Octopus AIM VCTs

Octopus AIM VCT and Octopus AIM VCT 2 are two of the longest-running AIM VCTs, benefiting from a large and well resourced investment team.

They provide exposure to a portfolio of more established AIM companies alongside earlier-stage businesses from newer investments. As at August 2023, 63% of the portfolio companies were profitable, 43% pay dividends. 

Both VCTs have to date a consistent dividend track record. Over the five years to September 2023, Octopus AIM VCT has paid out 33.5p per share in dividends, equivalent to 26.8% of its starting net asset value. Octopus AIM VCT 2 has paid 24.7p per share, equivalent to 26.7% of its starting net asset value over the period – dividends are variable and not guaranteed.

Overall, in the 10 years to September 2023, the NAV total return (including dividends) was 12.1% for Octopus AIM VCT and 15.5% for Octopus AIM VCT 2. Past performance is not a guide to the future. 

The VCTs have combined net assets of c.£210 million, invested in around 90 holdings (July 2023).

The manager

The Octopus AIM VCTs are managed by the Octopus Quoted Companies team, which includes some of the most experienced AIM-focused fund managers in the market. Together, they look after £2 billion across all Octopus products (30 June 2023). 

Headed by Richard Power and Kate Tidbury, the team of 11 has more than 140 years of industry experience. They conduct hundreds of company meetings each year to help identify what they believe are the best investment opportunities. This level of activity is likely to be hard to replicate by competitors and could be a real advantage in busy, competitive markets. The dedicated investment resource is a key differentiator for the Octopus AIM VCTs, in our view. 

Overall, the wider Octopus Group manages £13 billion (30 June 2023) on behalf of over 63,000 clients. Octopus is the UK’s largest VCT manager, managing over £1.6 billion across its VCTs. 

Investment strategy

Octopus AIM VCT launched in 1997 (originally as Close Brothers AIM VCT plc) and Octopus AIM VCT 2 in 2005 (originally as Close IHT AIM VCT plc). Since 2010, the VCTs have followed the same investment mandates, investing alongside each other in every subsequent deal. Today, the portfolios are near identical with similar performance and dividend track records. Investors can choose one or the other or split their investment between them. 

The VCTs’ managers will consider all qualifying sectors for new investments. In particular, the team looks for companies with one or more of the following:

• strong management
  
• healthy and largely debt-free balance sheet 
• a niche product taking a growing share of a growing market 
• a clear path to profitability 

The majority of the VCTs’ deal flow is expected to come from AIM IPOs and existing holdings. It will on occasion take small holdings in pre-IPO companies, either to secure the ability to follow on at IPO or when opportunities are concentrated in that part of the market. 

The team is willing to hold investments for the long term, providing it sees the business has potential to grow. Indeed, some of the companies have been in the portfolios for over a decade. If a holding becomes too large (greater than 5%–6% of the portfolio) the team will consider reducing the VCTs’ position to maintain balanced weightings.

Portfolio overview

Combined, the VCTs have c. £210 million of net assets (July 2023) across a diverse portfolio of around 90 holdings. As at August 2023, 63% of the portfolio companies were profitable and 43% pay dividends. 

The breakdown of the top 10 sectors for each VCT are shown below: as the graph shows, the portfolios are very similar.

Top 10 sector breakdown

Examples of portfolio companies

Ergomed – largest holding 

Ergomed offers a suite of specialist services to the drug development industry, specialising in oncology and rare diseases. Under the Ergomed brand, the business supports patient recruitment and engagement, while its PrimeVigilance product helps track, monitor, support and manage side effects from new drugs.

The company was founded in 1997 by current Executive Chairman Dr Miroslav Reljanovic after conducting drug trials in neurology at a large WHO collaborating centre. He subsequently led the company through its AIM IPO in 2014 and remains at the helm today.

A series of acquisitions as well as organic growth have seen revenues increase from £21.2 million in 2014 to £145.3 million in 2022, with profit before tax last year of £18.0 million. 

On 4 September 2023 the Ergomed board announced they had received an offer for the company of £13.50 per share. If approved, the deal would value the business at £703.1 million and represent a 32.7% premium to the six-month average share price.

Prior to the potential deal being announced, Ergomed accounted for 6.4% of Octopus AIM VCT and 6.1% of the Octopus AIM VCT 2 (July 2023). 

Itaconix – recent investment

Itaconix produces plant-based polymers. These can be used make everyday products – from dishwasher tablets to personal deodorants – more sustainable. 

The company has already seen success in cleaning products – it reported sales of $5.6 million in 2022, more than double what it achieved in the same period a year earlier. The company is seeing particular success in dishwasher tablets. 

Management is targeting other areas of both household and personal care for future growth. New proprietary technology for plant-based super-absorbents and new hair products expanded the group’s addressable market from $750m to $2.3 billion. 

The VCTs invested a total of £2.7 million in February 2023 as part of a £10.5 million funding round.

In The Style – example of previous failure 

In The Style was a fast-fashion retailer which marketed styles selected by a network of social media influencers. At its peak, the company had sales in 100 countries to over 1.5m customers. 

The Octopus AIM VCTs invested in March 2021 at a price of 200p. The self-funded, founder-led business had delivered rapid growth since launch in 2013, and targeted 50% a year revenue growth over 2021-2023. 

Unfortunately, it warned on profits in September 2021 as shipping and freight costs skyrocketed. In July 2022, the business reported flat sales for the year and a loss. Ultimately, In The Style’s board was forced to launch a strategic review in December 2022, and the business was taken private. The Octopus AIM VCTs opted to sell its shares at 0.42p. 

Exit track record

The companies in which AIM VCTs invest are quoted on AIM, so shares can be bought and sold more easily than is the case with private (unquoted) companies. Realisations – particularly partial ones – are common with AIM VCTs, for instance, to rebalance the portfolio. We do not believe they are indicative of a manager’s performance and for this reason we don’t focus on them. 

Performance and dividends

The AIM market has suffered a substantial fall in recent months, declining 11.4% in the nine months to September 2023 – past performance is not a guide to the future. The Octopus AIM VCTs have also been affected.

Octopus AIM VCT has fallen by -12.4% in the nine months to September 2023 (NAV total return including dividends). Over five years the VCT has produced NAV total returns (including dividends) of -26.8%. That includes total dividend payments of 33.5p per share, equivalent to 26.8% of the VCT’s starting net asset value. Over 10 years, the VCT has delivered a NAV total return of 12.1%. 

Octopus AIM VCT2 has fallen by -12.2% in the nine months to September 2023 (NAV total return including dividends). Over five years the VCT has produced NAV total returns (including dividends) of -24.3%. That includes total dividend payments of 24.7p per share, equivalent to 26.7% of the VCT’s starting net asset value. Over 10 years, the VCT has delivered a NAV total return of 15.5%. 

Note, we show VCT returns over a five-year period as a minimum, where possible. Where a VCT has followed the same investment strategy for longer, we also show returns over 10 years.

Past performance is not a guide to the future, dividends are variable and not guaranteed. 

Octopus AIM VCT seeks to pay annual dividends of 5p per share or a 5% yield, whichever is greater. Octopus AIM VCT 2 seeks to pay 3.6p per share annually or a 5% yield, whichever is greater. As the two VCTs pay dividends at different times of the year, investing in both VCTs offers the potential for investors to receive four dividend payments per year.

NAV and cumulative dividends per share over five years (p)

Dividend payments in the calendar year

Dividend reinvestment scheme

There is a Dividend Reinvestment Scheme that allows shareholders to reinvest future cash dividend payments in new shares if desired. As these are new shares they should be eligible for tax relief (you will need to claim this on your tax return or directly with HMRC) and the shares will count towards the VCT annual subscription limit. 

Share buy-back policy

The boards intend to buy back shares at up to a 5% discount to the prevailing net asset value. This is not guaranteed – please see the offer documents for details. 

Discount history

VCT shares are traded on the London Stock Exchange. Similar to investment trusts, the share price can fluctuate and can be different from the VCT’s net asset value (NAV), i.e. the value of the VCT’s underlying investments. The difference between the share price of a VCT, and its net asset value per share, is called a discount.

Based on data from Morningstar, the average discount to NAV as at 30 September 2023 was -3.3%. Over the previous five years the average discount to NAV was -5.1%.

The discount history is based on the closing share price of the VCT sat the end of each month, divided by the latest net asset value at the time. Past performance is not a guide to the future. Investors looking to sell their VCT shares may get a better price using the VCTs’ share buyback facilities, although this is not guaranteed.

Risks – important

This, like all investments available through Wealth Club, is only for experienced investors happy to make their own investment decisions without advice. 

VCTs are high-risk so should only form part of a balanced portfolio and you should not invest money you cannot afford to lose. They also tend to be illiquid and hard to sell and value. Before you invest, please carefully read the Risks and Commitments and the offer documents to ensure you fully understand the risks. 

To retain the tax benefits, VCTs should be held for at least five years. If you sell VCT shares and reinvest in new shares of the same VCT (including any mergers) within six months, tax relief can be restricted. Tax rules can change and benefits depend on circumstances.

The quantity and quality of investment opportunities available to AIM VCTs is dependent on sufficient VCT-qualifying fundraising activity on the AIM market, which will fluctuate. 

AIM shares can be very volatile and could suffer extreme volatility if the market falls sharply. The difference between the buying and selling price of AIM-listed companies is often wider than those listed on the main market. 

Charges and savings

A summary of the main charges and savings is shown below. The net initial charge shown includes the Wealth Club saving and any early bird discount. The investment may have additional charges and expenses: please see the provider documents including the Key Information Document for more details, offer price and share allotment calculation methodology.

Please note, capacity – for the offer or any early bird savings – can be reached early, and we may not be notified of this by the VCT in real time.

Annual rebate

The offer includes an annual rebate for Wealth Club investors, payable for the first three years. This is a rebate of our renewal commission and should be equivalent to a percentage (shown in the table above) of the net asset value of the offer shares issued to you when you invest. Terms and conditions apply.

Our view

The Octopus AIM VCTs benefit from being managed by a well resourced and experienced team within the UK’s largest VCT manager. The size of Octopus as an investor within AIM means the team has great access to companies' management teams and deal flow.

Over the long term, the Octopus AIM VCTs have consistently returned a mid-single digit dividend yield to shareholders and maintained the dividend target of 5% for each VCT for this year. Past performance is not a guide to the future.

As an AIM VCT, the trusts are subject to market volatility. Valuations of growth stocks have been turbulent recently affecting the VCTs’ performance. Fundraising on AIM has also declined significantly in the last 18 months, resulting in limited new investment opportunities. 

However, the investment team believes the fall has left many of its portfolio companies trading on attractive valuations. And the managers expect attractive new investment opportunities to emerge over time – both from existing portfolio companies looking to raise new capital and new ones coming to market.

The Octopus AIM VCTs are two of the more diversified AIM VCTs and, in our view, the offer could be an attractive way for experienced investors to back high-quality growth-orientated UK small companies in a tax-efficient manner. The VCTs have a large sector allocation to both software & computing services, and pharmaceuticals & biotechnology, which may complement a wider investment portfolio.

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.