin

 Liberum:                                        +44 (0) 20 3100 2000

 Chris Clarke / Darren Vickers / Owen Matthews

 Deutsche Numis:                                 +44 (0) 20 7260 1000

 Nathan Brown / Matt Goss

 Apex Administration (Guernsey) Limited:         +44 (0) 20 3530 3109

 Chris Bougourd

 

LEI: 213800F9SQ753JQHSW24

A copy of this announcement will be available on the Company's website at
https://www.chrysalisinvestments.co.uk
(https://www.chrysalisinvestments.co.uk)

The information contained in this announcement regarding the Company's
investments has been provided by the relevant underlying portfolio company and
has not been independently verified by the Company. The information contained
herein is unaudited.

This announcement is for information purposes only and is not an offer to
invest. All investments are subject to risk. Past performance is no guarantee
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