Octopus Titan VCT

New offer expected in late summer 2017 – register your interest below

The UK's largest VCT, Octopus Titan launched in 2007. It has around 60 companies in the portfolio and assets of around £425 million. It focuses on early-stage growth orientated businesses, which are by nature high risk.

Update (July 2017): Octopus has announced an intention to raise up to £120 million in 2017/18, with an over-allotment facility of £80 million. The prospectus is expected to be published shortly. Register below to get notified when the offer opens.

Highlights

  • A mature and diversified portfolio of around 60 companies – from established ones such as Secret Escapes, Calastone and Graze.com, to earlier-stage businesses
  • The UK’s best-performing generalist VCT over five years with net asset total returns of 92.7% to date (discrete performance figures shown below). Past performance is not a guide to the future
  • A history of exits – the latest, Zoopla, is the first VCT-backed £1 billion company
  • A track record of tax-free dividends – it aims to pay annual dividends of 5p per share (variable and not guaranteed). Since launch in 2007 it has paid total dividends of 61p per share 
  • Low minimum investment – just £3,000
  • Up to 3.5% discount when you invest through Wealth Club

The manager

Titan VCT is managed by the Octopus Ventures team, a dedicated business unit within the Octopus group. It is led by Alex Macpherson and Alan Wallace who founded it in 1999 – it was acquired by Octopus Investments 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 16 others in the team split between deal origination, portfolio management and exits.


Target return and strategy

There is a target dividend of 5 pence per share per year. Occasionally there might be special dividends, usually as a result of an exit or partial exit. Capital growth is also an aim. Indeed over the past five years the Octopus Titan VCT has been the UK's best-performing generalist VCT, delivering total returns of 92.7% to date (NAV cumulative total returns – see discrete performance below). Please remember, past performance is not a guide to the future. 

Early-stage businesses

This VCT unashamedly backs growth-orientated early-stage businesses. In most cases technology will represent an integral part of the offering. Investments are typically phased. The managers will start with an investment of as little as £150,000 in very small businesses, in some cases without revenue. They will only add to the original investment if the business proves successful. Overall the average investment per company is approximately £1.5 million. The strategy is not to bet the bank too early on a particular company.

An example of such a business is eve Sleep plc, which Octopus backed over 3 rounds from seed stage; it recently floated on London’s AIM. Read about the eve Sleep investment story here.

Investment process

An innovative aspect of the investment process is to test the idea of the business out on a 110-strong network of what Octopus calls its 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 cash Octopus wants; it wants investors in the network to add something to the underlying business and aid their development.

Each year the Titan VCT invests into between six and ten new companies, with the bulk of the money raised – approximately 75% – invested into existing portfolio companies.

Companies sought must be “tech enabled” with a strong management team, in a large market and have the ability to grow quickly. Tech enabled businesses exploit technology or technology trends, despite not being technology businesses. Examples are Secret Escapes, a digital travel business, or graze.com, which started out by offering snack boxes through an online subscription service. This type of business doesn’t normally need huge levels of capital to fund growth. Generally, Octopus Ventures invests in just the equity of the business and unlike other VCTs doesn’t lend money.

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 last year, he confirmed there is no predetermined exit strategy when buying into a business. If successful, the exit route would reveal itself. Looking at some of Octopus’s notable winners, the exit routes have been flotations, partial realisations, and trade sales.

Most of the realisations have been partial: Octopus has sold some of its shares in the business, but still retained a position. The manager is keen to stress they invest typically for five to eight years.

Risks

This is an early-stage growth VCT so some of the underlying companies will fail. In total, so far there have been 11 failures out of 64 companies invested in. These are generally longstanding investments of between five and eight years at least. Another risk is that when the performance hurdle is met, 20% of future gains will 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 Wealth Club discount of 2.5%. Existing Octopus investors can save another 1%. So the net initial charge could be as little as 2%. 

The annual management fee is 2% and in addition Octopus is entitled to an annual administration fee of 0.3%. Annual running costs are capped at 3.2%. 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 brochure.

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 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. 

Discrete performance over five years: Octopus Titan VCT
   2 Mar 2012- 
 2 Mar 2013
 2 Mar 2013- 
 2 Mar 2014
 2 Mar 2014- 
 2 Mar 2015
 2 Mar 2015- 
 2 Mar 2016
 2 Mar 2016- 
 2 Mar 2017

Octopus Titan VCT
(NAV total return)

 37.5%  10.5%  14.3%  6.2%  4.5%

Source: aic online (the Association of Investment Companies). Past performance is not a guide to the future, dividends are variable and not guaranteed.

This review is not intended to be advice or a personal recommendation to buy the investment mentioned, nor is it a research recommendation. Wealth Club aims to highlight investments we believe have merit, but investors should form their own view on any proposed investment. 03.03.2017

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