Preparing for a wave of value write-downs in the private equity trust universe The recent travails of privately-owned Swedish fintech Klarna have ignited the debate over valuations
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rivate equity investors have been put on warning after press reports last month that privately-owned BNPL (buy now, pay later) specialist Klarna was seeking to raise fresh capital at a steep discount to its previous valuation. This has raised the question of whether private equity valuations need to be downgraded across the board, as this would affect many investment trusts with unquoted holdings. The answer is almost certainly not but investors do need to know what they own and whether they are happy with the risk that in some cases valuations will need to be cut.
RETAIL CASUALTY According to the Wall Street Journal, Swedish firm Klarna approached investors in May to raise $1 billion of new financing at a valuation ‘in the low $30 billion range’. That compares with a valuation of more than $45 billion in June last year when Japan’s SoftBank led the previous investment round. The Financial Times goes further, suggesting investors have recently been approached ‘with the opportunity to invest at a valuation below $20 billion’, or less than half its value of a year ago. The collapse in valuations of publicly-listed buy now, pay later competitors such as US company Affirm (AFRM:NASDAQ), whose shares are down 80% this year, means Klarna investors may now have to bite the bullet. SWINGS AND ROUNDABOUTS UK investment trust Chrysalis Investments (CHRY) revealed in its March factsheet that Klarna was its second largest holding, making up 19% of the portfolio and group net asset value of roughly 212p per share based on what was thought to be a 30
| SHARES | 30 June 2022
conservative valuation of $30 billion. As analysts at Numis point out, a potential funding round for Klarna at a $15 billion valuation would reduce Chrysalis’s NAV by 9.5% to around 192p, while its shares are currently trading at around 106p or a 45% discount adjusted for the reduced valuation of Klarna. On that basis, it could be argued that the damage has been done and the downside for its stake in Klarna is already reflected in the share price. Notably the valuation of Starling Bank, Chrysalis’s biggest holding, was revised upward to almost twice the level of a year ago in its April funding round, showing that, as the managers argue, ‘fast growth is able to counteract valuation compression in certain circumstances’. Also, according to media reports, insurance technology company Wefox – which represents around 11% of Chrysalis’s portfolio – is in advanced talks to raise money at a valuation of between $5 billion and $6 billion. That is almost double its valuation of $3 billion a year ago, so what Chrysalis has ‘lost’ on its Klarna
