- Rumours of a Klarna IPO offer hope for beaten-up capital growth trusts
- Which funds might benefit, and how big can they win?
With its latest trading update unveiling a fifth straight annual loss, unquoted buy now, pay later business Klarna embodies some of the problems facing racy growth companies in recent times. Once seen as a promising name, the lender has struggled in the face of rising rates and cooling investor sentiment, as evidenced by a hefty valuation writedown in 2022. But in other ways it offers hope for backers – including those investment trusts that have banked on unlisted companies with racy narratives.
With markets showing some life again, Klarna has become the subject of initial public offering (IPO) speculation, its chief executive saying a 2024 listing was “not impossible”. The company is reportedly in talks over whether to use a dual-class share structure, so a listing is more than just on the cards. The valuation is expected to be around $20bn (£16bn).
That could prove important for shareholders in one investment trust that has proved turbulent in recent history: Chrysalis Investments (CHRY), which backs later-stage private companies, had an 11 per cent position in the company at the start of this year. The fund has sunk in the face of higher rates, with shareholders taking a paper loss of 60 per cent in the past three years. The shares recently traded on a discount of more than 40 per cent to portfolio net asset value (NAV).
A Klarna IPO could in theory offer substantial rewards for the trust. As Numis analysts Gavin Trodd and Ewan Lovett-Turner put it last week, a listing would “substantially alter the liquidity profile of the fund”, freeing up cash for other uses. "Chrysalis has previously announced that it would return £100mn of [Klarna IPO proceeds] to shareholders, likely through buybacks, while maintaining a £50mn buffer for working capital requirements and follow-on investments," they added.
IPOs can certainly offer trusts with portfolios of unlisted or illiquid assets a potential NAV boost, while unlocking capital for measures such as share buybacks. And with conditions improving, some other trusts with a focus on unlisted companies could be set for a boost.
The winners
Which names might benefit? James Carthew, head of investment company research at QuotedData, said that some trusts managed by Baillie Gifford were “bound to have some” IPOs soon. Payment processing company Stripe, a small position for Scottish Mortgage (SMT), has been discussed as a potential candidate, for one. “Brandtech, which is in SMT and CHRY, should be closer to an exit,” he said.
A more prominent name for Baillie Gifford vehicles would be Elon Musk’s SpaceX, a 4.3 per cent position in Scottish Mortgage and a 10.8 per cent for racy global small-cap fund Edinburgh Worldwide (EWI). Musk has expressed frustration with the public market requirements for Tesla (US:TSLA), but its listing has made him one of the richest people in the world.
Other trusts could also stand to benefit. Mick Gilligan, head of managed portfolio services at Killik & Co, pointed to Zopa, the online bank expected to IPO in the near future, and an 11.6 per cent position in Augmentum Fintech (AUGM). Seraphim Space (SSIT) could also see some activity. “One of SSIT’s holdings, D-Orbit, agreed to merge with Breeze Holdings in 2022, but this didn’t happen as the IPO/SPAC market effectively closed,” he said. “D-Orbit has continued to see good growth and may be in the frame for a listing if the IPO market starts to reopen.” Dedicated private equity trusts could also benefit, with HarbourVest Global Private Equity (HVPE) top holding Shein among the highest profile companies considering a listing.
Will it be enough?
From Chrysalis to Seraphim Space and Scottish Mortgage, many of these trusts have had a rocky ride in recent times, albeit they received a boost when growth stocks rallied in late 2023. SSIT shares are down by half since its 2021 launch, while SMT is down by 22 per cent over three years. The trusts have shown signs of a recovery in the past year, and IPOs could help provide an extra boost here. However, some have warned against seeing a resurgent IPO market as a silver bullet.
“I’m not sure how big a boost a return to IPOs will be to the growth capital trusts,” Gilligan said. “There is a real cloud over alternative investment trusts at the moment. Even the announcement from HICL Infrastructure (HICL), of a major realisation at a 30 per cent premium to carrying value [through selling a highway project for $232mn], has only nudged the share price up by a mere 2.5 per cent. So, I think it’s going to take a meaningful change in conditions to make a big difference.” Gilligan said that asset sales combined with share buybacks and the reduction of any debt could help boost valuations, but added that it could take a long time for these trusts to get back to previous highs.
