- Jupiter is selling a stake in unlisted bank Starling to Chrysalis Investments, an investment trust which it also manages
- Single stock worth 15 per cent of assets will be one of the highest across all investment trusts
Private equity investment trust Chrysalis Investments (CHRY) has agreed to purchase shares in Starling Bank from an open-ended fund also run by Jupiter, in a move derided by analysts.
Jupiter Fund Management (JUP), which runs Chrysalis Investments, will sell Startling Bank out of its open-ended funds, mainly Jupiter UK Mid Cap (GB00B1XG9482). The £20mn deal raised alarm given it will take Chrysalis's stake in the bank to 15 per cent of its assets – one of the highest single stock holdings across all investment trusts, according to analysts Winterflood.
Analysts warned shareholders to monitor their holding in Chrysalis following the move. Stifel has changed its rating from "hold" to "sell". The trust's share price has dropped 10 per cent following the announcement. Its discount to net asset value (NAV) widened from about 39 per cent to 43.1 per cent at close on 9 February. Growth Capital private equity investment trusts were trading at an average discount to NAV of 45.7 per cent and Chrysalis Investments was at a discount to NAV of 43.08 per cent, as of 9 February, according to the Association of Investment Companies.
Winterflood analysts said: "We would caution a 15 per cent concentration in Starling Bank would be among the larger single holdings across the investment trust universe. "It [presents] a risk which investors should monitor closely, particularly given Starling Bank's youth, single-country exposure and vibrant competitive landscape."
Chrysalis Investments had a gross cash position of about £69mn and total liquidity position of approximately £81mn as of 30 January 2023, but purchasing the further stake in Starling Bank will reduce this by £20mn.
Iain Scouller, managing director, investment funds at Stifel, said: "Our main concern is the limited cash that Chrysalis has on its balance sheet." He downgraded Chrysalis from hold to sell.
"Following the Starling purchase and funding of follow-ons we estimate cash will decline to £29m or 4 per cent of NAV. We think this is a low cushion as we do not know how much cash existing companies may need in the next year or two, given the lack of visibility on the economic outlook and company earnings," Scouller added.
Before this transaction was announced, the trust's managers said that the trust would spend about £20mn on potential follow-on commitments to other investments and this does not include the Starling Bank purchase.
It was not all negative, however. When the deal completes, the trust's NAV per share could see a modest uplift compared with the 31 December 2022 calculation of 128.26p.
Analysts at broker Liberum said that this could be a good time to increase exposure to Starling: "[The bank] is benefitting from growth in its loan book and the increased value of its deposit book as the Bank of England raises the bank rate. The material improvement in Starling Bank's financial performance through 2022 stands in stark contrast to the valuation of the business on Chrysalis' balance sheet which has been reduced by more than 50 per cent from its peak in March 2022."
Starling Bank reported that annualised revenue in December was nearly £600mn and profit before tax was over £250mn. Actual revenue for the year ending 31 March 2022 was £188mn, with a profit of £32mn.
Other existing Starling Bank shareholders are also purchasing Jupiter’s stake alongside Chrysalis, though these have not been disclosed. Other existing investors in the bank include US asset manager Fidelity Investments, Millennium Management, Qatar Investment Authority, Goldman Sachs and pension fund RailPen.
As part of the move, Jupiter said it would stop holding unquoted assets in its open-ended funds. Matthew Beesley, chief executive of Jupiter Asset Management, said: “Despite [Jupiter UK Mid Cap's] managers' strong ongoing conviction in Starling, we regularly review and prudently manage our unlisted exposures, especially in open-ended funds. The current total of unlisted holdings in Jupiter UK Mid Cap is well below the Financial Conduct Authority's permitted 10 per cent threshold. However, as a result of the sustained market volatility we have experienced in recent years it is also clear to us that investor sentiment towards holding unlisted assets in open-ended funds has changed. From now on, we will not make any new investments into this asset class through any of our open-ended funds."
Chrysalis Investments and Starling Bank declined to comment.
