Hammer Blow For Chrysalis Investments

Last week was a difficult one for Chrysalis Investments (LON: CHRY), whose shares were marked sharply lower when it became clear that its second largest holding was in trouble. The private equity trust provides exposure to a concentrated portfolio of unlisted stocks, so it is potentially very vulnerable to bad news flow.

It is the German insurtech platform Wefox that is the problem, with the new chair and CEO Mark Hartigan announcing that the company could face insolvency within months, unless it is able to secure the sale of some of its loss-making operations. The business accounts for around 15% of the assets, with the investment trust shares down about 14% in response.

Chrysalis has countered by saying that they have been in discussions with the company’s management and other shareholders for a number of months. This has resulted in a plan being put in place to simplify the business and drive it to profitability, with an extra €20m being provided to fund the new strategy including €3m from CHRY.

Things Had Been Looking Up

The broker Numis says that the Board and management team of Chrysalis had made good progress in rebuilding their credibility after the impact of significant net asset value declines in 2021/22, with the portfolio maturing and the announcement of significant structural changes. However, this has now taken another massive hit.

CHRY had passed a continuation vote in March based on a remit of returning the first £100m of capital from realisations, with 25% of net cash profits to be returned after that and a continuation vote in 2027. It remains to be seen how the latest update will affect things.

Investors will be particularly mindful of the fact that Wefox was written down by a third in Chrysalis’ latest quarterly NAV to the end of March that was announced as recently as 2 May. The risk is that the devaluation was not enough.

Where Do We Go From Here?

Numis says that a concentrated portfolio of private companies is always difficult to price, especially given a lack of information on many holdings, making it hard for shareholders to put a floor on the valuations at times of stress. They wouldn’t be surprised to see a volatile few days as investors decide what to do.

The broker thinks that the fund will come under further pressure to sell investments and return capital, although given that it holds minority stakes it is not in a position to engineer exits. Its best chance may be the Swedish fintech company Klarna that is thought to be considering an IPO in early 2025 and for which there is plenty of secondary liquidity.

It is obviously really hard for existing investors to decide what to do. Perhaps the easiest way to think about it is that the current price of 81p implies the full write-down of Wefox and a 35% reduction in the rest of the portfolio based on the end of March valuations. Not an enviable position to be in.