“A whiff of Woodford”: how Jupiter’s chrysalis came unstuck with unlisted companies

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The outstanding performance of £117m and management fees paid by investment trust Chrysalis last year gave little sign of the brutal months ahead.

“[It] was an embarrassment of riches,” said Richard Parfect, fund manager at Momentum Global, one of the trust’s top 10 shareholders that invests in unlisted companies. “It was thanks to good performance, at least optically. [But] you don’t want people to see you too well.

The fee was driven by soaring valuations of early Chrysalis bets on private tech companies such as “buy now, pay later” fintech Klarna; e-commerce retailer THG; challenger bank Starling and digital payments platform Wise. The two managers of the trust took their £60million fee in stock, with the rest paid in cash to Jupiter Asset Management, the struggling UK fund company that oversees Chrysalis.

Only a few months later, and after the value of its holdings and share price plummeted, Chrysalis said it would destroy the fee structure, revising performance-based payments that were similar to those of private equity managers.

Confidence has been hit by the strong sell-off in growth stocks over the past few months. Chrysalis’ share price has fallen more than 60% since the start of the year, giving it a market capitalization of £560 million. The value of businesses in his portfolio has also fallen by £200m since September 2021 as fundraising has dried up.

About 60% of the companies it invests in have yet to make a profit. Chrysalis managers said they had direct conversations with these groups, warning them that investors would be less tolerant of unprofitable tech stocks in the future.

The trust’s exposure to a sudden drop in the value of unlisted companies — and an ownership structure through which Jupiter owns a 23% stake in Chrysalis and owns its shares in at least 10 funds — drew comparisons with the Neil Woodford funds. Formerly one of the UK’s most prominent stock pickers, Woodford lost billions of pounds to his investors after his funds made large and illiquid bets on unlisted companies.

“It is unusual for so many Jupiter funds to own Chrysalis, and it is certainly not best practice. There’s a whiff of Woodford about it,” one analyst said.

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However, Momentum’s Parfect countered that the comparison to Woodford’s situation was a “lazy bias”. “That’s not it at all. . . [but] the board is right to consider perception,” he added.

Matthew Beesley, Jupiter’s chief investment officer, argued that it was not unusual for Jupiter to have Chrysalis shares in a range of its funds, or for funds to buy other funds internally within investment firms. “It is not at all inconsistent to see a UK small business fund want to invest in Chrysalis, which as an £800m market capitalization investment trust is itself a small business investing in small businesses,” he said.

The most dramatic reversal for Chrysalis was the value of Klarna. As of September 2021, the SoftBank-backed fintech was Chrysalis’ biggest investment, accounting for more than a quarter of the trust’s portfolio. “We remain extremely positive about the company’s potential. . . [and] it continues to perform exceptionally well,” Chrysalis wrote that month.

Now Klarna is only 6% after its valuation fell from $46 billion to $6.65 billion. Chrysalis bought when Klarna was valued at $5.5 billion in August 2019. Jupiter had valued Klarna at an even more bullish $49 billion at its peak.

Chrysalis backed Klarna again this week in an $800 million round. The trust expected the company’s new valuation, along with market and currency movements, to lower the value of its portfolio by a further 32p to 179.5p per share.

“The current funding round does not reflect Klarna’s progress since our initial investment, it reflects the very attractive terms capital providers are demanding in the current macro environment,” said Richard Watts, co-manager of Chrysalis.

Other Chrysalis operations also struggled. Wise, which was valued at $11 billion when it was floated in July 2021, has since fallen 65%. THG, which went public in September 2020 in one of London’s biggest tech IPOs, has seen its value plummet by 87% over the past year.

“I think private investors are going to be much more selective and demanding. . .[and] more realistic about valuations” in the new environment, Chrysalis’ other director, Nick Williamson, told the Financial Times. He acknowledged that this would make fundraising more difficult for the trust and mean it had to keep more money. “That being said, deals are still there to be done,” he added.

Chrysalis, which was listed on the FTSE 250 in 2018, appointed a new independent assessment committee in June, a move welcomed by shareholders. So far, most seem willing to continue supporting managers’ judgment.

“Given the difficult markets and the difficult macroeconomic environment that Chrysalis is currently facing, it is not entirely surprising to see the uncertainty surrounding valuations in public and private markets,” said Nick Wood, head of fundraising at Quilter Cheviot, one of the trust’s top 10 shareholders.

“If you’re cynical, you might say [valuing unlisted companies] is open to abuse, but I wouldn’t put it that way. Talking to the guys there, they have an inherent desire to be cautious,” Parfect added. His fund, which has been with Chrysalis since its listing, strengthens its position in a vote of confidence for the investment thesis.

Jupiter’s role raised further questions about conflicts of interest and the collection of fees.

One analyst argued that the $55 billion company under management, which has its own challenges after its shares have fallen by more than half over the past year, could be seen to be collecting fees from both sides: from investors managing their money in Jupiter funds, and from Chrysalis after using client money to buy into the trust.

Beesley, who is set to succeed Andrew Formica, who left last week, rejected the suggestion that the group would levy management fees on the Jupiter and Chrysalis funds. “We don’t double the fees,” he told the Financial Times.

As for the £117m performance fee, Beesley said it was based on Jupiter’s contract with Chrysalis. “If we wanted to change this fee structure, it is not in our power – it was put in place by Chrysalis. We are on receipt of this contract.

Additional reporting by Joshua Oliver

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