Octopus Titan writedowns put venture capital trusts in spotlight

Tax-favourable investment vehicles used by some of the highest-paid people in Britain are under scrutiny after the biggest player in the sector was forced to write down its underlying investments by £189 million last week.

Octopus Titan VCT, a £1 billion listed venture capital trust that counts 25,000 top earners among its investors, announced writedowns on 80 high-risk private companies it backs.

Its net asset value per share was cut back by 19 per cent to 62.4p after it reported cumulative losses of £469 million over two years on the back of tumbling valuations assigned to early stage companies.

Octopus Titan has backed some of the most ambitious ventures in Britain, including Orbex, a company aiming to launch a space rocket from northern Scotland. The Orbex stake was written down from £25.2 million to £15.3 million.

The biggest single writedown last year was of its stake in ManyPets, Britain’s third biggest pet insurer and an investment it previously had hailed as one of its successes. The stake was slashed from £102.7 million to £47.1 million after ManyPets reported falling turnover and a £41.8 million loss in the year to March 2023. Elvie, a company supplying breast pumps and other medical products for women, was another significant disappointment.

Malcolm Ferguson, the manager of the trust, said the writedowns had been caused by companies reducing their growth ambitions and focusing on controlling costs and reaching profitability more quickly. That had hit valuations, he said.

The business model of venture capital trusts was very much still intact, he argued, and “green shoots” were already appearing for the sector, with more technology floats being announced and potential acquirers of private companies becoming more active.

Octopus Titan also hadscored some successes last year, he added, with the valuations of 38 of its investee companies rising. One success was Pelago, a digital platform serving drug and alcohol addicts.

The creation of venture capital trusts goes back to the mid-1990s, when they were introduced as a way of encouraging investment in high-risk, early stage private companies in Britain by offering high-rate taxpayers very attractive tax breaks. Investors enjoy tax relief of 30 per cent on their initial investment and are able to draw dividends out of the trusts tax-free, so long as they hold the shares for at least five years.

Over the years many such trusts have produced strong returns for investors after including the tax benefits, even if the performance of the underlying companies has sometimes been less exciting or negative.

Octopus Titan is by far the biggest venture capital trust, more than twice the size of the next largest, Octopus Apollo, also managed by Octopus Ventures. It raised £107 million in new investment from clients in the last tax year, the most of any venture capital trust.

However, it has underperformed the competition recently. Of 36 generalist venture capital trusts, it ranked 35th for total shareholder return over one year, delivering a -13 per cent return, according to figures from the Association of Investment Companies. Over five years it ranked 33rd, chalking up -5.8 per cent.

The shares, which are thinly traded, have fallen from a high of 108½p in late 2021 to a low of 59½p. Venture capital trusts need to be able to sell some their investments to finance dividends, but Ferguson said these exits could be “very lumpy and unpredictable”.

Octopus Titan has had some notable successes, including being an early backer of Zoopla, the property search platform. It aims to produce a 5 per cent yield to investors.

Jason Hollands, of Evelyn Partners, said of venture capital trusts: “The tax relief is appealing, but you don’t want to lose sight of the fact that these are illiquid and high-risk investments. The last two years have been difficult for early stage businesses and Titan tends to invest more at the earliest stage.”

Investors are also charged high fees. Fees over five years for a £10,000 investment in Octopus Titan amount to £2,626, according to its own disclosures, with possible performance fees on top.

Ferguson is leaving this week, to be replaced on an interim basis by Jo Oliver, an Octopus Ventures colleague.