Octopus AIM VCTs

Octopus AIM VCT and Octopus AIM VCT 2 (together the Octopus AIM VCTs) are now raising £20 million, with an over-allotment facility of a further £10 million. 

The two VCTs provide exposure to an established portfolio of largely profitable AIM companies plus earlier-stage businesses from newer investments. These are two of the longest-running AIM VCTs, benefiting from a large and well-resourced investment team. 

Highlights

  • Access to a portfolio of more than 70 AIM companies
  • Well-resourced and highly experienced team 
  • 5% annual dividend target (variable, not guaranteed)
  • Consistent and long-term dividend history
  • Octopus is the UK’s largest VCT provider
  • Minimum investment £5,000 – you can apply online

Important: The information on this website is for experienced investors. It is not advice nor a research or personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and illiquid and can fall as well as rise in value, so you could get back less than you invest.

Read important documents and apply

The manager

The AIM VCTs are run by the Octopus UK Smaller Companies team, which manages more than £1.8  billion in AIM investments across all Octopus products. 

As the name suggests, smaller company investing takes up 100% of the team’s time.

Headed up by Richard Power, Andrew Buchanan and Kate Tidbury, the nine members of the team have more than 100 years of industry experience. They conduct more than 700 company meetings per year to help identify what they believe are the best investment opportunities. They will look at a whole range of companies with a market capitalisation ranging from £5 million to £100 million at the time of investment.

Investment strategy

Octopus AIM VCT launched in 1997 (originally as Close AIM VCT plc). Octopus AIM VCT 2 was launched in 2005 (originally as Close IHT AIM VCT plc). After completing separate mergers in 2010, the VCTs have since followed identical investment mandates, investing alongside each other in every subsequent deal. Today, the portfolios are near identical with just one holding not being shared. Investors can choose one or the other or split their investment between them. 

The managers of the VCTs will consider all qualifying sectors for new investments. When investing new money, Octopus is ideally looking for businesses at their last round of funding before reaching self-sustainability or profitability, with enough investment headroom for Octopus to provide any follow-on investment needed to become self-sustaining. Whilst a new investee company doesn’t need to be profitable at the time of the investment, the team expects it to be profitable within two years. 

The majority of the VCTs’ deal flow is still expected to come from AIM IPOs and existing holdings. While there have admittedly been fewer IPOs in recent years, Octopus remains confident that there are still a good number of interesting opportunities available. In particular, there is an increasing number of listed holdings requiring capital at the smaller, more neglected end of AIM, which can offer the benefit of very competitive valuations. 

The team is willing to hold investments for the long term, providing it sees the business has potential to grow. Indeed, some of the investee companies have been held in the portfolios for more than a decade. If a holding becomes too big (greater than 5.5%-6% of the portfolio) the team will reduce the VCTs’ position to maintain balanced weightings.

Current portfolio overview

Investors could benefit from a diverse portfolio of more than 70 companies – many established – across the two VCTs. 

Combined, the VCTs have over £191 million of net assets (October 2019). The first VCT has 77 holdings and the second 76. Over 75% of the equity of the portfolio is invested in profitable companies; with 52% invested in companies paying dividends.

The top ten sectors of the two VCTs are shown below: as the graph shows, the profile is very similar.

Source: Octopus Investments, as at 31 October 2019.

Examples of portfolio companies

GBG – Octopus AIM VCTsGB Group (largest holding)

GB Group (“GBG”) is the largest holding in both VCTs, representing around 5.2% of each portfolio.

Today, GBG is one of the leading specialists in fraud, location and identity data intelligence. It launched its first identify verification service in 2006 and has since expanded to over 240 countries with the ability to verify more than 60% of the world’s population. 

The company has focused heavily on international expansion in recent years with its international revenues surpassing those from the UK for the first time this year. It has also benefited from a number of astute acquisitions which, in combination with several multi-year fraud licenses, has helped deliver strong organic revenue growth.  Between 2015 and 2019 GBG has grown revenues from £57 million to £143 million and achieved a market cap of £1.17 billion. As of 31 October 2019, both Octopus VCTs have made a 9.86x return on their initial investment. Past performance is not a guide to the future.

Ergomed – Octopus AIM VCTsErgomed 

A specialist in the pharmaceutical industry, Ergomed offers a comprehensive suite of research and biotechnology services.

Its business is split into three distinct operations: clinical studies, drug safety, and drug development. Combined, these services can help its clients through Phase I trials all the way to complex later-stage clinical development. 

The company has sought a number of specialist acquisitions in the last few years to assist its expansion.  Its most recent addition, Dutch-based PSR Group BV, should bolster its orphan drug development programme. 

The VCTs have invested just under £2.5 million into the company which currently represents around 2.4% of the portfolios.

Sosandar – Octopus AIM VCTsSosandar (new investment)

Created by the former editor and publishing director of Look magazine, Sosandar is a new womenswear label focusing on quality designs for professional women.

Its founders, Julie Lavington and Ali Hall, have over 40 years’ experience in fashion media and launched the business after spotting a gap in the market for women who have graduated from trend-led brands. 

They believe the fashion industry can be obsessed with youth, despite the fact that older women spend more on clothing than millennials. 

The business floated on AIM in November 2017 through a reverse merger with Orogen Plc, a cash shell. It went on to raise £7 million in new shares to bolster its design capabilities and product ranges. The VCTs invested in August 2019 for a combined total of £2.5 million.

Faron Pharmaceuticals Company

There will inevitably be some deals that don’t work out. We asked the fund manager for an example. Kate Tidbury cites Faron Pharmaceuticals Company.

The company had been working on a drug, Traumakine, for the treatment of acute respiratory distress syndrome (ARDS). This condition – basically an obstructed airway – typically occurs in patients admitted to the ICU or those who have suffered traumatic injuries. A large proportion of patients on ICU wards die to due to complications of ARDS as available treatments are relatively ineffective. 

Faron Pharmaceuticals first floated on AIM in November 2015. Octopus didn’t invest at IPO, but during its Phase 3 drug trial. 

During human trials, the drug appeared to increase survival in patients with ARDS by 70%. However, an independent audit in May 2018 concluded this was due to the placebo effect. 

Performance

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 (dividends are variable and not guaranteed). 

The share price total return of the two VCTsis shown below.

Source: Octopus Investments. Past performance is not a guide to the future. Dividends are variable and not guaranteed. The bar chart shows Net Asset Value and cumulative dividends (paid out) over five calendar years each year (YTD to 30 September 2019), pence per share.

Around 52% of the portfolio is invested in companies that are already paying dividends. 

The history of dividends is shown below – note past performance is not a guide to the future. The spike in the summer of 2015 was due to the payment of a special dividend following the take-over of Advanced Computer Software by a U.S. private equity firm.

Source: Octopus investments. Please note, dividends are not guaranteed and past performance is not a guide to the future.

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. 

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.

AIM shares can be very volatile and could suffer extreme volatility if the market falls sharply.

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 up to 2%
Annual administration charge 2%
Performance fee
Annual rebate from Wealth Club (for three years) 0.10%

More detail on the charges

Deadlines

  • Invest before 4 April 2020 (noon) for allotment in the 2019/20 tax year (please note, cleared funds required).

Dividend reinvestment scheme

The companies have adopted a dividend reinvestment scheme under which shareholders are given the opportunity to reinvest future dividend payments by way of subscription for new shares. Subject to a shareholder’s personal circumstances, shares subscribed for under the dividend reinvestment scheme should benefit from VCT tax relief. 

Share buy-back policy

The boards intend to buy back shares at up to a 5% discount to the prevailing NAV. Please note, all buybacks are subject to the Companies having sufficient funds available and are at the discretion of the boards.

Annual rebate

The Octopus AIM VCTs 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 0.10% 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 a part of the UK’s largest VCT manager. They are managed by a well resourced and experienced management team. The size of Octopus as an investor ensures it has great access to company management teams and deal flow.

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

It is no secret the UK stock market has seen a loss of investor confidence in recent years, and this has weighed heavily on smaller UK companies, on AIM in particular. The Octopus VCTs have not been immune, both VCTs saw valuations fall in late 2018.  

Conditions within the UK market, particularly AIM, are likely to remain highly volatile, and this could influence the quantity and quality of deals coming to AIM for funding. However, some market participants would argue this pullback in sentiment has left a valuation opportunity for experienced investors patient enough to take a longer-term view and look through the current political uncertainty. Octopus is certainly of the view that the UK stockmarket offers an attractive valuation opportunity relative to elsewhere in the world: of course, there are no guarantees and capital is at risk. 

In our view, the Octopus AIM VCTs could potentially offer an interesting way to back quality but out-of-favour UK small businesses with the benefit of tax relief – but high risk, too.

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.

The details

Type
AIM
Target dividend
5% of NAV
Initial charge
5.5%
Initial saving via Wealth Club
2.5%
Net initial charge
3% (2% for existing shareholders)
Annual rebate
0.10%
Funds raised / sought
£7.0 million / £20.0 million
Deadline
4 Apr 2020 (noon)
Last updated: 30 November 2019

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