“It’s quite surreal, if I’m honest.” Nick Williamson is reflecting on Chrysalis Investments’ impressive journey during the past few years. When he and co-manager Richard Watts brought the trust, specialising in late-stage private companies, to market in November 2018, the reception was underwhelming.
Listing weeks after Terry Smith’s small and mid-cap Smithson vehicle smashed records for the largest investment company initial public offering (IPO) since Neil Woodford’s Patient Capital Trust, the pair only managed to scrape together half of their £200m target.
But a little over two years later the situation could not be more different. When Portfolio Adviser sits down with the Merian Global Investors duo, the trust has just entered the FTSE 250, fetching a market cap of £819.7m.
Last year, the trust’s net asset value grew by an impressive 42%, the highest in its growth capital peer group, as the valuations of its biggest holdings were revised upward, including the Hut Group, which floated on the London Stock Exchange last September for £5.4bn.
Investors have been chomping at the bit to get involved. Chrysalis has seen several oversubscribed placings, including its latest fundraise, which was approved by shareholders in early March.
Williamson and Watts raised £300m, overshooting their initial £240m target and bringing the total capital raised since IPO to £770m.
The recent placing will be going toward a £1bn pipeline of “strong investment opportunities” the pair has identified, including £250m worth of follow-on opportunities for existing holdings.
After putting in the blood, sweat and tears over the past two years, Williamson says it is gratifying investors and investee companies have a better understanding of Chrysalis’ proposition.
Unlike the typical venture capital and private equity backers of late-stage private companies, Williamson and Watts don’t ditch their investments as soon as they go public. Instead, they prefer a crossover approach, providing funding to businesses before and after IPO.
In the case of the Hut Group this has proved a winning strategy, with the Manchester firm’s shares up by 48% since listing. It is now Chrysalis’ largest investment at 15% of the portfolio.
“The appeal to investee companies is the fact that we don’t really differentiate around points of IPO,” says Williamson. “If you’ve got the firepower to stand behind them and put money in as they grow, that’s very attractive.”
It also widens the opportunity set for ordinary investors, most of who only have access to the listed world that is being disrupted by the sorts of private businesses the duo invests in. Williamson says: “As a normal investor you can’t get hold of the stuff that is really exciting. That’s what Chrysalis gives you an opportunity to do.”
The portfolio is highly concentrated by choice, with Williamson and Watts invested in just 12 holdings. “It’s never going to be a 40-stock portfolio,” says Williamson. “Big picture in a couple of years is that we will be 15 to 20 companies, which feels quite comfortable for us.”
For companies to make it into the portfolio “they can’t just be concepts”, Watts stresses, but must have “a proven business model” demonstrated by significant revenues and “a clear path to profitability” if they have yet to break even.
They like to think of companies in terms of waves. ‘Wave one’ firms, such as Swedish ‘buy now, pay later’ firm Klarna and Transferwise, which rebranded as Wise in January, have already proven themselves, with the former generating more than $1bn (£0.73bn) in revenue last year.
Berlin-based insurer Wefox and Starling Bank would be categorised as ‘wave two’, or ‘emerging disruptors’. This area is particularly exciting as companies are at a stage where they are growing quickly and scaling rapidly.
‘Wave three’ consists of smaller businesses with interesting propositions they can seed further down the line.
Williamson and Watts look to invest in “tech-enabled” companies. Though not out-and-out tech plays, these firms are similarly disrupting huge industries that are dominated by “bureaucratic, oldworld businesses”. Wise and Klarna are obvious examples, shaking up the foreign exchange and traditional payments markets, respectively, both of which have been dominated by the banks.
In this way the pair’s approach is not dissimilar to Baillie Gifford’s James Anderson, who has built his reputation on spotting and backing disruptors before they become household names.
But unlike Baillie Gifford, which tends to hunt for unlisted gems across the pond and more recently in China, Williamson and Watts very much see themselves as pan-European investors, preferring their traditional stomping ground of the UK.
In total they run about £6.5bn in the UK mid- and small-cap market, including Williamson’s £311.4m Jupiter UK Smaller Companies Focus Fund and Watts’ £3.4bn Jupiter UK Mid Cap Fund.
“From day one we’ve been offered opportunities in the US, but we felt there was enough to do in Europe and the UK without having to stretch the origination channel aggressively,” says Williamson.
“The Baillie Gifford guys are doing a lot in America and China, and good on them. They’ve got the connections. Our connections are nearer to home and that feels like the focus for now.”
One exception is their holding in New York ‘brandtech’ specialist You & Mr Jones, which is also owned by Anderson’s £16.5bn Scottish Mortgage trust. But Williamson insists You & Mr Jones was a unique situation. He and Watts are already major investors in Martin Sorrell’s digital ad agency S4 Capital, a close analogue to David Jones’ up and coming business.
“A lot of the due diligence background you’d need to do on an asset like You & Mr Jones, we’d already done,” Williamson explains. “And it came to us at a valuation we thought was extremely attractive, so it was quite an easy step to make.”
There has been speculation that several of Chrysalis’ holdings, including Klarna, Wise and Embark, could float on the London Stock Exchange this year.
IPO to go
Williamson and Watts have invested about £2.5bn in the IPO market during the past few years. In 2021 alone they have served as cornerstone investors in boot maker Dr Martens’ £1.3bn listing and Auction Technology Group’s flotation.
Takeaway delivery firm Deliveroo flopped on its debut on the London Stock Exchange on 31 March as its shares closed out trading at 284p a share, down 14%.
Speaking to Portfolio Adviser before Deliveroo’s listing, Williamson says the fact that bigger UK technology businesses are expressing interest in listing is encouraging. The number of IPOs in the UK has severely diminished in the past decade, falling from 200 annually pre-financial crisis to 83 a year on average.
“The fibre of the IPO market is important and has shown good signs of picking up,” he says. “There is a bit of the market trying to decide what’s happening with rates rising, but all that said and done I feel relatively positive about the outlook.
“There’s obviously very strong investor demand globally for a lot of these type of tech-enabled businesses, and demand for IPO, and I sense there is a better quality of backlog looking to float.”
This interview first appeared in the April 2021 issue of Portfolio Adviser. Read more here.