Quarterly NAV Announcement and Trading Update

Chrysalis Investments Limited

02 May 2024

 

The information contained in this announcement is restricted and is not for publication, release or distribution in the United States of America, any member state of the European Economic Area (other than to professional investors in Belgium, Denmark, the Republic of Ireland, Luxembourg, the Netherlands, Norway and Sweden), Canada, Australia, Japan or the Republic of South Africa.

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulation (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
Portfolio Company	Carrying Value (£ millions)	% of portfolio
Starling wefox Smart Pension Klarna Brandtech Featurespace Deep Instinct InfoSum Graphcore Secret Escapes Wise Sorted Growth Street	207.0  126.5  105.2  100.0  96.9  72.2  45.4  36.1  35.1  26.2  11.1  0.3  0.1	23.6% 14.4% 12.0% 11.4% 11.0% 8.2% 5.2% 4.1% 4.0% 3.0% 1.3% 0.0% 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.

-ENDS-

For further information, please contact Media Montfort Communications: Charlotte McMullen / Imogen Saunders	[phone] [e-mail]
Chrysalis Investment Partners LLP: James Simpson	[phone]
G10 Capital Limited (AIFM):	[phone]
Maria Baldwin
Liberum: Chris Clarke / Darren Vickers / Owen Matthews	[phone]
Deutsche Numis: Nathan Brown / Matt Goss	[phone]
Apex Administration (Guernsey) Limited: Chris Bougourd	[phone]

LEI: 213800F9SQ753JQHSW24

A copy of this announcement will be available on the Company's website at 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 of future returns. Prospective investors are advised to seek expert legal, financial, tax and other professional advice before making any investment decision. The value of investments may fluctuate. Results achieved in the past are no guarantee of future results. Neither the content of the Company's website, nor the content on any website accessible from hyperlinks on its website for any other website, is incorporated into, or forms part of, this announcement nor, unless previously published by means of a recognised information service, should any such content be relied upon in reaching a decision as to whether or not to acquire, continue to hold, or dispose of, securities in the Company.

The Company is an alternative investment fund ("AIF") for the purposes of the AIFM Directive and as such is required to have an investment manager who is duly authorised to undertake the role of an alternative investment fund manager ("AIFM"). The AIFM appointed is G10 Capital Limited (part of the IQEQ Group).

 

END