In a stock exchange notice today (13 October), the trust said it would consult with shareholders on the changes “shortly”, while also encouraging them to express their broader views on the trust ahead of its continuation vote at next year’s annual general meeting.
The proposed capital allocation policy will be based on three themes, Chrysalis explained. The trust will aim to maintain a “prudent cash reserve”, with the board and portfolio manager agreeing on £50m – around 6% of net asset value – as the appropriate amount.
Chrysalis NAV grows for second consecutive quarter
Following the meeting of the cash reserve requirement, the trust will prioritise distributions to shareholders.
Chrysalis intends to use its authority to buy back up to 15% of its share capital. It will also seek further approval from shareholders to continue the buyback scheme until £100m have been distributed, conditional to the ongoing discount, which currently sits at 60%.
Subsequently, the trust will balance its capital allocation between additional distributions and portfolio investments, aiming to distribute up to 25% of net cash profits on realisations.
Performance fee
Regarding the performance fee, Chrysalis and Jupiter agreed to a significant reduction to the annual charge from 20% to 12.5%, which was first approved by the board in November 2022.
The fee will also be capped at 2.75% of the trust’s audited net asset value. The fee will be based on share price performance and paid to Jupiter’s team to create “greater alignment between the portfolio manager’s management and shareholders”.
Chrysalis said it intended to defer 75% of any performance fee and apply conditions based on the long-term performance of the trust to ensure that the manager is “incentivised to generate long-term value creation”.
The trust’s high watermark will also be retained, meaning that no performance fee will be paid until the previous high watermark of 251.9p is reached.
The proposed amendment to the performance fee will require shareholder approval – with the vote currently scheduled be held on the same day as the trust’s 2024 AGM – as it will be considered a related party transaction as under the listings rules.
Chrysalis reduces performance fee
Chair Andrew Haining said that the proposed capital allocation policy has been set out to balance the board’s recognition of the “compelling opportunity” to buy back the company’s shares at what it believes to be an “attractive” discount.
“[We intend] to drive long-term returns by providing disciplined support for the current portfolio companies and potentially by allocating to new opportunities in the future,” he said.
“The proposed amendments to the performance fee also reflect an alignment of interests between the company and the portfolio management team, which has been welcomed by shareholders since the initial announcement of the key terms, and we are pleased to provide additional detail today in advance of the resolutions being proposed next year alongside the continuation vote.
According to data from the Association of Investment Companies, Chrysalis has significantly outperformed the Growth Capital AIC sector over the last year, gaining 6.2% compared to the sector’s 15.3% loss.
Changes questioned
In a research note, Stifel analyst Iain Scouller said the trust’s decision to hold £50m in cash was a “sensible approach”.
He said the “relatively thin amount” of net cash on the balance sheet – currently £33m (4% of NAV) – has been one of the firm’s “key concerns”, especially given the likelihood that some companies may require additional funding during and economic downturn.
Scouller noted that the trust’s goal to buy back shares with a value of £100m “could take some time”, especially considering the illiquidity of its underlying assets.
Shareholders to decide Chrysalis’ future in continuation vote
“We also wonder if buybacks are the best mechanism to return cash to investors and generally favour a regular tender offer, which provides a clean exit mechanism for all shareholders at a determined price,” he said.
“In contrast, buybacks only provide cash for those who are prepared to sell in the market at variable daily price levels. We note that Pantheon International recently changed tactics from a buyback to offering a £150m tender offer.”
Scouller also questioned whether the ‘up to 25% of cash profits’ being distributed following the buyback scheme will be a sufficient amount to satisfy shareholders.
He said Chrysalis has used the word ‘profits’ rather than ‘proceeds’, suggesting this may mean “profit over acquisition price, which is likely to be a much smaller figure than would be the case if the board used cash proceeds from realisations”.
Stifel downgrades Jupiter’s Chrysalis to ‘Sell’
“It is early days for these proposals, with the vote not due until Q1 next year – so there will be plenty time for shareholders to give their views,” he added.
“We remain wary on the risks around the portfolio such as the portfolio concentration and the potential for investments to require further funding, noting the relatively thin amount of cash on the balance sheet at £33m.”
Although he said the realisation of a large investment would be “transformational”, Stifel retains a ‘Hold’ recommendation, with a fair valuation of 68p.
