Octopus To Raise £70m For Start-Up Venture Investments.
Conventional wisdom is that investors’ appetite for risky smaller businesses is diminished during periods of economic uncertainty and market volatility – they’re supposed to prefer safer bets. Well, tell that to Octopus Investments, the specialist smaller companies fund manager. It’s just announced a £70m fund-raising for its Titan Venture Capital Trust (VCT), with the rider that there is also an option to raise a further £50m should there be sufficient demand.
Venture capital trusts, for the uninitiated, are collective investment funds that attract a special tax status from the UK government – the idea is to cushion the risk of investing in very small businesses with a generous array of tax breaks. So investors get 30 per cent upfront tax relief on their money as long as they hold their VCT shares for five years, are entitled to tax-free dividends, and don’t have to pay any capital gains tax on profits.
Despite these perks, however, VCTs are risky – all the more so since the Government was forced to change the rules of the scheme last year in order to avoid falling foul of the European Union’s State Aid rules. At least 70 per cent of the fund must be invested in companies that are no more than seven years old, have no more than 250 employees, and have assets worth no more than £12m.
In other words, these are businesses at the riskiest end of the market – many are effectively start-up ventures.
So why does Octopus think it can raise such significant sums for Titan at a time when investors are so nervous? Well, a combination of factors are in its favour. The tax breaks certainly help, particularly since the Government has recently reduced the tax incentives on offer to wealthier pension savers, who are therefore looking for other efficient ways to invest. But it’s also important to stress the attractiveness of the underlying asset class, particularly given that investors get access to it via a diversified portfolio that is professionally managed. The reality is that in a market place where growth capital is in relatively short supply, VCTs have some great opportunities to choose from. Even talented entrepreneurs with impressive track records don’t have too many options when it comes to raising equity finance – VCT managers are well placed to pick and choose.
In fact, Titan has a good record of doing so. The portfolio consists of around 50 companies at any given time and boasts a number of success stories. This year alone, for example, Titan has sold its investment in SwiftKey to Microsoft and Twitter has bought its holding in Magic Pony Technology.
This is not to suggest that the fund is a sure thing, or that there won’t be portfolio setbacks. The nature of investing in start-up ventures means there almost certainly will be failures. Despite the risks, however, Octopus is confident investors will support its fund-raising, even in this post-Brexit era of anxiety.
As for entrepreneurs themselves, this fund-raising is good news. It suggests the market for equity capital in start-up companies remains open for business – and raises hopes that the best ventures will be able to secure the finance they need to scale up.