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 July 2024, 67% of the portfolio companies were profitable, 50% pay dividends. 

Both VCTs have to date a consistent dividend track record. Over the five years to June 2024, Octopus AIM VCT has paid out 33.5p per share in dividends, equivalent to 33.0% of its starting net asset value. Octopus AIM VCT 2 has paid 29.8p per share, equivalent to 39.5% of its starting net asset value over the period – dividends are variable and not guaranteed.

However, AIM has had a couple of very tough years, declining -35.8% in the three years to June 2024; this compares with -39.9% for the Octopus AIM VCTs. Overall, in the 10 years to June 2024, the NAV total return (including dividends) was 1.2% for Octopus AIM VCT and 4.3% for Octopus AIM VCT 2. Past performance is not a guide to the future. 

The VCTs have combined net assets of c.£200 million, invested in around 80 holdings (August 2024).

• Seeking to raise up to £20 million, with a £10m overallotment facility
  
• Targets an annual dividend of 5% – variable and not guaranteed 
• Available for the 2024/25 tax year
• Minimum investment £5,000 (you can split your investment 60/40 between the two VCTs or invest in just one) – you can apply online
• Next deadline: 25 October 2024 (5pm) for pre-budget allotment

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 £1.9 billion across all Octopus products (30 June 2024). 

Headed by Richard Power and Kate Tidbury, the team of 14 conducts 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 £13.4 billion (30 June 2024) on behalf of over 63,000 clients. Octopus is the UK’s largest VCT manager, with over £1.5 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 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. 

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 the managers believe a holding has become too large (greater than 5%–6% of the portfolio) the team may reduce the VCTs’ position to maintain balanced weightings.

Portfolio overview

Combined, the VCTs have c. £200 million of net assets (August 2024) across a diverse portfolio of around 80 holdings. As at August 2024, 67% of the portfolio companies are profitable and 50% pay dividends. 

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

Top 10 sector breakdown

Examples of portfolio companies

Hasgrove Limited – largest unquoted holding 

Hasgrove’s only operating subsidiary, Interact, is a leading provider of AI-powered intranet solutions to improve internal communications and information sharing within enterprises and large businesses. 

Interact offers a suite of services, from planning and launching a custom network through to training and technical consultation. It has more than four million global users and includes clients such as Indeed, Domino’s, and the NBA.

In its latest financial report (2022), Hasgrove reported revenue growth of 28% to £29.4 million and operating profit growth of 30% to £8.1 million. The company benefitted from growth and new opportunities in the US and an increase in recurring revenue (up 27% in the year). To reflect this, the VCTs’ investment has been marked up. 

The VCTs collectively own 5.3% of Hasgrove. The combined holding is valued at £11.8 million on an investment cost of £241,000. It accounts for 5.7% of Octopus AIM VCT and 7.8% of Octopus AIM VCT 2 (August 2024). Past performance is not a guide to the future.

Breedon Group plc – largest quoted holding 

Breedon is a leading provider of cement, aggregates and other construction materials in the UK and Ireland. The company has over 100 quarries, 50 asphalt plants and 160 ready-mixed concrete plants, as well as two cement factories.

A combination of 25 acquisitions and organic growth has seen its revenues increase by an average of 20% a year between 2011 and 2023. Operating profits over the same period rose 31% a year, to £156 million in 2023. The company declared its first dividend in 2021, and aims to pay out 40% of profits – dividends are variable and not guaranteed. 

In 2024 the company entered the US with the acquisition of BMC Enterprise for $300 million. The deal left the company with 1.4x leverage – which it believes provides ample headroom for dividends and further bolt-on acquisitions across the UK, Ireland and the US.

The Octopus AIM VCTs first backed Breedon in 2010, and the company now accounts for 5.1% of Octopus AIM VCT and 4.8% of Octopus AIM VCT 2 (August 2024). The positions cost a total of £1.4 million and are valued at around £10 million – past performance should not be taken as an indicator of future returns.

Strip Tinning Holdings plc – recent investment

Strip Tinning manufactures flexible electrical connectors. These are primarily used for heating and antenna systems embedded in car windows and account for around 90% of the company’s £10.8 million revenue in 2023. The core business was both profitable and cash generative in 2023, though the company as a whole reported a loss of £771,000.

More recently, the company has started to develop connectors for cells within electric vehicle battery packs. It was the need to invest in this new area that drove the company’s IPO in 2022.

The Octopus AIM VCTs did not participate in the IPO, but invested a total of c.£1.1 million as part of a £5.1 million fundraise in January 2024. This fundraise sought to fund the recruitment of specialist staff to underpin and expand volumes in the EV business.

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

Most of 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 years, declining -35.8% in the three years to June 2024 – past performance is not a guide to the future. The Octopus AIM VCTs have also been affected.

Octopus AIM VCT has fallen by -40.3% in the three years to June 2024 (NAV total return including dividends). Over five years the VCT has produced NAV total returns (including dividends) of -10.7%. That includes total dividend payments of 33.5p per share, equivalent to 33.0% of the VCT’s starting net asset value. Over 10 years, the VCT has delivered a NAV total return of 1.2%. 

Octopus AIM VCT 2 has fallen by -39.5% in the three years to June 2024 (NAV total return including dividends). Over five years the VCT has produced NAV total returns (including dividends) of -8.1%. That includes total dividend payments of 29.8p per share, equivalent to 39.5% of the VCT’s starting net asset value. Over 10 years, the VCT has delivered a NAV total return of 4.3%.

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 June 2024 was -4.6%. Over the previous five years the average discount to NAV was -5.2%.

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 been able to sustain a dividend yield in the middle-single digits or higher, and they target a yield of 5% 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. However, the investment team believes this has left many of its portfolio companies trading on attractive valuations. 

Fundraising on AIM has also declined significantly over the last two years, resulting in limited new investment opportunities. However, the managers expect attractive this to change over time – with opportunities arising 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. 

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.