The Merian Chrysalis investment trust (MERI) is to raise another £100 million from investors, less than a year after its launch.
The trust, which focuses on unquoted companies, launched in November 2018, raising £100 million. With a track record of less than 12 months, the trust is not currently rated by Morningstar. Yet it is clearly a popular choice among investors, with its shares currently trading at a hefty 19.6% premium to net asset value. Shares have climbed 28.1% year to date while the trust has grown its net asset value by 10%.
The trust is now set to issue new shares to raise a further £100 million. That’s despite the fact that manager Richard Watts has only put around 80% of the capital already raised to work at present.
Merian says the team has a pipeline of exciting opportunities and a number of potential investments are undergoing due diligence. Around half of the money raised through the new share issue will be used to increase the trust’s stake in companies it already invests in.
Ben Yearsley, director at Shore Financial Planning, says: “The trust is currently very small so I think we are likely to see a number of fundraising rounds over the next couple of years while the team build it up to the size they want.”
Watts aims to find later-stage private companies, which may be close to IPO. Previous investments include online retailer The Hut Group, currency exchange platform Transferwise and online holiday firm Secret Escapes. At launch, Watts said the trust is likely to hold only between seven and 15 companies in its portfolio.
Watts, says: “Over the past decade, here has been a significant increase in the number of businesses who have delayed an IPO due to the increasingly short-term focus of stock markets. The trust was launched last year to exploit this growing opportunity.
“Now Merian Chrysalis is around 80% invested, it is an opportune time to expand the portfolio and quickly capitalise on our strong pipeline of investment opportunities.”
The investment trust will buy shares in companies from Merian's open-ended funds, a move Morningstar analyst Samuel Meakin describes as sensible. "The investment trust structure, not subject to daily investor flows, is better suited to holding these illiquid investments," he says. At the same time, Meakin says he is comfortable with the open-ended funds' small exposure to unlisted stocks.
Private for Longer
A trend in recent years has seen more companies choose to stay private for longer, making it harder for investors to get exposure to the fast growth of businesses before they list on the stock market.
Investing in unquoted companies can offer the potential for greater returns as these smaller, less-established businesses can often grow at a quicker pace than their listed counterparts. However, the sector has come under the spotlight in recent months after the suspension of the Woodford Equity Income fund.
The Woodford fund had invested a significant proportion of its assets in unlisted companies and illiquid assets and was subsequently unable to meet redemption requests from investors. The Financial Conduct Authority is undergoing a review as to whether unquoted companies should be allowed to be held in open-ended funds because of a “liquidity mismatch”.
But the Merian Chrysalis trust is a closed-end fund, which experts say is a more appropriate vehicle in which to hold illiquid assets. Closed-end funds, or investment trusts, do not see their assets under management rise and fall in line with investor demand so they do not have to shift their portfolios in order to meet any redemption requests.
Yearsley adds: “I hope the Woodford fund suspension has not put people off unquoted investments. It’s a potential very exciting part of portfolios as long as you hold the assets in the right structure.”
The trust has an annual charge of 0.5% of its net assets but there will be no fee on any uninvested cash until 90% of the money raised has been deployed.
Dan Nickols, head of UK small and mid-cap equities at Merian, adds: “Recent events have resulted in a heightened level of interest regarding this type of investment in open-ended funds. We have always maintained a prudent approach to unlisted holdings, investing only in established businesses, combined with strict compliance oversight.”
Nickols runs the Gold-rated Merian UK Smaller Companies fund, an open-ended fund which has 5.8% of its assets in unlisted companies including TransferWise, Starling Bank and Secret Escapes.
According to Pitchbook, Secret Escapes raised £52 million from Old Mutual Global Investors (now Merian) in July 2018. Meanwhile, Transferwise completed a funding round earlier this year, in which it was backed by BlackRock, Baillie Gifford and Lone Pine Capital among others.
