The trust where investors are down 66% after paying big performance fee

A double whammy of plummeting shares and high costs hits DIY investors.

Few funds exemplify the party of 2020 and 2021 and the crash of 2022 better than Chrysalis Investments.

Classified as a “growth capital” trust by trade body the Association of Investment Companies (AIC), it buys fledgling companies that might make it big, such as buy now, pay later firm Klarna and digital bank Starling.

Shares rose from around £1.20 at the start of 2020 to a peak of £2.70 as investors rushed to own a slice of the future. With interest rates near zero, there was no opportunity cost to owning the riskiest parts of the market.

The share price rise was backed up by increases in the net asset value (NAV) of its private stock portfolio of around 15 companies as investors rushed to give them more money.

This increase in net asset value of 57% in the year to 30 September 2021 triggered a performance fee of £112 million, with around £60 million of that shared between Chrysalis fund managers, who work for Jupiter Asset Management, Nick Williamson and Richard Watts.

The fee meant that the trust’s ongoing charge for the past year was 10.7%, according to the AIC.

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However, with interest rates now rising rapidly, safe government bond yields offer attractive returns. This has sucked the life out of “growth” stocks with little by the way of profits. The Chrysalis share price has plummeted from £2.70 to 94p, a drop of 66%. It now has a market cap of just £600 million.

Crashing appetite for unquoted stocks is sparking a mass exodus from private equity investment trusts, causing them to lurch to record discounts as valuations struggle to catch up with public market sentiment.

Chrysalis Investments is trading on a 54% discount, according to investment analyst FE FundInfo. Other “growth capital” trusts on wide discount are Seraphim Space Investment Trust (LSE:SSIT) at 49% and Schroder UK Public Private Trust (LSE:SUPP) at 38.5%.

Across private equity and growth capital trusts, the average discount is now 29%. This includes a 28% discount for HgCapital and 45% discount for Pantheon Internationalal, according to FE FundInfo.

However, private market valuations are becoming more realistic. Klarna was recently valued at $6.5 billion (£5.3 billion), an 85% drop from its previous $46 billion valuation, according to Financial Times sources. In Chrysalis’ latest update to investors, it marked down its portfolio by 16% in the six months to March 31 2022.

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Numis, the stockbroker, notes that this new Klarna valuation would mean a valuation of $6.5 billion would lead to a reduction of 32p from the Chrysalis March NAV of 212p.

But Chrysalis’ public stocks Wise (LSE:WISE) and THG (LSE:THG) have fallen 73% and 89% from their highs, suggesting that the rest of its private stocks could have some way to fall yet, and the Chrysalis share price may decline further. 

Fund managers Williamson and Watts say that the focus is now on finding firms that can be profitable, rather than grow fast at any cost.  Currently just 40% of the portfolio is profitable.

The pair said last week in a note to investors: “In spite of the difficult backdrop, the portfolio continues to demonstrate its ability to deliver robust growth and operationally is performing well in aggregate.

“With approximately 40% of the portfolio already profitable, our focus has been working with the 60% that has yet to break-even, where we have supported a number of companies to balance operation expenditure budgets with growth aspirations. This has extended cash runways, which currently average approximately 14 months for this group.”

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Performance fee under review

Chrysalis raised eyebrows last year when it announced a £112 million performance fee. This was distributed because its net asset value soared 57% in the year to 30 September 2021, therefore crossing its performance “hurdle” where it begins to take a 20% cut of returns.

However, the trust’s board said last week that it had provided fund manager Jupiter with a new performance fee structure that would be more “appropriate”.

After surveying its top 20 investors, it said: “The study confirmed that these shareholders shared the board's view of the shortcomings of the existing performance fee structure and wished to see amendments made.”

Nevertheless, there are no plans to return any of the performance fee to investors given the Chrysalis NAV and share price collapse this year.