OAM2681 OVCT 2 Prospectus aw12 - Clubfinance

PART THREE –
THE INVESTMENT OPPORTUNITY
As set out in the investment policy, Octopus VCT 2 will invest in a
portfolio of unquoted companies in a variety of sectors and technologies
where the Octopus team is confident that investments can be
structured with a higher level of capital security with the objective of
building a portfolio of lower-risk investments. Investments made by
the Company will be in a mixture of debt and equity instruments.
Whilst Octopus VCT 2 will have the ability to invest in a variety of
sectors and technologies, the focus will be in the renewable energy
sector, and, in particular, on solar energy. The Octopus team has
significant experience in making such lower-risk investments from
funds raised by VCTs. The investment processes and investee
company objectives below are those particularly applicable to
solar opportunities, but will also apply, as relevant, to other
investment opportunities.
WHY SOLAR
Following recent UK and European legislation, the UK government
has set a target that, by 2020, 30% of all of the UK’s electricity is
generated from renewable sources. Given that only 5.5% is currently
generated from such sources, this is a huge challenge. The UK needs
to build capacity to produce “green electricity” equivalent to 11 new
nuclear power stations. With the possibility of large financial penalties
as well as wider political pressure if the government fails to deliver,
solar is being viewed as an important solution in meeting this
looming deadline.
In April 2010, UK government legislation introduced a Feed-in Tariff
(FIT) regime to the UK. Its aim is to incentivise smaller scale renewable
electricity generation schemes, including ‘solar installations’ – the use
of solar panels to generate electricity. This follows a similar model that
has been used in mainland Europe for a number of years, successfully
encouraging significant roll-out of solar installations using proven
technology. In Germany, for example, one in ten commercial buildings
have solar panels installed and an estimated £42 billion has been
spent on solar installation since it introduced a FIT regime in 2004.
HOW DOES IT WORK
The UK legislation means that the electricity supply companies (not
the UK government) effectively subsidise the cost of installing and
operating solar installations. They do this by guaranteeing to the
owner of the solar installation, the price for the electricity generated.
In addition, the solar installation owner can receive further revenues
from selling the electricity generated to the grid or directly to the end
user (such as the owner of the building upon which the solar panels
are placed).
One of the intentions of the FIT scheme is to encourage the micro
generators of electricity to be located in the same place as the users.
As a result, Octopus VCT 2 will focus on investing in companies that
have received planning permission to own and operate solar installations
on commercial and industrial roof-tops and brownfield sites.
It is expected that the companies in which Octopus VCT 2 will invest
(known as the “investee companies”) will have already agreed terms
with a property owner and obtained planning permission to install
and operate a solar installation prior to the VCT’s investment. The
investee companies will, following investment, be the owner and
operator, but will draw upon experienced third parties in delivering
installation and operation. The investee companies will pay the
property owner for the rent of their roof-top or unused brownfield
site, in addition to potentially supplying the electricity to them.
The landlord therefore obtains a new income stream from an
otherwise redundant space and also the opportunity to fix the price
of electricity that it uses, from the solar power created on the
property owner’s site. The investee company will receive the FIT for
25 years and also revenue from selling electricity to the property
owner. This creates a mutually beneficial arrangement that has the
important positive result of helping the UK government to deliver on
its targets and ultimately reduce our reliance on fossil fuels.
WHY IS SOLAR GOOD FOR LOWER RISK VCT
INVESTMENTS
There are a number of reasons why solar investments under the FIT
scheme are attractive for lower risk VCT investments.
First, solar electricity generation has a proven track record. It is a well
established technology that has been delivered on a large scale over a
number of years outside of the UK.
Secondly, it offers a long-term price for the output that accounts for
inflation. The government legislation stipulates that the payments to
the solar investee companies will remain in place for 25 years, with
the amount paid increasing in line with the Retail Prices Index.
Finally, it delivers predictable volumes of energy, and therefore a
visible revenue stream and return for investors. Despite the inclement
UK weather, it is possible to accurately forecast the level of solar
radiation (sunlight) that can be expected on a site by site basis.
Furthermore, the installation and operating costs of a site can be
projected with some certainty from the outset. This combination, plus
the government’s support for FIT schemes to help achieve its green
energy targets, results in a very visible earnings stream for the owner
and operator of a solar installation. This means Octopus can deliver
an associated level of predictability in the returns generated for
VCT investors.
This predictable underlying investment is then delivered within a VCT
that has been specifically designed to take a lower risk approach. Not
only are the Octopus management fees deferred and only paid when
minimum criteria have been met (see Part Six of this Prospectus), but
also the solar operators’ profits are deferred until the investors obtain
their investment back with a hurdle return.
HOW WILL THE OPPORTUNITIES BE STRUCTURED
AND DELIVERED
Octopus has a team of investment professionals with many years of
experience of undertaking lower-risk investments and delivering
dealflow. In addition, in respect of solar energy investments, the team
will work closely with Lightsource Renewable Energy Limited
(“Lightsource”). The Lightsource team is experienced in developing
and operating solar projects, and the combined Octopus and
Lightsource teams have the expertise across the range of skills
required to deliver solar installations including planning, engineering,
property development, legal and financial knowledge, and experience
of rolling-out installations in the established German, Italian and
Spanish markets. Lightsource already has a number of preliminary
agreements in place with well known property owners in preparation
for the roll-out of solar sites.
The Octopus team will source, introduce and structure investment
opportunities for Octopus VCT 2 in respect of solar opportunities,
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