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Jupiter stuck inside Chrysalis

The issues surrounding Jupiter’s direct involvement in listed, but illiquid, investments continue to sap the fund manager
July 5, 2022
  • Illiquid investments still the bane of fund managers
  • Chrysalis left naked by tech retreat

Keeping track of newsflow at Jupiter Fund Management (JUP) has been a challenge recently after the abrupt retirement of chief executive Andrew Formica at the age of 51. Whatever the immediate circumstances of Formica’s retirement – he is replaced by chief investment officer Matt Beesley, who while an experienced funds veteran, has never run a public company – the news was overshadowed by the ongoing controversy generated by Jupiter’s close involvement with Chrysalis Investment Trust (CHRY), where rows over ill-designed performance fees and the wider issue of mainstream managers investing funds in illiquid and unlisted companies have dominated the headlines.

There has long been a suspicion that many of Jupiter’s issues are self-inflicted, particularly in the case of Chrysalis. Jupiter owns a 23 per cent stake in the Chrysalis listed company, which it had inherited after its £240mn takeover of Merian in 2020. According to reports in The Times, up to 12 of Jupiter's funds invest in the trust, whose investment strategy is overseen by two of Jupiter’s own managers – small-cap companies duo Nick Williamson and Richard Watts. Ultimately, the bundle of mainly unlisted technology companies earned a £117mn management performance fee for Jupiter, including a £60.5mn payment in shares to the two managers vesting over three years, as tech valuations soared during 2021 – just before the market slumped.

The importance of Chrysalis to Jupiter in terms of generating fees cannot be understated. In Jupiter’s 2021 annual report, Chrysalis is mentioned 25 times in the document, including this summary: “Our strong investment performance also generated £113mn of performance fees this year, driven primarily by the Chrysalis Investment Trust.” The total operating profit for the year was £190mn.

The problem, as has now become clear, is that the values of Chrysalis’ technology-heavy investments, which include the likes of Starling Bank, buy-now-pay-later specialist Klarna and now bombed-out ecommerce company THG (THG), have cratered and those performance fees – collected just prior to the market taking a turn for the worse – have started to look radically ill-timed. The performance fee structure was designed at a time when Chrysalis was a much smaller player in terms of net asset value and the trust’s management is now redesigning the scheme, according to the half-year statement. Chrysalis has also now become a self-managed investment company and has appointed an independent valuation board to oversee its valuations, with Jupiter continuing to provide discretionary portfolio management services.

 

Liquid or illiquid?

There are signs that the asset management industry has taken on board some of the lessons of the Woodford funds debacle. For example, Chrysalis now has a fully independent valuation board, rather than having it imposed on it by the Financial Conduct Authority (FCA) as happened with Woodford. But clearly, the questions over whether there is an effective way to access non-listed investments via a traded vehicle, whether via a trust or an open-ended investment company (Oeic), are not going to disappear, particularly as success in this area seems to depend on the market being receptive to funding regular initial public offerings (IPOs), which hasn’t been the case since the autumn.

Last year, Baillie Gifford flagged that its UK Growth Trust (BGUK) would invest in non-listed companies but that this would make up no more than 10 per cent of its total capital. By contrast, the investment ratio at Chrysalis seems to have been almost the reverse. Interestingly, despite the approval of Baillie's shareholders to increase the number of private companies, the private portfolio is still small in comparison to the trust’s listed investments.

So, even savvy Baillie Gifford has suffered during the the tech retreat, with large holdings in listed share platforms and asset managers dragging it back, and the UK Growth Trust’s share price is now at a 13 per cent discount to net asset value (NAV). However, that still compares favourably with the 58 per cent discount to NAV on which Chrysalis is currently languishing.

Overall, the saga highlight two significant lessons for investors. Firstly, there is no sure way to access private, unlisted companies without taking on a large amount of liquidity risk. Chrysalis’ portfolio cannot be easily liquidated and clearly depends on the IPO route as a possible shareholder exit. Secondly, a listed entity with unlisted investments is just as susceptible to market raiders and broader volatility as any other company. In fact, shorters started taking significant positions against Chrysalis the moment the tech sentiment started to turn. It is fair to say that Jupiter will have to mark this down to experience and retrieving the situation will be one of the first tasks for its new management.