Review: Octopus Apollo VCT
Octopus Apollo VCT seeks to raise up to £20 million (with a £10 million overallotment facility).
- Large and diverse portfolio of over 50 companies
- Managed by the largest VCT manager
- Aims to invest in proven businesses, not startups
- Mixture of debt and equity
- Targeting a regular annual dividend of 5% of NAV – not guaranteed
- 0.25% annual rebate for three years when you invest through Wealth Club
- Minimum investment £5,000
Octopus Investments, the largest VCT manager, was launched in 2000 out of the front room of one of the three founders. Today it has more than 750 employees and manages £7.7 billion (31 Dec 2018) on behalf of retail investors, charities and institutions, including pension funds, fund-of-funds and family offices.
The Octopus Apollo VCT is managed by a team of seven, nearly all of whom have experience in equity and lending to complement the VCT’s hybrid investment portfolio. The team is still relatively small but hopes to expand as the VCT begins to grow again.
The Octopus Apollo VCT has been through a few iterations over its lifespan. Originally launched as Octopus Apollo VCT 3 in 2007, it has since merged with six other VCTs including Octopus VCT 2 and Octopus Eclipse VCT to create the VCT in its current form in 2016.
Historically and until recently, the VCT pursued a cautious investment strategy. It invested in more established and often already profitable companies rather than startups. In addition, most of the investments also included a secured debt element with pre-agreed interest payments, which could generate a more reliable income stream than equity investments and support dividends.
However, changes to the VCT rules introduced in November 2015 meant those types of deals are no longer allowed for new investments (the changes do not affect existing investments).
While a significant disruption to Apollo’s original strategy, the investment team has taken a measured approach to revamp the portfolio.
The VCT has not raised money for two years: its last offer closed in March 2017. Octopus recruited a new investment director to support the VCT during the transition period. Richard Court, an experienced SME investor, was selected for the role due to his broad experience in debt and equity investments. Rather than rush, the investment team purposefully declined to raise additional capital and focus on rebuilding an investment mandate for the VCT under the new rules.
The VCT will now follow a hybrid strategy of unsecured debt and equity. The goal is to be a one-stop-shop funding solution for investee companies, where the VCT can provide initial growth capital as well as support for the future. The VCT will also be geared towards less volatile deals meaning the investment team will steer clear of startups.
Any potential company should already be relatively established and commercialised – only requiring incremental funding to accelerate its growth. Ideally, the team seeks companies that have annual revenues between £3-8 million, ideally recurring or contracted and that could provide an opportunity for the VCT to realise its investment within three to five years, although this is in no way guaranteed.
Exit track record
Octopus Apollo VCT realised six investments in under two years between 2016 and 2017, generating sale proceeds of over £50 million combined. Please note, past performance is not a guide to future returns. Some of these exits have been because of a shift in the portfolio’s focus to investments that fall into the VCT’s new investment strategy.
One of the most recent exits was the detection hardware designer, Technical Software Consultants (TSC).
Technical Software Consultants - recent exit
Operating in the oil and gas sector, TSC develops hardware to inspect infrastructure components. This could be anything from structural monitoring or stress mapping to underwater defect detection.
Octopus Apollo VCT first invested £3 million in 2012. However, the company ran into difficulties when the global oil market crashed in 2015/16. As oil prices plunged, the industry struggled to stabilise leading to extremely challenging market conditions. To complicate matters further, TSC lost a second investor, leaving the issue solely to the Octopus Apollo VCT investment team.
To protect the business, the VCT provided follow-on capital of £0.5 million in January 2016 and within 12 months the company recovered. TSC was eventually sold to Eddyfi Technologies in May 2017, generating a final return of 1.5x of total cash invested. Please note, past performance is not a guide to the future – see annual performance figures below.
Current portfolio overview
The current portfolio comprises around 50 companies with a mixture of legacy, co-investment and growth capital deals. At the moment, the largest sector in the portfolio is energy but this should decrease as the investment team focuses on new growth capital investments. In the last year, the VCT has invested £16.4 million into five new investments and £1.1 million into follow-on deals.
Example portfolio companies
Countrywide Healthcare Supplies (legacy investment)
A specialist healthcare provider, Countrywide Healthcare aims to be the first choice for the UK’s rapidly growing care home sector.
The company caters to almost every aspect of care home management, from supplying everyday consumables like household cleaning products to designing and furnishing a 75-bedroom luxury care home in Kent.
For the Apollo VCT investment team, the company demonstrated three key traits: recurring revenues, high customer retention, and a strong customer focus. The VCT invested £2.7 million in April 2014 to support a management buyout and develop the company’s sales and marketing.
Since then, the business has grown 46% and now has a base of over 5,000 customers including well known industry giants. The company recently achieved a record year in 2018, with turnover reaching more than £21 million due to a boost in online presence and the purchase of Allanda, an online retailer of incontinence products. Please note, past performance is not a guide to the future.
Natterbox (recent investment)
Established in 2010, Natterbox is a cloud-based telephony system which provides solutions to common call centre problems.
By operating through a cloud-based system, Natterbox removes the need for expensive IT and phone infrastructure allowing businesses to easily scale without upgrading servers. The software can also integrate into most Client Relationship Management (CRM) programs, enabling automatic call capturing and information recording.
For the VCT’s investment team, this is a great example of the type of company it targets. The business is growing fast, it has a strong management team and a relatively consistent recurring revenue base.
Octopus Apollo VCT first invested £5 million in March 2018 to increase sales and improve product development. Since then, reported revenues have grown considerably and the company has opened a US office to expand its target audience.
Performance and dividends
There is a target annual dividend yield of 5% of Net Asset Value, not guaranteed. The average annual dividend for the VCT has been 8.8p, however, this figure is skewed by the special dividend payments made in 2016/17. Please note, past performance is not a guide to the future, dividends are variable and not guaranteed.
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.
Tax rules can change and benefits depend on circumstances.
VCTs can now only invest new money in growth capital deals. Management buyouts, replacement capital deals and investments in mature companies are no longer permitted. This results in considerably higher risks.
Fees and charges
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.
|Full initial charge||5.5%|
|Early bird discount||—|
|Wealth Club initial saving||2.5%|
|Existing shareholder discount||1%|
|Net initial charge through Wealth Club (new investors)||3%|
|Net initial charge through Wealth Club (existing shareholders)||2%|
|Annual management charge||2%|
|Annual administration charge||0.3%|
|Annual rebate from Wealth Club (for three years)||0.25%|
More detail on the charges
The board intends to buy back shares at up to a 5% discount to the prevailing net asset value. This is subject to availability and board and shareholder approval. Please see the offer documents for details.
Dividend Reinvestment Scheme (DRIS)
There is a Dividend Reinvestment Scheme under which allows shareholders to reinvest future dividend payments by way of subscription for 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.
Unless the offer is fully subscribed beforehand, the following deadlines apply:
- Deadline for next allotment: 12 July 2019
- Deadline for applications in 2019/20 tax year: 5 April 2020
- Deadline for application in 2020/21 tax year: 9 May 2020
A dividend of 1.5p has been proposed which, subject to shareholder approval at AGM, will be paid on 9 August 2019. The ex dividend date is 19 July 2019.
The Octopus Apollo VCT 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 0.25% of the Net Asset Value of the Offer Shares issued to you when you invest. Terms and conditions apply.
While the VCT has admittedly faced setbacks in the last few years its team have made a considerable effort to capitalise on the industry challenges.
However, growth capital deals are still unfamiliar ground. The new hybrid strategy the VCT will implement appears sound but is so far unproven.
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.
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