Tax Efficient Review of Octopus Eureka EIS Fund with ... - Clubfinance

Track Record
made by the Octopus Fund Managers. This endorsement comes through the potential
investee company presenting directly to a group of the VPs. Ultimately, unless a reasonable
number of VPs commit to invest into a deal (typically 5-15% of the capital for each deal comes
from the VPs) Octopus will not invest. Octopus sites this as being one of the key ways in which
they mitigate risk.
4. Post-investment Octopus works actively with its portfolio companies in order to maximise
the value from each investment. The VPs provide a significant and valuable resource in this
process. Often VP members will sit on the Boards of investee companies or act as Octopus’
observer/monitor within that company.
The aim of this EIS offering is to create a diversified portfolio of investments in early stage unquoted
companies with a focus on the environmental, technology, media, telecoms, consumer lifestyle and
wellbeing sectors.
A key number for potential investors in an EIS Fund offering is the amount that, after costs, will be
invested in the underlying EIS qualifying companies as this number will drive the initial income tax relief
and any amount of deferred CGT. Octopus tells us "Our estimate is that the amount invested into qualifying
companies will be approximately £92,000 assuming that the IFA rebates the commission" (see Table 5).
We asked Octopus for its view of the time taken from the investment to investors receiving EIS
certificates. Their response is "It is expected that investors will receive the EIS 3 certificates approximately
3 months after investment into each of the qualifying companies".
Tax Efficient Review Strategy rating: 28 out of 30
This is an offering from Octopus that has been established for 3.5 years now (with a different
strategy to previous Eureka EIS fund raisings). During this period, the economic conditions have altered
substantially with the credit crunch and economic upheaval effecting stock markets globally.
A total of 26 qualifying investments made into unquoted companies in this time (Table 4) and 9
into AIM listed companies (Table 5). The aggregate investment by Eureka into all of the companies
managed by the Ventures team totals £11.392m.
The Eureka portfolio (Table 6) of 26 unquoted investments made by the Ventures team now has
three fully written-down, three impaired, increases in value from four of the businesses and the
remaining sixteen held at cost.
As these businesses are unquoted (with the exception of e-Therapeutics) they are valued in accordance
with International Private Equity and Venture Capital Guidelines. In the case of the Eureka
investments, this means the valuation of a business is generally left at cost unless a further funding
round has taken place or the performance has been poor. If a further funding has taken place,
the investment will be re-valued up or down to reflect the most recent issue price. The investment
will also be re-valued if there has been an impairment to trading or an impairment in the business’
outlook. Here the valuation of the investment will be reduced at the six monthly re-valuation
dates even though no share transaction may have taken place. On this basis, the Eureka portfolio
managed by the Ventures team is currently valued at £11.412m with a cost price of £11.392m. Full
details are in Table 4.
Looking at the individual companies, it is perhaps worth considering two in particular. Zoopla,
an investment made in January 2009, is now the UK’s second most visited website after Rightmove
(Source: Nielson). Whilst significant in size, Rightmove is a listed business valued at over £1.2bn.
Meanwhile, Calastone, the mutual messaging service, releases an announcement regarding new
clients on an increasingly regular basis as more and more of the industry adopts the service (Source:
Calastone press announcements).
The AIM team have made 9 investments since Eureka was relaunched in May 2008. The total
capital deployed into these investments is £4.481m. Full details of the AIM investments are detailed
in Table 6. Performance for the AIM investments is straightforward as this is a quoted market.
Overall the performance of the Eureka offering has not been stellar and, with no exits so far from
those investments specifically made as EIS investments, we rate the Eureka performance inferior to
10 Tax Efficient Review Reprinted for the use of Octopus Investments Limited November 2011