Review: Octopus Titan VCT
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
Nobody could ever accuse Octopus Titan VCT of doing things by halves. At £825 million (23 October 2019), it’s already the largest VCT by some degree. If the current offer is fully subscribed, it could potentially become the first £1 billion VCT.
Its investment style has always been equally ambitious. The team looks for companies it believes can become £1 billion businesses and deliver return multiples of at least 10x. There have been both failures and successes along the way. Zoopla is probably the best-known example of the latter. Octopus Titan VCT invested when it was a startup. Six years later, it listed on the main London Stock Exchange and then became the first VCT-backed £1 billion company. Past performance is not a guide to the future.
How does Octopus do it?
It is perhaps both a science and an art. Octopus Ventures, the investment manager, engages with thousands of businesses every year. A stringent selection process follows. In the 12 months to April 2019, the team reviewed 1,100+ opportunities in detail and held 160 preliminary meetings. From these, it expects to make 10-15 new investments a year.
Octopus looks for “unusually talented” entrepreneurs, with whom it can build a long-term and mutually profitable relationship.
As an example, in 2003 the investment team that would later become Octopus Ventures helped three entrepreneurs – William Reeve, Graham Bosher and Alex Chesterman – grow their merged online DVD company, which later became LoveFilm (sold to Amazon for £200 million in 2011).
Since then Octopus has backed the same three entrepreneurs through five subsequent ventures. Mr Reeve was on the early board of Secret Escapes. Mr Bosher was behind Graze.com and Tails.com. Mr Chesterman went on to start Zoopla (later Zoopla Property Group) then, most recently, second-hand car supermarket Cazoo. Secret Escapes is still part of the Octopus Titan VCT portfolio; Cazoo is one of its newest investments.
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Has this approach paid off?
Octopus Titan VCT has realised a number of high-profile exits.
That said, over the last five years, the bulk of its returns have come from the growth and revaluation of its existing holdings, rather than through exits or income generation. But this is what you would expect from Octopus Titan VCT’s investment style.
Early-stage high-growth companies seldom pay dividends. Also, they tend to go through numerous “revaluations”, e.g. new funding rounds (which will influence the value of the VCT holding), before reaching the point a realisation might be on the cards.
Despite this – and despite net asset growth being somewhat subdued in the last five years – Octopus Titan VCT has continued to pay out a healthy tax-free dividend each year. Please note, dividends are not guaranteed and past performance is not a guide to the future.
What does the current portfolio look like?
The current portfolio includes 75+ businesses, with the largest 10 holdings making up 43% of the portfolio (excluding cash, 30 April 2019).
It is, therefore, one of the more diversified VCTs. It is also spread across companies at various stages of maturity: more than 20, together valued at £200+ million, have been held for five years or longer.
An example is Secret Escapes, which accounts for 7.3% of the portfolio by value, with further interest via Zenith Holding. Secret Escapes is a members-only club that sells heavily discounted luxury hotel stays online. Turnover has increased from £20.4 million in 2014 to £73.2 million in 2017 and further in 2018.
On the flipside, the fund is now very big, so some of the investee companies will have to really shine to make a serious impact on performance. Octopus is confident the VCT’s portfolio includes a significant number of such companies, but there are no guarantees.
Cazoo – recent investment
Cazoo aims to be the UK's first online marketplace for used cars, making the experience as quick and hassle-free as buying anything else online. Customers will be able to place an order one day and have their car on their driveway just 48 hours later.
Cazoo has only just launched (in December 2019) but it has already attracted over £55 million in investment – £5 million through Octopus Titan VCT.
It isn’t as much of a leap in the dark as it might seem. Cazoo is the brainchild of Alex Chesterman, whom the team behind Octopus Titan VCT has already backed twice in the past: as the co-founder of the company that eventually became LoveFilm and as the founder of Zoopla. LoveFilm was sold to Amazon for close to £200 million. Zoopla listed on the main market of the London Stock Exchange and proceeded to become the first VCT-backed £1 billion company in 2014, before being sold to Silver Lake for £2.2 billion in 2018.
The jury is out on whether Alex Chesterman can replicate his past successes: as you will know, past performance is not a guide to the future. Interestingly, besides Octopus Ventures, another two of the four main investors in Cazoo, dmg ventures (the venture arm of DMGT plc) and Stride.VC, previously also backed Zoopla.
This review first appeared in our investment newsletter published on 17 November 2019. Please remember, VCTs invest in smaller companies, which are high risk: you could lose all the capital you invest.
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