Review - Octopus Titan VCT

Archived article

Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.

This £50 million offer (that could rise to £80 million) is a top up to the largest VCT, Octopus Titan, which currently has assets of approximately £215 million. This longstanding venture capital trust was first launched in 2007 and today has 53 companies in the portfolio. It is focused on early stage growth orientated businesses.

Highlights

  • Early stage high growth investments
  • Proven record of finding winners
  • Large, well-diversified portfolio
  • Annual dividend target of 4 pence per share

The manager

The Titan VCT is managed by the Octopus Ventures team. It is led by Alex Macpherson and Alan Wallace who founded the team in 1999, subsequently being bought by Octopus in 2008. In total Octopus manages over £5 billion of assets across a range of VCT, EIS and IHT products. As well as Messrs Wallace and Macpherson, there are a further 16 team members split between deal origination, portfolio management and exits.

Target Return and strategy

There is a target dividend of 4 pence per share per year, rising to 5 pence per share from October 2017. Capital growth is also an aim.

This VCT unashamedly backs growth orientated early stage businesses. Most companies invested in have some form of technology related to the business. Very small businesses, many without revenue, are backed with an investment of as little as £150,000, with the aim of adding more money to the winners in the portfolio in later rounds of funding. Overall the average investment per company is approximately £1.5 million. Their strategy is not to bet the bank too early on a particular company.

An innovative part of the investment process is to test the idea of the business out on a 110-strong network of what Octopus call their venture partners. These individuals pay Octopus an annual fee and are invited to invest alongside every deal on the same terms. It isn’t just hard cash Octopus wants; they want investors in their network to be able to add something to the underlying business and to aid their development

Investments are made into between six and ten companies new to the VCT per year; around 75% of new money invested though is used to invest more money into existing companies in the portfolio.

Companies sought have to be “tech enabled” with a strong management team, in a large market and have the ability to grow quickly. Tech enabled businesses are those that can exploit what is going on in the tech world, for example the huge growth in mobile use currently. Tech enabled businesses are the focus as these are not normally in need of huge levels of capital to fund growth. Generally, Octopus Ventures invest in just the pure equity of the business and aren’t lending money like other VCTs.

Whilst seeking new deals, money raised will be invested in a mix of different assets including cash, money market funds, gilts and other Octopus products.

Exit strategy

In a meeting with Mr Wallace recently, he admitted that there was no predetermined exit strategy when buying into a business. His view was that if successful, the exit route would reveal itself. Looking at some of their notable winners: flotations, partial realisations, and trade sales have all been present. Overall there have not been many full realisations thus far, though the manager is keen to stress they invest for five to eight years typically.

Risks

This is an early stage growth VCT and as such there will be failures of some of the underlying companies. In total, there have been 11 failures out of 64 companies invested in since the VCT first launched.  These are generally longstanding investments of between five and eight years at least, there haven’t been too many realisations thus far. Another risk is that as the performance hurdle has currently been met, 20% of future gains automatically go to Octopus. The hurdle rate is reset at the end of each financial year assuming the NAV has increased.

Fees

There is an initial charge of 5.5% before any Wealth Club discount. The annual management fee is 2% and in addition Octopus is entitled to an administration fee of 0.3% annually. Annual running costs are capped at 3.2% per annum. Octopus also receives deal arrangement fees of 1.5%.

A performance fee is also payable of 20% of any future gains, based on increasing total returns from this point – for full details please read the prospectus.

Summary

The Octopus Ventures team is in our view the star of the Octopus stable. Led by Alex Macpherson, it has a long track record of investing in, nurturing and exiting companies profitably, although most realisations have been generally partial, in other words only a part of the holding has been sold. Invariably, there will be failures in earlier stage investments, but the winners have more than made up for this so far. Please also remember this VCT has a lot of cash to invest. Although the team is well resourced, this puts the pressure on to find exciting new businesses.