Octopus Titan VCT
Nearly a third of all the money raised by VCTs last year was invested in Octopus Titan. By VCT standards, it’s a giant. Even before last year’s raise it was by some measure the UK’s largest VCT. The VCT now has more than £615 million of net assets.
On the back of last year’s success, Octopus Titan seeks to raise up to £200 million. Like last year, this consists of an initial £120 million with an over-allotment facility of up to £80 million.
Octopus Titan launched in 2007. The portfolio currently comprises 67 companies (July 2018). It focuses on early-stage growth-oriented businesses, which are by nature high risk. Octopus has the largest and probably most experienced team in this area. Some investors may hold concerns over its ever-increasing size.
- A large and diversified portfolio spanning from established companies such as Secret Escapes, Calastone and graze.com, to earlier-stage businesses such as depop and memrise
- A history of exits – including Zoopla, the first VCT-backed £1 billion company, SwiftKey, the AI-powered smartphone keyboard acquired by Microsoft, and more recently Tails.com, a tailor-made dog nutrition business acquired by Nestlé Purina PetCare
- Track record of tax-free dividends – since launch in 2007 it has paid total dividends of 69p per share (a total of £85 million), and has an annual dividend target of 5p per share – not guaranteed. Past performance is not a guide to the future
- Low minimum investment – just £3,000
- Option to invest through an ISA (transfers only)
- Early bird saving of 1% – deadline 25 October 2018
- Additional saving of 1% for existing shareholders in any of the Octopus VCTs
- 0.25% annual rebate through Wealth Club, paid for three years
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Octopus Investments, the UK’s largest VCT manager, was launched in 2000 out of the front room of one of the three founders. Today it has more than 230 employees (700 across the whole Octopus Group) and manages £8.3 billion on behalf of over 60,000 private and institutional investors, including pension funds, asset managers, fund-of-funds and family offices.
This VCT is managed by the Octopus Ventures team, a 31-strong dedicated business unit within the Octopus Group. The team has expanded by over 50% in the last 18 months, to reflect the accelerating rate of new investments and the growth of the portfolio. It currently includes 21 investment professionals led by five partners and supported by a team of 10 in operations and finance.
Before joining Octopus, many were well established in other industries, such as consumer goods, professional services and technology. Some of the team were also entrepreneurs themselves, having grown and sold their own businesses.
Most of the team is based in London, but a new office opened in New York in 2016, giving the team an international presence and facilitating the expansion of portfolio companies in the US.
Octopus Titan launched in 2007. There were previously five Octopus Titan VCTs which have now merged into one.
This VCT has backed growth-orientated early-stage businesses since its beginning, so, unlike other VCTs, it didn’t need to adjust its investment strategy following the recent introduction of stricter VCT rules.
Companies sought must be “tech enabled”, with a strong management team, in a large market and with the ability to grow quickly. Tech-enabled businesses exploit technology or technology trends, rather than being outright vendors of technology.
Due to its size and position in the market, the Octopus Ventures team believes it sees 60% to 70% of the suitable investment universe in any given year.
In the 12 months to April 2018, it engaged with around 5,000 businesses. Sources of deals include entrepreneurs known to Octopus from previous ventures, the Octopus investment network (which includes investment professionals, incubators and accelerators) and competitors.
Only 10% (500) made it to the next stage – a preliminary meeting with the management team. Of these, 25 opportunities were brought to the Investment Committee for approval.
In the 12 months to April 2018, Titan has invested £89 million in 39 companies: £39 million was invested in 13 new deals and £50 million in 26 follow-on deals.
The rate of investment has increased by 48% compared to the previous year and is forecast to increase by 38% in the 12 months to April 2019.
When we interviewed Jo Oliver, one of the Octopus Ventures Partners, he explained this is a reflection of the number and quality of the opportunities the team is seeing. The team has been expanded accordingly. Octopus Titan had £240 million uninvested cash as at April 2018, which the team believes should be more than enough to support an accelerated rate of new and follow-on investments.
Exit track record
Octopus Titan VCT has realised a number of high-profile exits, including:
- 2013: Partial exits from Zoopla, Calastone, graze, Secret Escapes, alongside the sale of Evi to Amazon, helped the VCT pay a special dividend of 34p
- 2014: Google acquired Rangespan and Liquidnet acquired Vega-Chi
- 2016: Microsoft acquired SwiftKey for a reported $250 million; Twitter acquired Magic Pony for a reported $150 million; Essilor acquired Vision Direct for a undisclosed amount
- 2017: Zoopla fully exited from Titan's Zenith Holding Company
The most recent exit is from personalised dog food subscription service Tails.com.
Tails.com – most recent exit
Surrey-based Tails.com offers personalised dog food by post. The company uses an algorithm developed by vets, nutritionists and software engineers to develop a dog’s diet plan based on their breed, age, size and medical condition. Octopus Titan VCT made its first investment in Tails.com in 2013, the year it was founded, and a follow-on investment in 2015. By August 2017, Tails.com was one of the fastest-growing start-ups in the UK, feeding more than 70,000 dogs. In April 2018 it was announced that Nestlé Purina PetCare has acquired a majority stake for an undisclosed amount. Octopus Titan VCT realised a 10x return on the initial share price.
It is an example of Octopus repeatedly backing successful teams. The idea for Tails.com came from Graham Bosher, co-founder of healthy snacks firm graze.com, a successful Titan investee company. Another co-founder of Tails.com is Mark Holland, an ex-Zoopla software developer.
Of course, not all investments work out, as is to be expected with any early-stage business. Since launch in 2007, 21% of companies have been exited at a whole or partial loss. This equates to less than 12% of total capital invested. So far positive realisations have been sufficient to compensate for the failures, but there is no guarantee this will continue to be the case: past performance is not a guide to the future.
Current portfolio overview
The portfolio currently comprises 67 companies across a number of sectors, with a bias towards business software and the leisure and consumer sectors. The top 10 holdings include well known businesses such as members-only travel club Secret Escapes, online furniture retailer Swoon Editions and online property investment firm Property Partner.
Of the current portfolio companies, 6% are profitable; 86% are post-revenue/pre-profit; 8% are pre-revenue (30 June 2018). A material number of companies are currently loss making but have underlying profitability, i.e. they are re-investing for growth which is what we would expect from early-stage companies.
Examples of recent investments
depop is a social shopping app: an online marketplace for vintage and unique fashion and lifestyle items you cannot find on the high street. Think of it as a niche eBay for the Instagram generation. Vendors post images of the items they want to sell. Unlike eBay, images of any sold items remain in the seller’s profile, creating a profile that, in time, can amass followers. Followers “like” and comment on products and can communicate with vendors. Usually, the more followers a seller has, the more popular their store will be.
Currently, depop has more than 10 million users worldwide, 80% of them are under 25-years-old. They sold $230 million of clothing last year and are on track to double that to $460 million in 2018; depop makes money from applying 10% commission after every successful sale.
Octopus Ventures led a $20 million Series B funding round and invested £5 million in January 2018. The investment will support the global growth of the platform, particularly in the US, and scale the business. This will include the opening of bricks and mortar spaces, which should help depop get closer to its users and experiment with new formats.
memrise is a language learning app created by Ed Cooke, a Grand Master of Memory (he can memorise a 1,000-digit number in one hour), and Greg Detre, a Princeton neuroscientist specialising in the science of memory and forgetting.
In 2015 a “Membus,” a memrise double-decker bus, toured Europe collecting clips of tens of thousands of native speakers. These clips are used in the app to give a sense of how real people use the language. The app then employs artificial intelligence to adapt to users’ needs as they progress through their lessons.
memrise has now passed 35 million users globally and became profitable earlier this year. This makes it the second-most popular language app globally in terms of both users and revenues (Duolingo has more signups, Babbel more revenue). The basic plan is free and allows users to learn any language from any language (there are 200+ combinations). Premium "Pro" plans, which offer additional features, start at $4.92 per month.
Octopus Ventures, co-led a $15.5 million Series B funding round and invested £4.4 million last year, although it had been tracking the company since 2012. The funding will be used to accelerate development, with plans to enhance the app software engine, and rollout multimedia enhancements to its iOS, Android and web products.
A note on Zenith Holding Company Ltd
The largest holding of the Octopus Titan VCT is Zenith Holding Company Limited.
Zenith came about in 2013 as a result of the growth of four portfolio companies in Octopus Titan VCTs 1, 2 and 3.
These companies were Zoopla, Calastone, Secret Escapes and Nature Delivered (trading as graze.com). Octopus believed their growth could have potentially jeopardised the VCTs’ qualifying status.
Octopus Zenith LP, funded by two institutional investors, bought assets from Titan VCTs 1, 2 and 3 at the prevailing value. Octopus Titan retained an interest in Zenith (i.e. in all four transferred assets) via Zenith Holding Company Limited.
Zenith Holding Company still holds shares in Calastone, graze and Secret Escapes. Zoopla was fully exited in 2017.
Performance and dividends
There is a target dividend of 5 pence per share per year. Successful exits may help fund occasional special dividends.
Since launch, the VCT has paid 69p per share in cumulative dividends. Please remember, past performance is not a guide to the future and dividends are variable and not guaranteed.
As this VCT generally invests in earlier-stage deals, it is high risk. Some of these companies may be the bright new businesses of tomorrow, but many of them will fail.
Please remember capital is at risk. VCTs are high-risk investments and are not suitable for everyone. Investors should not invest money they are not prepared to lose.
Tax rules can change and the value of tax benefits depend on circumstances.
This is a large VCT – the UK’s largest. That has its advantages (for instance it is well resourced, influential and has efficiencies of scale) but some disadvantages too (the VCT will need to take significant stakes and its successful investments will need to really shine to have any impact on performance).
Fees and charges
A summary of the fees and charges is shown below. The net initial charge shown includes the Wealth Club discount and early bird saving.
|Full initial charge||5.5%|
|Wealth Club initial saving||3.5%|
|Loyalty discount for existing shareholders||1%|
|Net initial charge through Wealth Club (new investors)||2%|
|Net initial charge through Wealth Club (existing shareholders)||1%|
|Annual rebate (for three years)||0.25%|
More detail on the charges
The board intends to buy back shares at up to a 5% discount to the prevailing net asset value. This is subject to availability and board and shareholder approval. Please see the offer documents for details.
Dividend Reinvestment Scheme (DRIS)
There is a Dividend Reinvestment Scheme under which allows shareholders to reinvest future dividend payments by way of subscription for 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.
Invest in an ISA
Octopus Titan VCT allows investment in an ISA, by transferring funds in existing ISAs. Octopus was the first – and is so far the only – VCT provider to offer this facility.
How does the Titan VCT ISA work in practice?
Let’s suppose you transfer £10,000 from your existing ISA into the Titan VCT ISA, which invests in the Octopus Titan VCT. If this year you have a tax bill of at least £3,000 after other reliefs and allowances, that £3,000 tax bill could reduce to zero, by virtue of your VCT investment. Please note, this is a simplified example. Furthermore, tax rules can change and benefits depend on circumstances.
Early bird savings and deadlines
Unless the offer is fully subscribed before these dates, the following deadlines apply:
- Deadline for early bird saving of 1%: 25 October 2018
- Deadline for shares allotted in the 2018/19 tax year: 5 April 2019
- There is a loyalty discount of 1% for existing Octopus VCT shareholders
Annual rebate when you invest through Wealth Club
The Octopus Titan VCT 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 0.25% of the Net Asset Value of the Offer Shares issued to you when you invest. Terms and conditions apply.
To date, Octopus Titan has been incredibly successful at finding companies that have gone on to be the next big thing. No other VCT seems to have had their knack of picking such high-profile winners. Titan has already spawned one billion-pound business in Zoopla Property Group. The manager believes it has several more potential “unicorns” in the portfolio. Our opinion remains that if any VCT is going to invest in the next Facebook, it is likely to be Titan. The reduction in fees is also a welcome change for this latest offer.
The new VCT rules very much play into Octopus Titan’s hands. The latest restrictions mean investment has to be targeted at early-stage, high-growth opportunities. This is what Octopus Titan has always done. Many other VCTs are having to change their investment strategy significantly as a result of the rule changes.
There are caveats, however. Firstly, past performance is not a guide to the future. Secondly, Titan is now a very big beast. This means that to generate significant returns for investors it will have to take bigger stakes, and these will really have to shine to make a big impact. Titan also has to be careful to ensure with so much money to invest that the new deals are of the same quality as the old ones and that it does not overpay for opportunities.
Read important documents and apply
Wealth Club aims to highlight investments we believe have merit, but you should form your own view. You should decide based 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. 14.09.2018
- Target dividend
- Initial charge
- Initial saving via Wealth Club
- 3.5% (4.5% for existing shareholders)
- Net initial charge
- 2% (1% for existing shareholders)
- Annual rebate
- Funds raised / sought
£16.5 million /
- 25 Oct 2018 for early bird saving