This has historically been justified both by the concentration in the portfolio (It only has 10 holdings at the moment and 3 of those are unlisted), and the risk inherent in many of the assets. Today valued at £1. Tomorrow possibly only 10p.
It might be considered that the fund has done better for management than investors.
However presumably noticing the discount, Saba Capital Management, an American VC has bought 26% of the shares.
This matters as in November Crystal is due a continuation vote and this requires 75% support. Saba has said it will vote against and so there would be no continuation. It is also worth noting that a couple of other VC’s have built up positions and can be expected to vote with Saba.
Having announced that they would not support continuation Saba left management with two options.
A)Come up with a revised opportunity that Saba could support.
B)Accept that the business would be wound up.
With the arrival of the results for June 2021 it seems that management have opted for Option B and the winding up of the business.
As of June NAV is £122.9m and the market cap £95.5m giving a possible 28% upside.
It should be recognised that in part the level of NAV is due to share price bounce backs after Covid and it is equally susceptible to share price falls, as seen this week.
Management have begun actions to see if there are any potential buyers for the portfolio and absent this claim to be looking to sell individual assets in the portfolio.
The 5 biggest holdings are
De La Rue 36.2% of Crystals NAV
GI Dynamics 16.3%
Equals 15.3%
Hurricane Energy 13.2%
Allied Minds 7.8%
Total 88.8%
It seems to me to be perfectly possible that De La Rue, Equals and Allied Minds could be sold reasonably quickly at something similar to valuation. Though it needs to be recognised that with Crystal’s big position in each company selling, unless to a single buyer, would drive down the share price, possibly significantly. I am sure the point could be made in all these cases that a little longer in development could reap a notably better reward.
Hurricane Energy has been a complete dog, with very dubious management and poor operation. It might be worth near NAV to a trade buyer, but I do not believe you could get anything like NAV selling the shares into the open market.
GI Dynamics is unlisted and will only have real value if the products it is developing have an actual market. The products have yet to be fully developed or the market proven and Crystal management have indicated that they believe the best policy would be further investment into GI to accelerate the possible growth.
Doing this may of course lead to a higher eventual pay out. But it also means that any pay day on disposal will be put back till realisation or abandonment.
For a company with few assets the ongoing costs are not small.
All of the above leads me to see this as a crystalisation event in slow motion. I can see the winding up being over 2 years and management who have been paid well not rushing this.
I also think that there is a risk that assets are overvalued at the current NAV, but might be of significant worth to the right trade or financial buyer. So even if sold they might not get what was sought, though on the right day they could get more. But the fact Crystal would be a known seller directs towards being worth less.
Overall there is a risk which means that I will limit my holding, but equally a good chance at a greater than 10% pa return over the next two years. In reality I am hoping that the returns will be better than this simply by a lot of the realisation being delivered at the earlier part of the period rather than the later.