The pros and cons of a Chrysalis recovery play

Chrysalis Investments (CHRY) has become quite the fashionable pick in 2024 after a torrid few years, with many an analyst making the case for the trust as oversold and due a recovery.

There's certainly sense enough in this. The shares have traded at a discount of more than 40 per cent to net asset value (NAV) for most of 2024, prominent holding Klarna is expected to generate some liquidity by going public in the near future and, generally speaking, the fund may already have weathered the worst of the storm in terms of interest rate rises and the value of assets getting written down. Having also survived a continuation vote and moved its investment management arrangements onto a surer footing, it has seemed obvious enough as a recovery play.

Life, however, isn't quite so simple, as evidenced by the latest issues worrying the trust. Sky News reported earlier this month that the boss of Wefox, a so-called "insurtech" company that made up a chunky 14.4 per cent of the Chrysalis portfolio at the end of March, had warned that the firm faced collapse within months in the face of regulatory and financial challenges. That prompted a serious tumble for Chrysalis shares, although the trust did issue a statement to the market seeking to reassure investors. Here, it noted that the investment team had been in discussions with Wefox management and other shareholders for some months, with a plan now in place to "simplify Wefox's business model to drive the company towards profitability".

Wefox also recently raised roughly €20mn from shareholders, with Chrysalis contributing €3mn. The trust had already announced in early May that it had written down its valuation of the company, something that reflected "a deterioration in the assessed multiple of the listed peer group against which Wefox is marked, a fading of the calibrated premium to the last funding round reflecting passage of time, and strategic repositioning within the business".

Is the case for Chrysalis broken? As analysts at Winterflood have noted it does certainly illustrate the downsides of just how concentrated the portfolio is, with any setbacks hitting the fund hard. We saw this back in 2022 when Klarna suffered a valuation writedown, and the risks are certainly still there. Note that Starling Bank made up 23.6 per cent of the portfolio at the end of March, with Smart Pension on 12 per cent and both Klarna and Brandtech making up more than 11 per cent of assets each.

There's an argument to be made that having such concentrated positions will benefit the trust if good news occurs, such as a Klarna flotation, and that this simply suits the venture model of investing where a few successes can offset problems in the broader portfolio.

But the Wefox drama is a reminder that the trust's recovery narrative is not quite so simple, that stock-specific risk can be very real and that chunky positions in the growth capital trusts, such as Oxford Nanopore (ONT) in the Schroders Global Capital Innovation (INOV), can invite plenty of volatility. These names do look cheap on plenty of measures, and the tide might have turned in a sense. But investors hoping for an easy ride to profits need to be made of sturdy stuff.