Review - Octopus AIM VCT and Octopus AIM VCT 2
This is a top-up offer to the longstanding Octopus AIM VCT and Octopus AIM VCT 2. Combined they have over £158 million of assets; the first VCT has 71 holdings and the second has 69. Investors can choose to allocate 100% to either VCT, or have a 50/50 split.
- Large, well-diversified VCTs
- 5% annual dividend target
- Experienced management team with £1 billion under management
- Small top-up offers expected to sell quickly
- Minimum investment £5,000
The Octopus UK Smaller Companies team manages both VCTs. It is an experienced team of eight including Richard Power, Andrew Buchanan and Kate Tidbury. They manage £1 billion across these VCTs, funds, EIS and AIM IHT portfolios. In total Octopus manages over £6.1 billion of assets across a range of VCT, EIS, funds and IHT products.
Target return and strategy
Octopus AIM VCT seeks to pay annual dividends of 5p or a 5% yield, whichever is greater. Octopus AIM VCT 2 seeks to pay 3.6p minimum annually or a 5% yield, whichever is greater. There is no specific growth target for either VCT.
The Octopus team likes investing in disruptive, unique or niche businesses whose management teams have a track record of growing publicly quoted companies.
Octopus typically invests in businesses at their last round of funding before reaching self-sustainability or profitability. Therefore, lots of analysis is undertaken around the business model and potential cash generation. Whilst the company doesn’t need to be profitable at the time of the investment, it should be within two years.
The senior team includes Andrew Buchanan, Kate Tidbury, Richard Power and Paul Stevens, who spend most of their time meeting companies (an average of more than 500 meetings with company management per year) and brokers pre-float and are arguably the key decision makers. However, every investment opportunity is discussed by the whole team at their weekly meeting. The decision doesn't need to be unanimous, but if one of the senior team is really against it they probably wouldn't invest.
The team looks at the whole range of companies with a market capitalisation ranging from £5 million to £100 million at the time of investment; the average market capitalisation of companies in the VCTs today is £285 million. They will consider every qualifying sector, for example the biotech sector was key for new deals last year. Octopus will take stakes of up to 15% in the underlying company, but generally won't take board seats.
The trigger for selling an investment is often a significant change in the share price. This doesn’t necessarily mean a fall in price, it could simply be the share price has gone so far the investments represents a disproportionately large part of the portfolio. Further reasons for selling could be a deterioration in business case, a change in investment direction, or in management. The final decision is made by the investment committee.
There will be scenarios where the VCTs will sell and the EIS funds managed by the same team will continue to hold due to the potential loss of tax breaks if sold early in the EIS. The team is happy to hold companies for the long term, this is partially evidenced by the average market capitalisation in the portfolio.
Raising a small amount of new money shouldn’t put pressure on the managers to find and invest in new deals that quickly. With an already well diversified and large portfolio, any new money should be easily manageable, especially as they have three years to invest it. Octopus tends to look for slightly earlier stage, often pre-profit companies, therefore there might be a higher risk of failure.
Please remember capital is at risk. VCTs are high risk investments and are not suitable for everyone. Investors should not invest money they cannot afford to lose. Tax benefits depend on individual circumstances and tax rules can change.
There is an initial charge of 5.5% before any Wealth Club discount. There is a 1% loyalty bonus for existing Octopus VCT investors. The annual management fee is 2%. There is no performance fee. There is no cap on the total annual charges, however as the VCTs have grown in size total costs have fallen. In the last financial year the annual running costs were between 2.3% and 2.4%.
The AIM VCT universe has shrunk over the past decade and what remains is generally of decent quality – managers with experience who are fully committed to the specialist nature of the task at hand. Octopus’ team is probably the largest manager of AIM investments in the sector. This size brings advantages such as early access to potential new qualifying deals. Please remember, though, past performance is not a guide to the future.