‘A whiff of Woodford’: how Jupiter’s Chrysalis came unstuck with unlisted companies

The £117mn bumper performance fee paid out 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, a top 10 shareholder in the trust that invests in unlisted companies. “It was on the back of good performance, optically at least. [But] you don’t want to be seen to be doing too well.”

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

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

The trust has been hit by the sharp-sell off in growth stocks in recent months. Chrysalis’s share price has fallen by more than 60 per cent since the start of the year, giving it a market cap of £560mn. The value of the companies in its portfolio has also dropped by £200mn since September 2021 as fundraising has dried up.

About 60 per cent of the companies it invests in have yet to turn a profit. Chrysalis managers said they were having upfront conversations with those groups, warning them investors would be less tolerant of unprofitable technology stocks in future.

The trust’s exposure to a sudden drop in the value of unlisted companies — and an ownership structure through which Jupiter has a 23 per cent stake in Chrysalis and holds its shares in at least 10 funds — have drawn some comparisons with Neil Woodford funds. Formerly one of the UK’s most high-profile stockpickers, Woodford lost billions of pounds for his investors after his funds made large, illiquid bets on unlisted companies.

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

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

Matthew Beesley, Jupiter’s chief investment officer, argued it was not unusual for Jupiter to have Chrysalis shares across a range of its funds, or for funds to purchase other funds internally within investment firms. “It is not remotely inconsistent to see a UK smaller company fund wanting to invest in Chrysalis, which as a £800mn market cap investment trust is itself a small company investing in small companies,” he said.

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

Now Klarna makes up just 6 per cent after its valuation has crashed from $46bn to $6.65bn. Chrysalis bought in when Klarna was valued at $5.5bn in August 2019. Jupiter had valued Klarna at an even more bullish $49bn at its peak.

Chrysalis backed Klarna once again this week in an $800mn down round. The trust expected the company’s new valuation, along with market and currency moves, to push the value of its portfolio down 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 that providers of capital are demanding against the current macroeconomic backdrop,” said Richard Watts, Chrysalis’s co-lead manager.

Other Chrysalis holdings have also struggled. Wise, which was valued at $11bn when it listed in July 2021, has fallen by 65 per cent since. THG, which went public in September 2020 in one of London’s biggest tech IPOs, has seen its value tumble by 87 per cent in the past year.

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

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

“Given the challenging markets and the difficult macroeconomic environment Chrysalis is currently facing, it is not entirely surprising to see uncertainty around valuations in both public and private markets,” said Nick Wood, head of fund research at Quilter Cheviot, a top 10 shareholder in the trust.

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

Jupiter’s role has raised other questions about conflicts of interest and fee collection.

One analyst argued that the $55bn-under-management firm, which has its own challenges after its shares have fallen by more than half in the past year, could be seen to be collecting fees on both sides: from investors who have their money managed in Jupiter’s funds, and from Chrysalis after using clients’ money to buy into the trust.

Beesley, who is set to take over as chief executive from Andrew Formica, who left last week, rejected the suggestion that the group takes management fees from both the Jupiter and Chrysalis funds. “We do not double dip on fees,” he told the Financial Times.

As for the £117mn performance fee, Beesley said it was based on Jupiter’s contract with Chrysalis. “If we wanted to change that fee structure, that’s not in our power — it was put in place by Chrysalis. We are on the receiving end of that contract.”

Additional reporting by Joshua Oliver