Chrysalis Inves Regulatory News (CHRY)

The information contained in this announcement is restricted and is not for publication, release or distribution in the United States of America, any member state of the European Economic Area (other than to professional investors in Belgium,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.

29 January 2024

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

Quarterly NAV Announcement and Trading Update

Net Asset Value

The Company announces that as at 31 December 2023 the unaudited net asset value ("NAV") per ordinary share was 143.37 pence.

The NAV calculation is based on the Company's issued share capital as at 31 December 2023 of 595,150,414 ordinary shares of no par value.

December's NAV represents an 8.72 pence per share (6.5%) increase since 30 September 2023.

Movement in the fair value of the portfolio accounted for approximately 9.89 pence per share, with foreign exchange generating an adverse movement of approximately 1.02 pence per share. Fees and expenses make up the balance.

Investment Adviser Comments

Richard Watts and Nick Williamson (co-portfolio managers) comment:

"The Company's NAV rose over the period, primarily a result of revaluations for two of our key assets, Klarna and Starling Bank. The revaluations were driven by ongoing strong financial performances as well as increases in the valuation of several respective peers being used as comparatives. In the case of Klarna, some of its peers, including Affirm Holdings Inc and Adyen have seen very significant share price increases since September 2023 (Affirm +131% over this period, Adyen +65%) following positive trading updates, against a backdrop of increased appetite for tech stocks as bond yields fell. 

At the last quarter end, we talked about the IPO market showing signs of life. Recent downward movements in bond yields have assisted both indices - such as the NASDAQ - and stocks, such as ARM Holdings Inc, to move higher over the period; ARM is now well above its mid-September 2023 IPO price of USD51. This market action is indicative of risk appetite returning, and potentially leading to the reopening of realisation channels for the Company, including IPO markets.

Recent comments from Klarna concerning a potential IPO continue to be positive and a realisation from the portfolio could prove very significant for the Company's liquidity, and lead to the initiation of the capital allocation policy that will form part of the continuation proposal that shareholders are recommended by the Board to support at the upcoming AGM. Momentum in our key investments continues to be strong, and we believe this is likely to be a key determinant of share price progression from here."

Portfolio Activity

There was no investment activity in the quarter, with most investments well-funded. In December, the Company announced a likely disposal, which is subject to certain conditions. No further update can be provided at this time.

Portfolio Update

The portfolio in aggregate continues to perform well, particularly in terms of the later-stage assets:

wefox

wefox continues to grow well, crossing the ?1.5 billion milestone in terms of Gross Platform Value (insurance premium volume transacted), and achieving its first full month of profits in December 2023 as it continued its drive towards profitability. While activity has some seasonality, the Investment Adviser expects further progress on profitability over 2024.

As previously announced, the company boosted its governance in the quarter with the appointments of Jonathan Wismer as its new Group Chief Financial Officer and Mark Hartigan as Chairman. Both have considerable industry experience. In addition, in November Paul Onnen, who has 30 years of industry experience including with Amazon, Google and Expedia, was appointed as CTO.

Starling

Starling announced that from 1 October, it will share the benefit of increased interest rates with its customers, by paying 3.25% AER interest on account balances of up to £5,000. The impact of this initiative has been to generate significantly more deposit inflows than in previous months.

Engine by Starling ("Engine") - the Software-as-a-Service subsidiary of Starling - announced two deals in the quarter. Salt Bank will become Engine's first customer. This is a new bank being set up in Romania looking to prove as disruptive as Starling in the UK, with an expected go-live date early in 2024. The second is with AMP, a £1.4 billion Australian listed financial services firm with over one million customers and employing approximately 3,000 people. Engine will build a new digital bank for AMP to go live in early 2025, with AMP expecting to commit AUD60 million of investment.

These successes for Engine show that Starling has other ways to monetise its technology, in addition to using it to run its highly profitable UK bank. In that regard, and given ongoing supportive bank rates, Starling has continued to generate strong operating profits over the quarter.

Brandtech

Despite a well-publicised slowdown in advertising markets, Brandtech continued to grow and has spent the latter part of 2023 consolidating its recent acquisitions of Jellyfish and Pencil AI.

In line with many of our companies, Brandtech looked to reduce its cost base over the year, to ensure it is in the best possible position to grow efficiently and profitably in 2024. The outlook for this year is more optimistic, with a strong sales pipeline and significant interest in its products, particularly its Gen-AI offering.

Klarna

Klarna released its results for the nine months to the end of September during the quarter. These results showed an acceleration in revenue growth and further improvements in profitability, building on its shift back into profitability in the second quarter.

Revenue growth was +30% in 3Q23 year-on-year, increasing from +17% and +13% year-on-year in 2Q23 and 1Q23 respectively. The Investment Adviser believes this partly reflects the overlap of two quarters when growth was impacted by the cost cutting exercise that occurred around 2Q23, but also due to on-going work by Klarna to improve the shopping experience.

Credit performance was also very strong, with credit losses falling 46% in 3Q23 year-on-year to 0.33% of Gross Merchandise Volume, a figure which the Investment Adviser believes is the lowest Klarna has reported since 2018.

The result of this growth, and impairments falling, was that profitability improved again in the quarter, with Klarna reporting SEK500 million of adjusted operating profit, up from roughly break-even in 2Q23 and compared with losses of SEK1.6 billion in 3Q22. This implies that Klarna's quarterly operating performance has improved by approximately SEK2.1 billion year-on-year, or roughly USD200 million, or approximately USD800 million on an annualised basis.

In January 2024, Klarna's CEO - Sebastian Siemiatkowski - gave an interview with BNN Bloomberg in which he described a Klarna IPO as "?very likely to happen quite soon". This builds on other comments made by him in recent months suggesting that Klarna is gearing up for a flotation. This latest interview also suggested that Klarna is leaning towards a US listing.

If Klarna did choose to IPO this year, then the Investment Adviser believes that this would substantially alter the liquidity profile of Chrysalis.

Smart Pension

Smart announced a new SME pension solution with Mercer in the quarter, called Mercer Smart Pension.

This project looks to combine Smart's market-leading technology platform - Keystone - with Mercer's significant market reach, investment capabilities and retirement services. to provide SMEs with the same level of service and market access as bigger companies. Given Mercer's position in the market, the Investment Adviser believes this could generate significant assets-under-management ("AUM") flows in the coming years.

Featurespace

Featurespace released research in December 2023 that showed the market backdrop for fraud prevention continues to be strongly supportive in relation to financial crime trends. Of the financial institutions surveyed, 70% reported that overall fraud rates had increased over the year, marking an eleven percentage point increase over 2022. Compounding these higher fraud rates were an increase in false positives - where a valid transaction is blocked - which rose 20 percentage points to 63%: Featurespace attributes this to imposition of blanket controls on customer bases. Increased false positives lead to lower revenues for financial institutions, but also higher costs, as customers often query why a transaction has been rejected.

The Investment Adviser believes Featurespace remains at the forefront of the fight against fraud. The previously announced launch of TallierLTM, the world's first Large Transaction Model (LTM) - a foundation AI technology for the payment and financial services industry - is helping to preserve its competitive advantage and potentially open up new applications.

Cash Update

As of 31 December, the Company had net cash of approximately £20 million and a position in Wise of £13 million, to give a total liquidity position of approximately £33 million.

The majority of the portfolio remains well funded. While there may be additional funding requirements across the portfolio in the short to medium term, the Investment Adviser considers that the Company will have sufficient available liquidity over that period to address these.

Portfolio composition

As of 31 December 2023, the portfolio composition was as follows:

Source: Jupiter Investment Management Limited. 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 £854 million for 31 December 2023.

Outlook

The Investment Adviser has previously expressed optimism that risk appetite will return to markets, a key precursor to the reopening of exit channels for investee companies, including via IPO. Although there has been some volatility in yield expectations into 2024, fundamentally this view is unchanged.

Further comments from Klarna over its potential IPO suggest that the Investment Adviser is not alone in its view that markets are now more amenable to new issuance than over the previous couple of years. The capital allocation policy that has been disseminated as part of the documentation for the AGM in connection with the continuation proposals could provide a significant return of capital to shareholders in the event of a material realisation. At the current level of discount, at which the Company's shares trade at versus NAV per share, any repurchase of shares by the Company could generate significant accretion in NAV per share.

The Investment Adviser remains focussed on assisting other companies in the portfolio in getting to a point where a realisation event is a realistic possibility.

Factsheet

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

-ENDS-

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.